Trail of Bits Consensys Diligence ABDK Consulting +1 Dapp.org
Trail of Bits Consensys Diligence ABDK Consulting Dapp.org
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Last updated: Nov 23, 2022
Uniswap is the largest decentralized exchange and automated market maker running on the Ethereum network.
Uniswap exchange was created in 2018 for peer-to-peer trading of cryptocurrencies on the Ethereum blockchain. It operates in a fully decentralized way completely relying on a set of smart contracts. Currently, Uniswap stays the leading DEX and AMM on Ethereum and across other blockchains by the means of the active user base, liquidity depth, and daily trading volume.
In a way, Uniswap’s creation fueled the global trend for DeFi and triggered the overall decentralized finance market growth that followed not only because it offered lots of trading and arbitrage opportunities, but also because of its non-custodial and trustless nature - anyone can create a pool for their token paired with ether or any other crypto.
Uniswap long served as a model DEX on the global cryptocurrency market and its open-source nature has led to the emergence of its multiple incarnations on various chains. The most well-known Uniswap forks still operating are Sushiswap, PancakeSwap, and Quickswap.
Uniswap lists a number of VCs as investors including Andreessen Horowitz, Paradigm Venture Capital, Union Square Ventures LLC, and ParaFi.
As of the end of 2021, Uniswap exists in three versions. All Uniswap protocol’s iterations are currently live and will remain this way as long as the Ethereum network is running, as there is no possible way to alter or stop its smart contracts. This feature puts Uniswap on the list of the most trustless protocols in DeFi.
At its core, Uniswap operates as an automated market maker via a set of smart contracts that allow users to create various pools and add liquidity to them in exchange for the portion of fees received from traders for using the protocol. Traders pay a certain fee for exchanging one type of token for another, and those fees are later divided between liquidity providers and holders of the UNI tokens.
Each liquidity pool on Uniswap contains a pair of ERC-20 tokens. Initially, the protocol allowed swapping ERC-20 tokens only one way, for ether. So, in order to buy DAI using USDT on Uniswap v1, a user needed to make two transactions, therefore paying gas fees twice. In May 2020, this inconvenience was eliminated with the launch of Uniswap v2 which allows the creation of pools consisting of various ERC-20 tokens.
The second iteration of the DEX - Uniswap v2 - has introduced a flashswap concept to the market that enables users to allocate liquidity for capital-free arbitrage purposes in a single transaction. Users may withdraw any ERC-20 token from a corresponding pool with no upfront cost, as long as the value taken is returned in a single transaction either in a pair of tokens from the pool in question or in one token alongside a small fee. If the user didn’t manage to return funds in a single transaction, it was canceled. This particular feature took a lot from a flash loan concept, first introduced by Aave in February 2020.
In May 2021, when the next iteration of the DEX, Uniswap v3, went live, the protocol introduced the concept of concentrated liquidity. This feature allows LPs to place their liquidity within a certain price range - presumably the one where the most trades are going on. LPs also can create multiple positions each with its price range.
The fees Uniswap charges vary depending on the protocol’s version. Uniswap v1 charges a constant 0.30% fee on all trades that is divided between the LPs. On Uniswap v2 a 0,05% fee on trades was introduced with an option to be shut on/off by the community decision. Uniswap v3 brought even more fee flexibility with variable tiers such as 0.05% for stablecoin pools, 0.30% for standard pools, and 1% for exotic pools that contain extremely risky asset pairs for LPs. The protocol fees are off by default but may be turned on by the governance decision.
When using the latest version of Uniswap - v3, liquidity providers allocate liquidity within a custom price range unlike earlier versions of the Uniswap app where it was distributed along the whole price scale. This functionality may be useful when taking part in polls with stablecoin pairs as a liquidity provider since users can choose to allocate capital to smaller price ranges because stable asset pools rarely utilize their whole liquidity as most of it is out of the price range.
The Uniswap wallet support includes most Ethereum crypto wallets like Trust wallet, MetaMask, and Coinbase Wallet.
UNI is a native governance token on the Uniswap exchange. An ERC-20 token was launched on the Ethereum network in September 2020 and was airdropped to users who were active on Uniswap before that day. The Uniswap token has a total supply of 1 billion.
Uniswap creators claim the protocol is fully decentralized, however, its governance model is often criticized by observers. The platform requires an initial quorum of 10 million UNI tokens that represent 1% of the total UNI supply to approve the proposal before it may be submitted for a vote. And after the proposal is submitted it needs to gain 40 million UNI (a 4% quorum) to pass. But since large amounts of UNI are held by the team (21,5%) and the protocol’s investors (17,8%), the whole governance system is considered by some as rigged and centralized.
Uniswap Labs is a New York-based company that oversees the development of the protocol. It is led by the protocol’s creator and founder Hayden Adams who wrote a proof-of-concept of Uniswap v1 based on the whitepaper by Vitalik Buterin. Adams came into the blockchain industry after being laid off from Siemens in 2018 where he worked as a mechanical engineer.
According to the company’s LinkedIn profile, the Uniswap team currently includes around 50 people.
Uniswap v3 whitepaper lists Hayden Adams, Noah Zinsmeister, Moody Salem, River Keefer, and Dan Robinson among its authors.
In July 2019, OpenZeppelin described a vulnerability in the ERC-777 standard tokens trading pairs which allowed a possible attacker to hijack trades with such tokens due to a callback mechanism implemented in the contract’s transfer function through which the malicious party was able to perform illicit operations before the balance is updated. As all details about the possible exploit were shared by OpenZeppelin in a GitHub repository publicly, where they still remain, months later an attacker used the detailed guide to perform a reentrancy attack and targeted Uniswap’s ETH-imBTC pool containing 1,278 ETH. It must be noted that around 24 hours later, the same type of attack occurred on the lending platform Lendf.Me.
Due to the DEX's nature, Uniswap has become the birthing place for many DeFi protocols that hold their IDOs on the platform.
The full map of Uniswap’s vast ecosystem can be found on its website. It lists some prominent DeFi projects as partners, such as MakerDAO, 1inch, Aave, Compound, OpenSea, and Rari Capital that constantly use its pools for yield-farm purposes alongside others.
The team behind Uniswap doesn’t share any specific roadmap of the protocol’s ongoing development. Any proposed changes and corresponding discussions can be tracked through the governance forum.
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