What is Uniswap?
Uniswap is a decentralised exchange protocol launched on the Ethereum mainnet in November 2018. It was created by Hayden Adams with funding from an Ethereum Foundation grant. It’s built on a beautifully simple concept whereby liquidity for exchange transactions is provided in the form of on-chain pools, equal in value for both ETH and a single ERC-20 token traded. Trades are executed against these on-chain pools, which use an automated market making strategy to enable exchange free of order books or additional counterparties. The smart contract design allows for exceptionally low gas usage when compared with other exchanges. If you haven’t had the chance to learn about it yet I would recommend reading some of the excellent articles on the subject (1, 2), the documentation overview, or the white paper.
Uniswap already has a budding ecosystem including a trading interface and statistics portal, and integrations are coming thick and fast. Development efforts are coordinated on Slack, GitHub and Reddit. In only its first 2 months, Uniswap has already achieved significant trading volume.
Who are Liquidity Providers?
Trades on Uniswap cause price slippage, with trades that are large relative to total liquidity causing more slippage. So, for Uniswap to function well and allow large trades it also needs large liquidity pools. So who provides this liquidity, and why should they pool their valuable ETH and ERC-20 tokens in a Uniswap exchange? Liquidity providers can be anyone who is able to supply equal values of ETH and an ERC-20 token to a Uniswap exchange contract. In return they are given tokens from the exchange contract which can be used to withdraw their proportion of the liquidity pool at any time. Whenever someone trades on the exchange, the trader pays a 0.3% fee which is added to the liquidity pool. Since no new liquidity tokens are minted, this has...