Is Uniswap (UNI) a Good Investment? • Benzinga Crypto (2024)

In September 2020, Uniswap gave out 400 UNI tokens to each cryptocurrency wallet that’s ever interacted with its platform. At the time, the airdrop was worth about $800, and it made big news in the cryptocurrency industry. For those who held their free UNI tokens, their 400 UNI tokens are now worth more than $8,000. Now that’s a nice stimulus check.

In 2021, Uniswap grew rapidly alongside the Decentralized Finance (DeFi) industry. However, as of 2022, Uniswap has cooled off. Currently, the exchange is ranked in the top 7 by total value locked (TVL) on Ethereum’s network with over $7 billion in TVL. UNI tokens are used to vote on upgrades to the protocol, and investors can stake their UNI tokens for liquidity to earn interest on their investment.

What is Uniswap?

Uniswap is a decentralized exchange built on Ethereum’s blockchain. Decentralized exchanges (DEXs) let investors swap cryptocurrency without needing to make an account with a centralized cryptocurrency exchange like Coinbase or Binance. The platform transacts north of a billion dollars in cryptocurrency on a daily basis, and it’s the most used decentralized exchange in the world.

The Uniswap token is an ERC-20 token, meaning that it uses Ethereum’s blockchain to process transactions instead of having its own network. Many cryptocurrencies use Ethereum’s blockchain, including most non-fungible tokens (NFTs). The main advantage of Ethereum over Bitcoin is its smart contract technology. Smart contracts enable developers to make valuable protocols on Ethereum’s blockchain, such as Uniswap.

Uniswap Smart Contracts

Essentially, Uniswap is just a bunch of smart contracts that work together to make a decentralized exchange. Smart contracts are code that’s uploaded to the blockchain, and since it's on the blockchain, the code has the same immutible, decentralized and borderless capabilities that cryptocurrencies have. Smart contracts are capable of transferring money autonomously based on the parameters in the code, allowing for extremely efficient financial services.

Let’s take a look at how a Uniswap smart contract works. Investors send their cryptocurrency funds to a Uniswap smart contract to earn interest on their holdings; these investors are referred to as liquidity providers, and the smart contracts that hold their cryptocurrency are called liquidity pools. Liquidity providers are necessary for Uniswap to operate, as it’s how the platform is able to provide liquidity for investors.

Instead of order books, the smart contract calculates the price of each crypto asset. Since each liquidity pool has an equal value of each crypto asset, say Ethereum and DAI, the code calculates the price of each asset using the constant product formula X*Y=K, where K is the total amount of funds (denominated in USD) in the pool and X and Y are the amount of cryptocurrency tokens in the liquidity pool. These liquidity pools will readjust their token holdings continuously in order to preserve a 50-50 balance of each asset in the liquidity pool.

Advantages of Decentralized Exchanges

There are many benefits of using Uniswap over traditional cryptocurrency exchanges. Investors who use Uniswap can swap their cryptocurrencies directly from their Ethereum wallets, so there’s no need for the exchange to have custody over their funds. This significantly lowers the risk of being hacked, adding a layer of security that centralized exchanges can’t achieve. Moreover, investors don’t need to make an account to use Uniswap, allowing them to trade cryptocurrencies anonymously.

Since Uniswap is decentralized, no single entity controls the exchange. After popular stock brokerages like Robinhood and WeBull halted trading of Gamestop (GME) after its recent price surge, more attention has been paid to Uniswap, as nobody can halt the trading of assets. This is because no one entity controls the exchange.

Unbeknownst to most investors, there are ways to trade many different assets on Uniswap. Ethereum projects that have tokenized precious metals like gold and silver are available on Uniswap, and Mirror Protocol tokenizes stocks like Apple, Tesla and Google that can be traded on DEXs. Due to regulation, however, the Uniswap team has delisted some synthetic stocks from its front-end interface. Users can still trade these tokenized stocks through other interfaces; the protocol remains unchanged.

Providing Liquidity on Uniswap

Investors can choose to stake their Ethereum tokens on Uniswap to earn interest on their investment. Ethereum tokens include Ether, Ethereum’s native token, but it also includes ERC-20 tokens, such as Aave, DAI, Wrapped Bitcoin, and ChainLink. When investors provide liquidity on Uniswap V2, they need to provide equal amounts of Ether tokens and an ERC-20 token to enter the liquidity pool. However, with concentrated liquidity in Uniswap V3, users can deposit unequal amounts of 2 crypto assets.

To keep an equal value of each crypto asset, the smart contract rebalances the amount of Ethereum tokens and ERC-20 tokens in the liquidity pool when the price of one of the tokens changes. Albeit a small difference, if one token goes up while the other stays the same then you’d be better off just holding each token separately –– a concept known as impermanent loss.

As of May 5th, Uniswap launched UNI V3. The biggest upgrade in Uniswap V3 is called concentrated liquidity, and Uniswap has the exclusive rights to use this function for the next 2 years, giving them a large advantage over its competitors. Concentrated liquidity uses non-fungible tokens (NFTs) to let investors set a specified range of prices to provide liquidity in.

For example, an investor can concentrate their liquidity so their funds are only used in the ETH-DAI pool for when Ethereum tokens are between $1500 and $2500. Uniswap V2 liquidity providers have to cover all price ranges from $0 to infinity, which isn’t an efficient allocation of their staked funds. This is especially the case for stablecoins, as stablecoins rarely move more than 1% in either direction before returning to their average price of $1.

Uniswap expects that investors can earn much more interest by providing concentrated liquidity, and you can see the interest rates you can earn on Uniswap V2 compared to Uniswap V3 on Uniswap’s website.

Is Uniswap Safe?

Uniswap’s exchange is regarded as one of the most secure ways to exchange cryptocurrencies. Since Uniswap interacts directly with your Ethereum wallet, a hacker would need to breach your crypto wallet, as your funds aren’t held by the exchange. Since centralized exchanges hold custody of your cryptocurrency, they’re much larger targets for cryptocurrency hackers. If a hacker can breach an exchange’s security, they’d be able to access a much larger pool of funds than if they were to hack any individual cryptocurrency wallet.

In regards to UNI token, there's an inherent risk of losing money just like any other investment. Cryptocurrencies, especially altcoins, are high risk investments. This being said, early investors in Uniswap have seen huge returns on their investment.

Some speculators argue that Uniswap is still undervalued, as they only have about 12 employees, yet the company has similar transaction volumes to Coinbase. Uniswap’s market capitalization is sitting at $16.7 billion, while Coinbase has a market cap of over $60 billion. Of course, there is more than just transaction volume that affects the valuation of these exchanges, but it’s an interesting statistic nonetheless.

Where to Invest in Uniswap

The 2 most popular centralized exchanges that support Uniswap token are eToro and Coinbase. Making an account with either of these exchanges is an easy process; you just need to enter your email address and create a password. Once you’ve made an account, you’ll need to verify your identity. Exchanges typically require you to provide a photo of your driver’s license, your Social Security number, home address and date of birth.

Alternatively, you can use Uniswap’s exchange to invest in UNI token. To use the platform, all you need to do is connect your Ethereum wallet to Uniswap’s website. The most popular Ethereum wallet investors use for Uniswap is Metamask, as its Google Chrome extension makes it easy to use with blockchain protocols like Uniswap.

DeFi Price Movements

Decentralized finance tokens are among the most hyped assets in the cryptocurrency community today –– for good reason. Investors speculate that DeFi will be used as an alternative for those who don't have access to banks. Moreover, DeFi platforms are extremely efficient. While traditional banks and exchanges employ hundreds if not thousands of people, DeFi only needs a few employees to serve the same function, as smart contracts do much of the work autonomously.

So, is Uniswap a Good Investment?

If you believe in the decentralized finance industry, Uniswap may be a great addition to your portfolio. Not only is it the most liquid decentralized exchange, but Uniswap’s V3 upgrade makes cryptocurrency on the platform even more liquid. While Uniswap’s other upgrades could be used by other DEXs, its V3 upgrade is protected for 2 years, giving Uniswap a huge competitive advantage over other decentralized exchanges.

Frequently Asked Questions

Recommended lecture: WHAT IS ARBITRUM?