Liquidity has long been a problem for many cryptocurrency exchanges as it is the metric that determines the likelihood of a successful exchange of two cryptocurrency assets. Centralized exchanges dominated the cryptocurrency market until a decentralized exchange like Uniswap came along. By using a new decentralized trading mechanism, Uniswap ensures that liquidity is never an issue for cryptocurrency exchanges. While Uniswap has amassed clients from the world over, it still lacks in certain areas. This is also why cryptocurrency traders are looking for Uniswap alternatives.
What is Uniswap and how does it work?
Uniswap is a decentralized exchange that facilitates P2P market making. The platform enables users to trade cryptocurrencies without involving any centralized third party. Uniswap is hosted on the Ethereum platform and has the native token UNI. It uses a permissionless design and allows users to trade digital assets, create a new market in which to exchange a new pair of digital assets, and provide liquidity.
The liquidity pool is the backbone of Uniswap. Liquidity pools can be described as a large group of coins protected by a smart contract. They are the financial backbone of any decentralized financial ecosystem like Uniswap. Uniswap also uses a liquidity pool to avoid steep gas fees. It also allows any user to provide liquidity and generate passive income through yield farming.
Why do we need alternatives to Uniswap?
While Uniswap is an example of a very functional decentralized exchange, it does lack in a lot of areas. The need for a Uniswap alternative has long been felt by many in the crypto community, particularly due to the disadvantages of Uniswap. Here are some of the reasons why we need a Uniswap alternative.
- Supports only Ethereum-compatible cryptocurrencies
While Ethereum is one of the most used blockchains to come up with new blockchain projects, there are many other blockchains available as well. Uniswap only supports the exchange of Ethereum and Ethereum-compatible cryptocurrencies. This leaves behind a significant part of the crypto community who own tokens built on other blockchain networks.
- Impermanent loss
There is a high chance of suffering impermanent loss for users of Uniswap when providing liquidity. Impermanent loss refers to a kind of opportunity cost when Uniswap users provide liquidity to a given pool, but the price of those assets in the pool changes. This deters a portion of potential users. There have been reports that a significant number of liquidity providers on Uniswap have incurred losses from impermanent loss.
- Network speed
Uniswap’s UNI token is an ERC20 token and runs on the Ethereum network. It thus succumbs to all the features of the first-mover of Ethereum smart contracts. Ethereum is known for its sluggish network which the team behind it is trying to fix. However, such a solution is still not available. On the other, smart contract chains like Tron, Cardano and Binance are much faster than Ethereum. They can achieve faster transaction speeds as they are capable of processing 1000s of transactions compared to the 22.34 TPS speed of Ethereum.
- No insurance coverage for lost cryptocurrencies
The cryptocurrency market has been victim to many hacks and data breaches over the years. High-profile incidents such as the $615 million from Axie Infinity have made people realize that security is of utmost importance. As such, cryptocurrency insurance offers investors and exchanges a limited amount of reimbursement for any funds lost due to theft. However, Uniswap does not have insurance for any lost crypto due to fraudulent activity.
- Fake coin projects
The fact that anyone can list tokens on Uniswap can work both ways. While many see it as an advantage, others fear that this feature will be used by scammers. There have been instances where people list fake coins to trick other investors to send them assets in exchange. This becomes a problem and may lead to permanent losses as transactions are irreversible.
Conclusion
Uniswap has succeeded in providing a good DEX experience in a market where hurdles and barriers to entry continue to limit adoption. However, it still needs to address several areas of concern as mentioned above. Newer alternatives to Uniswap are being released, which aim to address these particular areas of concern.