How Does Uniswap Make Money?

  • Uniswap is a decentralized cryptocurrency exchange founded by former Siemens mechanical engineer Hayden Adams in 2018. The exchange utilizes an automated market-making system rather than a traditional order book for transactions on the Ethereum blockchain.
  • Liquidity providers on the Uniswap exchange control transactions and collect fees for their services. In other words, none of the platform founders receive a cut from the trades that are facilitated through the protocol.
  • To fund development, maintenance, and general operating expenses, the platform may take a small cut from each transaction fee. Though it is more likely these expenses are met by Uniswap selling a portion of its UNI token holding as required.

Origin story

Uniswap is a decentralized cryptocurrency exchange founded by former Siemens mechanical engineer Hayden Adams in 2018. The exchange utilizes an automated market-making system rather than a traditional order book for transactions on the Ethereum blockchain.

The Uniswap story begins shortly after Adams was made redundant from his job at Siemens. Feeling down and directionless, he messaged friend Karl Floersch who was working on the consensus protocol Casper FFG at the Ethereum Foundation. Floersch reframed the bad news as the best thing that could have happened to Adams, encouraging him to make a fresh start and learn everything there was to know about Ethereum and smart contracts. 

Adams agreed to the proposal, but to broaden his skillset, Floersch suggested he work on a decentralized exchange (DEX) incorporating an on-chain automated market maker with various unique characteristics. The idea had already been proposed by Reddit user and Ethereum founder Vitalik Buterin, who as it happens also came up with the name Uniswap.

Some months later, Adams started work on turning Buterin’s idea into a functional product with financial and other assistance from Floersch and high school friend Uciel Vilchis. After securing a $100,000 grant from the Ethereum Foundation, Uniswap was eventually launched in November 2018. 

The platform was praised for being affordable, user-friendly, and intuitive. But what makes Uniswap unique is that the platform solves the problem of high spreads for illiquid assets on order-book exchanges. This issue exists because there is little incentive for professional market makers to provide liquidity on thinly traded assets. With Uniswap, however, anyone can act as a market maker by depositing assets into a pool and earning fees based on the amount of trading activity.

Uniswap became the first decentralized finance (DeFi) protocol to generate $1 billion in liquidity provider fees in August 2021. The company also enjoys a dominant market share among DEX platforms of 63.8%, which equates to approximately 2.5 million users.

Uniswap revenue generation

Uniswap is a decentralized protocol backed by the crypto hedge fund Paradigm. This means the platform does not make any money per se, with all fees user-controlled and collected by traders who provide liquidity. 

The current transaction fee paid to liquidity providers is based on a three-tier system of 0.05%, 0.3%, or 1% depending on which tier offers the best deal for each trade. These fees are added to the liquidity pool by default, but providers can redeem them at any time.

While it is unclear as to whether the company takes a portion of the transaction fee, it is more likely Uniswap has reserves of the governance token UNI and sells the token periodically to cover maintenance and other expenses

According to the Uniswap website, 21.266% of the initial four-year allocation of UNI will be held by team members and future employees. As the tokens are distributed over this period, the value of Uniswap’s collective holding will increase.

Lear More From The Book Blockchain Business Models

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Read Next: Blockchain Business Models Framework Decentralized FinanceBlockchain EconomicsBitcoin.

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According to Joel Monegro, a former analyst at USV (a venture capital firm) the blockchain implies value creation in its protocols. Where the web has allowed the value to be captured at the applications layer (take Facebook, Twitter, Google, and many others). In a Blockchain Economy, this value might be captured by the protocols at the base of the blockchain (for instance Bitcoin and Ethereum). However, according to blockchain investor Paivinen due to ease of forking, incentives to compete and improved interoperability and interchangeability also in a blockchain-based economy, protocols might get thinner. Although the marginal value of scale might be lower compared to a web-based economy, where massive scale created an economic advantage. The success of the Blockchain will depend on its commercial viability!
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A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like the Ethereum’s Casper protocol). Proof of Stake has the advantage of security, reduced risk of centralization, and energy efficiency.
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A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result they get rewarded in coins.
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Non-fungible tokens (NFTs) are cryptographic tokens that represent something unique. Non-fungible assets are those that are not mutually interchangeable. Non-fungible tokens contain identifying information that makes them unique. Unlike Bitcoin – which has a supply of 21 million identical coins – they cannot be exchanged like for like.
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A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
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Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.

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