How Does Uniswap Make Money? Business Model of Uniswap


How Does Uniswap Make Money

Uniswap is a popular decentralized exchange that uses an automated market maker to facilitate transactions. The platform also has its own token, called UNI.

Uniswap primarily makes money via protocol fees on transactions. The company also makes money from appreciation in the value of UNI tokens.

Founded in 2018 by Hayden Adams, Uniswap was originally a learning project. Hayden had been laid off from his previous job as a mechanical engineer at Siemens and wanted to learn more about crypto. He began working on Uniswap after being inspired by the founding principles of Ethereum.

Uniswap had captured 40% of the decentralized exchange market share by 2020.[1] In the same year, Uniswap was managing an average daily trading volume in excess of $200 million.[2] The platform has now surpassed over $1.1 trillion in total trade volume.

What is Uniswap & How Does It Work?

Uniswap is a decentralized exchange that runs on the Ethereum blockchain. It allows users to swap ERC-20 tokens by linking their crypto wallet. Uniswap is an automated market maker (AMM) that uses liquidity pools instead of an order book.

Users love Uniswap because of its accessibility and transparent approach to crypto trading. The platform lets anyone swap tokens without the need for personal identification or registration. Not only does this expedite the process of swapping tokens, but it also helps individual users maintain anonymity.

At its core, Uniswap provides everyone equal access to the world of decentralized finance (DeFi). There are no special privileges reserved for certain users, and nobody can be blocked out of the network. There is no central management authority or group that can censor specific coins or users.

Since Uniswap uses an immutable smart contract, no group can update the terms of token exchanges to suit their needs. Each user is the custodian of their liquidity and holdings. The lack of intermediaries also lowers transaction fees, which makes users prefer Uniswap compared to other exchanges.

Users only pay a small market maker overhead of 0.3% to reward liquidity providers, along with the Ethereum network gas fee. Uniswap doesn’t charge any platform or convenience fees. The exchange has its own crypto token called UNI that is rewarded to community stakeholders for providing liquidity.

UNI can also be purchased through exchanges or from within the Uniswap app itself by trading another ERC-2O token. To swap coins on the app, users need an existing crypto wallet. Currently, the platform supports some of the most popular wallets, such as MetaMask, Coinbase, and Trust Wallet.

It also supports hardware wallets like Trezor and Ledger. Users of hardware wallets can use intermediary services like MetaMask or Coinbase to link their funds with Uniswap. The process of linking a wallet is very fast and usually takes less than a minute.

There are multiple tabs within the Uniswap app. Selecting the ‘Swap’ tab will display a window with two tokens. The one at the top is the token being sold, and the one at the bottom is the token being purchased in exchange.

Uniswap allows users to easily change the token type by selecting options from a predefined list. Currently, the platform supports many popular tokens on the ERC-20 network, such as 1inch (1INCH), Aave (AAVE), USDC, and Wrapped Bitcoin (WBTC). Users can enable or disable lists from which available tokens are pooled.

By default, Uniswap has a list of tokens that are supplied by Uniswap Labs. It also uses the Gemini token list. By clicking on the ‘manage token lists’ option, users can import lists from databases like CoinGecko.

Users can also copy the address of a token manually from sites such as CoinMarketCap and paste it into the search box. If it is already present in one of the many lists, the token’s icon will show up underneath. Once token types have been selected for the sell and buy fields, Uniswap will display the latest exchange rates.

It also shows the Ethereum network gas fees at the bottom right corner of the transaction window. Gas fees are the fees required to execute a contract or transaction on the Ethereum network. Users pay validators for the resources used to verify transactions. Uniswap has an auto-routing system that automatically selects the best liquidity pools for swapping. The auto-router can split individual trades across multiple pools to lower gas costs.

Once users have selected the number of tokens they wish to sell or buy, Uniswap provides further customization options. By clicking on the gear icon at the top right of the window, users can view transaction preferences. Here, they can modify the slippage tolerance and transaction deadline.

A higher slippage rate is needed during periods when the network is busy. This results in more potential losses. By setting a maximum slippage rate, users can minimize this loss. Uniswap will revert a transaction if the price of a token exceeds the slippage percentage set by the user.

Uniswap also allows users to set a transaction deadline. For example, a transaction deadline of 15 minutes results in a cancellation if the network fails to process it within that time. Within the preferences window, users can also select whether they want to enter expert mode.

By default, slippage rates are automatically determined by Uniswap. Users can override this in expert mode to manually set higher slippage rates. Before making a trade, users can see the liquidity provider fees.

Uniswap also displays analytics for pairs of cryptocurrencies. By opening the analytics page, users can view trade volumes and time-charted graphs for the liquidity of a specific token pair. The analytics page also displays recent historical trade orders for the selected pair that were successfully completed on Uniswap.

Because of the platform’s transparency and accessibility, it regularly conducts a large volume of trades. In May of 2022, it was estimated that the platform had 3.9 million concurrent users.[3] To date, Uniswap has surpassed $1.1 trillion in trade volumes with over 111 million trades.

The platform is integrated into more than 300 DeFi apps, allowing users to conveniently swap tokens at any time from the platform of their choice. It also supports a very wide range of tokens. This is why many users choose the platform to manage their crypto holdings across a variety of networks and wallets.

 

Business Model of Uniswap

Uniswap is a permissionless peer-to-peer (P2P) crypto exchange that follows a decentralized model. It attracts traders by offering guaranteed liquidity and lower transaction fees through the lack of intermediaries.

By using an automated market maker (AMM) smart contract, Uniswap lets individual users supply their own liquidity and profit from it.

Users submit liquidity in pairs, like ETH-DAI. Uniswap uses a constant product formula that is expressed as “x*y=k”, where k is a constant value. While centralized exchanges facilitate trades between people through order books, Uniswap allows traders to exchange tokens directly from a liquidity pool.

This eliminates the need for market makers and bolsters security. To become a liquidity provider, users select a predefined pair or ‘liquidity pool.” Then, they add equal amounts of each token into the pool.

Users receive Liquidity Pool (LP) tokens that can be redeemed to receive the trade fees. By default, these fees are 0.3% of the trade amount. Uniswap’s AMM system ensures that the liquidity of a certain pool never drops to zero, ensuring constant market activity on its platform.

Compared to centralized exchanges, Uniswap offers several benefits. The most important one is a decentralized trading network that operates through immutable smart contracts. There is no central governing body as the arbiter of transactions.

Instead, trade orders are automatically executed from an available liquidity pool through known mathematical formulas that determine the price of a token. Users also don’t have to deposit funds into the exchange to carry out transactions. Every trade is carried out directly from a crypto wallet like MetaMask or Trust Wallet.

That means that individual users retain full custody of their assets at all times. Using an automated market maker also removes the potential for insider trading and manipulation by bad actors. So the exchange has no way of fixing prices in its favor.

The potential for hacking is also reduced since Uniswap is hosted on a decentralized network. There are millions of nodes, and bypassing the security of one does not compromise the entire platform. Finally, Uniswap allows individuals to release their custom tokens and create new liquidity pools.

By giving users the ability to host their markets on the exchange, Uniswap differentiates itself from a centralized exchange. Centralized exchanges have validity requirements and checks that they conduct before hosting a token. Uniswap has no such processes.

This improves market freedom, but also increases the risk of scamming because there are so many unproven coins on the exchange. Hence, users must do their research before purchasing a token. Uniswap displays market analytics for a token so users can view its validity and calculate the potential for profit.

Uniswap’s operating structure and AMM algorithms are transparent. This generates trust and loyalty among users who prefer Uniswap over competing platforms due to its decentralized nature.

Uniswap’s integration with other decentralized apps incentivizes users of the blockchain ecosystem to use it as their primary exchange app. It seamlessly links up with all popular DeFi wallets and tools. In August of 2022, Uniswap’s website received over 3.4 million visitors.[4]

Of these, 26.22% were from the United States.[5] The largest demographic on Uniswap consists of people between the age of 25 to 34, comprising nearly 36% of all users on the platform.[6] This is a demographic that tends to keep up with the latest technologies and trends in crypto, making them high-value customers for any digital exchange.

The majority of Uniswap’s traffic comes from direct visits, which account for nearly 74% of all traffic.[7] This indicates that the platform has cultivated a loyal userbase of regular traders who prefer the unique advantages offered by Uniswap. By choosing Uniswap over other exchanges, these users increase market liquidity and drive higher engagement rates for the platform.

One of the downsides to using an AMM is the limitation on total liquidity. Since the exchange relies entirely on users to provide liquidity, its services are limited by the number of users on the platform. The use of an AMM also results in slower transactions and higher slippage rates.

In 2021, a study estimated that around half of all liquidity providers on Uniswap lose money through impermanent losses (IL).[8] This happens because the revenue of 0.3% generated by trading fees is often less than the value lost through price fluctuation of assets. Meaning that only certain liquidity pools are profitable in the long run.

Uniswap’s biggest rival is PancakeSwap, as they offer similar services. PancakeSwap uses the BNB Smart Chain, which results in lower gas fees compared to Uniswap. It is also a highly gamified platform with lotteries, games, and contests to drive higher user engagement.

Because Uniswap uses the ERC-20 standard, it features more token pairs and sees higher trade volumes compared to PancakeSwap. Uniswap also has a cleaner user interface with well-defined core components that are easy to find and interact with. In comparison, PancakeSwap’s interface feels busier and more cluttered.

There is no data on Uniswap’s financials, as it is a private company. It is hard to speculate on Uniswap’s operating costs.

Uniswap is estimated to have an annual revenue of around $14.5 million per year, but it also has considerable expenses.[9] These include things like staffing costs, hosting costs, platform costs, and development costs.

Because there is a lack of data on Uniswap’s financials, it is unclear how profitable the company’s business model is.

 

How Does Uniswap Make Money?

Uniswap makes money from two different revenue streams. These include protocol fees and UNI tokens.

As Uniswap is a private company, details about how much revenue it generates from these different revenue streams aren’t public.

Protocol Fees

Uniswap operates three different protocols: V1, V2, and V3. Starting with V2, the platform introduced an optional protocol fee that can be turned on or off through community voting.

Usually, the protocol fee is 0.05% of the standard 0.3% liquidity provider fee. These protocol fees are used to fund platform development and make profits.

A 2021 report estimated that Uniswap had generated over $1 billion in fees for its liquidity providers.[10] Most of the money went to liquidity providers. It is not clear what Uniswap’s share of this revenue amounts to.

 

UNI Tokens

In September 2020, Uniswap introduced UNI as a form of governance token. A total of one billion tokens were created during the genesis. Every address that had called V1 or V2 contracts prior to September 2020 was eligible to claim 400 UNI.[11]

Voting on platform changes is handled by community members who own UNI tokens. Voting power is allocated on the basis of token share. As more users conduct transactions on Uniswap, the value of this token will rise.

The tokens are also market assets that can be traded. Since Uniswap employees hold 21.26% of the tokens, they can sell them off to fund platform development and upgrades.

 

Uniswap Funding, Valuation & Revenue

Uniswap is currently a private company, and its financials aren’t available to the public. Right now, it is unclear what the company is valued at.

However, Uniswap raised $11 million in a 2020 Series A funding round. Notable investors include Andreessen Horowitz, Union Square Ventures, ParaFi Capital, and SV Angel.[12]

Uniswap’s valuation has never been publicly disclosed. Since its Series A funding round in 2020, the company hasn’t had any more funding rounds, which indicates that it has sufficient capital to continue operations and growth.

Annual revenue for Uniswap is estimated to be around $14.5 million.[13] But there is no official report to verify this. Given recent downward trends in the crypto market, it is possible that Uniswap could be making less than this figure.

 

Is Uniswap Profitable?

Uniswap is likely not yet profitable. The company’s revenue streams are fairly limited, with optional protocol fees that are turned on through community voting only. As Uniswap doesn’t disclose any details regarding its finances, it is hard to guess how much the company makes.

The company seems to be focused on growing the Web3 ecosystem and increasing the value it offers to users rather than profits. Recently, Uniswap launched its venture capital firm to invest in other Web3-based DeFi projects.[14]

As of now, it is unclear whether Uniswap will be profitable in the near future.

 

Conclusion

We hope you enjoyed this blog post on how Uniswap makes money and the business model of Uniswap. All in all, Uniswap is one of the best blockchain projects out there today. We hope this blog post will help you make an informed decision about investing in this project.

If you want to learn more about Uniswap, you can visit their website at uniswap.org. You can also follow them on Twitter (@Uniswap) or on GitHub (@Uniswap).

If you have any questions or comments about this blog post, please let us know via email! We always love to hear from our readers, so don’t be shy.

Thanks for reading, and be sure to check out our blog for in-depth analysis of other business models.

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Sources

  1. The Block
  2. Bloomberg
  3. Coin Telegraph
  4. Similarweb
  5. Similarweb
  6. Similarweb
  7. Similarweb
  8. Nasdaq
  9. Growjo
  10. Coin Telegraph
  11. Uniswap
  12. Crunchbase
  13. Growjo
  14. Techcrunch