Uniswap Revenue: King of the DEXs

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Summary: In 2021, Uniswap reigned because the undisputed leader of the DEX revolution. With no centralized order book, the exchange relied on a sensible algorithm to set costs on lots of of ERC-20 token pairs out there on the platform for consumers and sellers.

With low trading charges and a growing userbase, Uniswap was the king of DEXs. But now, the crown appears to be slipping. 

What has changed? Is Uniswap’s UNI still an excellent investment? Who may be subsequent to the throne? Read on to be taught the answers to these questions and more.

Uniswap was one of many largest decentralized exchanges in the cryptocurrency enviornment in 2021, dealing with the lion’s share of DEX trading volumes.

Traditional centralized exchanges (CEXs) like Coinbase and Binance depend on an order e-book – a listing of all of the buyers and sellers for specific security – to set the prices on the trade.

Decentralized exchanges (DEXs) like Uniswap depend on mathematical formulae to cost the property. This know-how is called an automatic market maker (AMM), and it removes the need for a intermediary to set the prices for the market.

In the historical past of crypto, Uniswap was a big step ahead.

Where CEXs have been sluggish to add new tokens (they had to carefully vet each one), Uniswap could routinely support any Ethereum-compatible token the place there was enough supply and demand. The software-based strategy let the company scale rapidly.

The original version of the Uniswap protocol was launched on the Ethereum mainnet in November 2018. There have been a number of incremental upgrades since then:

  • Version 1 allowed customers to trade between ETH and any ERC-20 tokens.
  • Version 2 launched in May 2020 and added new options and functionality like increased decentralization, Flash Swaps, and ERC-20 swimming pools, allowing direct exchange between totally different Ethereum-based tokens.
  • Version 3 launched in May 2021 and improved security and effectivity, with options like concentrated liquidity, range orders, NFTs, and versatile charges.

The native token of the Uniswap protocol is also called Uniswap (UNI). Its said objective is to serve as the governance token of the protocol, though our thesis is that investing in UNI is like shopping for Uniswap “stock.”

UNI was launched without any ICO/token sale in September 2020. Instead, neighborhood members, protocol users, and liquidity providers got free airdrops of the token, up to 400 UNI (worth approx $1500 on the time).

Synthetix founder Kain Warwick referred to as the airdrop a “galaxy mind move,” since it rewarded early users for his or her loyalty. It was a bit like getting free inventory in an organization at its IPO, as thanks for being a loyal customer.

The airdrop was one other Uniswap innovation that has since been copied by many new crypto tasks, and right now is anticipated of any new token launch.

Uniswap logo

Does Uniswap Have Revenue?

As a decentralized change, Uniswap generates revenues for two major events: the group behind the protocol, and the liquidity suppliers (LPs).

Uniswap Team Revenues

The protocol is managed by the Uniswap firm, shaped by founder Hayden Adams. The company has obtained large monetary backing from distinguished investors like Andreessen Horowitz, Paradigm VC, and Union Square Ventures. (The project isn’t quick on funds.)

Beyond obtainable capital reserves, the Uniswap protocol also earns revenues by charging a small charge for every commerce executed on the DEX. But the overwhelming majority is paid out to liquidity suppliers (see below), and the corporate doesn’t at present run on earnings.

Apart from the trading charges, the opposite main supply of value/revenue for the challenge is its native token, UNI. Although nearly all of the tokens have been airdropped to community members, liquidity suppliers, and protocol users on launch, 20% of the UNI supply has been saved in reserve.

The total provide of UNI is 1 billion. At the time of writing, UNI had a value of $6.90, placing the worth of the 20% reserve at $1.3 billion, which is put aside for the team behind the Uniswap project. Depending on the coin’s market value, this share can herald extra revenues.

Uniswap LP Revenues

Anybody with available crypto property can turn into a liquidity provider, or LP. A decentralized exchange cannot function without LPs: they make the trades possible. Thus, Uniswap desires to encourage as many people as attainable to become LPs.

To understand the income potential for being a Uniswap LP, a fast detour to elucidate how Automated Market Makers work.

In an order book system at a conventional trade like Binance or Coinbase, we’ve buying and selling pairs. (For example, BTC/ETH, ADA/DAI, or any other pairing of two currencies.) On these traditional crypto exchanges, a transaction occurs between a purchaser and a seller, i.e., peer-to-peer.

However, in an AMM exchange, the counterparty isn’t one particular person, but a pool of funds supplied by many various users, with the smart contract setting the value and executing the trade.

This is where LPs enter the equation: the cryptos they lock into Uniswap provide the liquidity to the good contract. Instead of a buyer and vendor, you’ve a buyer and a liquidity pool. People make up the pool.

In Uniswap, these pools are often based mostly on token pairs like ETH/BTC or SOL/DAI. To take part in a liquidity pool, you deposit equal amounts of the 2 tokens in a 50:50 ratio (for example, 50% ETH/50% BTC).

The AMM on Uniswap makes use of a formula of x * y = ok  to calculate the pricing of tokens. In the equation, okay  refers to a pool’s whole liquidity and has to remain fixed. The different two variables, x and y, discuss with the quantity of collaborating tokens.

Since they are so integral to an AMM, liquidity providers are rewarded handsomely by the protocol. The lion’s share of the buying and selling fees charged on the platform goes to the LPs.

In 2021, Uniswap generated over $1 billion in revenues, with the whole amount awarded to the LPs (less the $40 million reserved for the challenge team). This is greater than 99% of the total revenues on the protocol.

It will pay to play within the pool.

gold coins with uniswap logo

The History of Uniswap Revenues

Uniswap started to take off after the launch of v2 in 2020, which allowed customers the liberty to commerce any ERC-20 token pairs. (Before that, v1 only allowed users to commerce ERC-20 tokens against ETH.)

Monthly revenues climbed from $4.8 million in July 2020 to $35 million by December that year. But the actual spike in Uniswap revenues occurred in 2021, as v3 upgrades added further efficiency and features.

The protocol gained widespread acceptance, and monthly revenues shortly exceeded $100 million by March 2021. Uniswap hit a brand new peak in May, with revenues reaching an all-time excessive of $285 million.

Uniswap revenues declined briefly in Q3 2021 earlier than regaining steam in Q4, rallying to $180 million in November. Since then, revenues have been on a sustained downswing, along with the broader crypto market:

uniswap total revenue chartSource: Token Terminal

Some context is required: we are still within the crypto winter of 2022, and cannot see this as a long-term trend with Uniswap, especially without trying at the competitors.

Uniswap Revenue vs. Other DEXs

Uniswap remains the top DEX on Ethereum, but several contenders have emerged, providing stiff competitors for the throne:

SushiSwap and PancakeSwap: Both are clones of Uniswap, built utilizing the latter’s open-source source code and offering related features and similar/lower charges as a competitive benefit.

Compound: Launched in 2017, this is a specialised DEX that creates tokens for property locked on the platform. The tokens allow customers to earn curiosity while retaining the freedom to transfer and use the belongings on different platforms.

Curve Finance: Another specialized DEX, focused solely on stablecoins like USDT, USDC, DAI, and TUSD. User can stake their stablecoins in liquidity swimming pools or swap between different cash on the buying and selling platform.

dYdX: Another DEX launched in 2017, dYdX gives extra choices to users within the form of derivative buying and selling. It overtook Uniswap as the top DEX when it comes to buying and selling quantity in September 2021.

Let’s compare Uniswap’s revenues against the contenders:

uniswap revenues against contendersSource: Token Terminal

It is undeniable that the rise of clones like PancakeSwap and SushiSwap has eaten a piece out of Uniswap’s business. Together, these clone DEXs accrued $1.5 billion in revenues, despite launching after Uniswap.

And dYdX has been steadily eating away at the market share of Uniswap since 2021. With the benefit of an order e-book, derivative trading, and a large airdrop of the dYdX token, the protocol has taken the highest spot of DEX tables with $1.2 billion in trading volumes (daily).

Here is a fast take a look at the recent DEX rankings:

DEX 24h Volume Market Share No. of Markets Type Launch Date dYdX $1.2 billion 0.0016% 10 Orderbook April 2019 Uniswap V3 $1.01 billion 0.0013% 578 AMM May 2021 Kine Protocol $268 million 0.0004% 16 Peer-to-Pool March 2021 Pancakeswap V2 $225 million 0.0003% 3844 AMM April 2021 Honeyswap $142 million 0.0002% 70 AMM July 2020

Source: CoinMarketCap

Why Uniswap is Important for Investors

Uniswap is probably the most successful DEX based on the AMM mannequin. Moreover, if it maintains high revenues and stability, it’s the proof of concept that a crypto change can work, with no centralized order guide or market maker.

The whole idea of blockchain is predicated on decentralization: trusted transactions on a clear but extremely safe community. Uniswap brings that vision to the crypto exchange market — like dealing with your cash your self.

Conversely, mainstream crypto exchanges use centralized architectures to supply a greater consumer expertise and more consumer safety — like trusting a broker or banker to handle your money for you.

2022 has been robust for everyone within the crypto market, but if revenues maintain falling on AMMs, it could possibly be an indication for investors to take a look at different extra profitable alternate options for staking liquidity.

Investor Takeaway

Uniswap faces an uncertain future. Though it still has an enormous userbase, it is shedding market share to competing DEXs that don’t have the AMM model. Many LPs face an uphill battle to retain earnings in AMMs as a outcome of “impermanent loss.”

Still, Uniswap has a historical past of innovation, and delivering on important protocol upgrades. Uniswap ships. It can be far easier to for the common consumer to understand and use than tech-heavy sites like dYdX.

With the rise of knockoffs and non-AMM alternatives, Uniswap has its work cut out: it should proceed to innovate, adding new features and improving its person experience, two areas where it has historically performed properly.

Of course, much will also depend on the lengthy run trajectory of the crypto market. It’s nonetheless too early to put in writing out Uniswap from the world of DEXs, which is why we continue to hold UNI as part of our Future Winners Portfolio.

FAQs

Is Uniswap Worth Investing In?

The Ethereum blockchain is the most popular and vibrant crypto ecosystem on the planet. It can be more likely to receive significant upgrades to efficiency, gas fees, and transaction times over the following several years, making it exhausting for other Layer 1 chains to overtake it.

As the pre-eminent decentralized change on Ethereum, with entry to over 578 trading pairs, Uniswap still has so much to offer buyers thinking about staking their belongings in liquidity swimming pools.

Our funding thesis is that buying and holding UNI is type of a long-term funding in the Uniswap company. Despite the challenges listed above, we imagine in Uniswap’s capacity to execute, and presently have the token as a half of our Future Winners Portfolio.

How does Uniswap make money?

Uniswap makes cash by charging a zero.3% fee for every trade on the platform. Most of this is paid out as a reward to liquidity suppliers. The company also earns revenue via the governance token UNI, which can respect in worth with modifications in the crypto markets.

However, within the current state of affairs, over 50% of LPs on Uniswap are dropping money due to impermanent loss [read our guide here]. In a extremely risky crypto environment, loss in the value of a token isn’t compensated by the fees of a transaction on the DEX.

This causes a loss in dollar worth to investors on the platform. In the longer term, this will likely change with an improved algorithm. But as lengthy as they fail to address impermanent loss, Uniswap will stay a sub-optimal funding option for liquidity providers.

Should you commerce on Uniswap?

DEXs like Uniswap require some technical expertise: you must personal a crypto pockets like Metamask, and understand the method to navigate gasoline fees. In addition, the interface could not provide much hand-holding, in distinction to centralized exchanges. With these caveats, if you would like to purchase or promote any ERC-20 tokens, Uniswap is probably certainly one of the greatest DEXs on the market.

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