$UNI Technical Analysis

Romain NEBOIT -

Uniswap is a fully decentralized exchange – meaning it isn’t owned or operated by any single entity. It implements an Automated Market-Maker that enables swaps between token pairs, through liquidity pools that hold balances of both tokens in the pair. The ratio of the tokens in a pair determines the price of one token relative to the other. This is a really simple but incredibly powerful design that has probably been the main deriver of the DeFi phenomenon.

Initially developed by Hayden Adams as a study project to improve his skills in Solidity, the project later received funding from the Ethereum Foundation to be developed further and make the protocol freely available to all users.

The benefits of using Uniswap

Using Uniswap allows you to trade without a trusted third party. While some DeFi services seem somewhat obscure, Uniswap is very transparent in its simplicity. Exchange pairs can be set up easily using smart contracts that are available to all. Uniswap is a not-for-profit protocol, and fees only go to users who bring liquidity to the system. This allows users to pay very low fees, and, therefore, trade at a low cost compared to other decentralised exchanges.

Uniswap fees

Here are the different fees applied on Uniswap according to the operations carried out:

  • Exchange of ETH to an ERC-20 token: 0.3% paid in ETH
  • Exchange of ERC-20 to ETH: 0.3% paid in ERC-20
  • Exchange of an ERC-20 to another ERC-20: 0.3% fee paid in ERC-20 for exchange for ETH, 0.3% fee paid in ETH for the exchange to the desired ERC-20, 0.59% fee paid in incoming ERC-20.

The 0.3% fee for each exchange between ETH and ERC-20 tokens is used to finance the liquidity contributions. These fees are paid to users who provide liquidity to the protocol (LPs), in proportion to the amount they have contributed. The Uniswap platform charges no fees.

The Uniswap v.2 upgrade, introduced a new protocol fee that can be turned on or off via a community vote and essentially sends 0.05% of every 0.30% trading fee to a Uniswap fund to finance future development. Currently, this fee option is turned off, however, if it is ever turned on it means LPs will start receiving 0.25% of pool trading fees.

The mechanics of Uniswap

Uniswap runs on two smart contracts; an “Exchange” contract and a “Factory” contract. These are automatic computer programs that are designed to perform specific functions when certain conditions are met. In this instance, the factory smart contract is used to add new tokens to the platform and the exchange contract facilitates all token swaps, or “trades.” Any ERC20-based token can be swapped with another on the updated Uniswap v.2 platform.

Therefore, the ERC-20 / ETH exchange contracts are exchange platforms in their own right. Having two different reserves per different contract allows the creation of a market on the pair. If the ETH reserve decreases or vice versa, the exchange ratio is modified, which changes the token price. Arbitrage is also possible and ensures a certain level of liquidity in the trading pairs.

How the exchange ratio gets calculated

The exchange ratio for each ERC-20 token is calculated mathematically using the constant product equation x × y = k where k is an immutable constant, x and y represent the quantities of the pair of ERC-20 tokens in the smart-contract reserve. The original formula comes from Vitalik Buterin, who posted it in early 2018, explaining its usefulness in the context of decentralised trading platforms.

This chart makes it easy to understand how the formula works in case of volatility. Let's take the first case, which is the case of the exchange of a large quantity of the ERC-20 tokens. Therefore, the reserves will be modified, resulting in many ETH and a few ERC-20 tokens now available. Knowing that k will remain constant whatever happens, it is the price of the token that will be modified upwards. Otherwise, if the supply of tokens is abundant, the price of this token will be low.

The Uniswap $UNI token

The Uniswap native token, $UNI is used as a governance coin. This gives holders the right to vote on new developments and changes including how minted tokens are distributed among community members or developers; any sort of fee structures that may arise from these decisions can also be voted upon with this particular cryptocurrency
The original purpose for creating it in September 2020 was so users wouldn't defect towards competing decentralized exchange SushiSwap, which had forked Uniswap and incentivised users to move from Uniswap by rewarding them with $SUSHI tokens.

Uniswap responded by creating 1 billion $UNI tokens and decided to distribute 150 million of them to anybody who had ever used the platform. Each person received 400 $UNI tokens, which at the time amounted to over $1,000.

Technical Analysis of $UNI:

All prices shown are as of26/05/2022 at 15:00 UTC+5

Long term chart:

From a long-term point of view: prices are back to the beginning.

We retraced from the previous ATH ($45) to the first day quotation at $USD 5.5.

This is the last strong support that prices defend before entering a crucial correction with another help at $USD 4.

With Ichimoku, we’re definitely bearish, and the Weekly Tenkan has been driving prices since October 2021.

To give a first bullish signal, prices need to break the $USD 7.5 area.

Daily Chart:

From a short-term point of view, this is a little more positive.

Prices have been in a range for a few days and are stuck between the Daily Tenkan and Kijun.

The last dojis suggest a “waiting period” from the operators, and volumes confirm this, with lower exchanges after the previous sell-off.

Two scenarios:

  • Prices break the Daily Kijun and the last resistance at $USD 6: this will signal going back to the Daily Cloud.
  • Prices break the previous bottom at $USD 4.6, and it opens a way to go lower, as explained previously.

So we’ll wait and see how it will evolve. Only time will give us an answer!

In Summary

The Uniswap protocol showed how it is not necessary for an intermediary market-maker to run a centralized order book to derive the price of an asset and facilitate trades between counter-parties. Automated market-makers have been the engine behind DeFi and will no doubt provide utility to ReFi, by enabling permissionless decentralised peer-to-peer market exchanges that don't rely on intermediaries.

Romain

Not financial or tax advice. This article is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. For tax advice talk to your accountant. DYOR – do your own research.