What Is Uniswap (UNI), and Should You Buy It?

If you like decentralized exchanges, the Uniswap token is worth a look.

Uniswap is the governance token for the Uniswap decentralized cryptocurrency exchange. To understand how it works and whether the token is worth buying, we first need to understand decentralized exchanges or DEXs.

Uniswap basics

• What it does: UNI is the token for the Ethereum-based decentralized exchange called Uniswap. It's a governance token, so owners can participate in decisions on how the platform is run.
• Management team: Uniswap was founded by Hayden Adams, a former engineer at Siemens.
• Date launched: The exchange began trading in 2018 and Uniswap launched its token in September 2020.
• Market cap: $11.3 billion (CoinMarketCap, July 2021).
• Availability: Most major U.S. cryptocurrency exchanges.

How decentralized exchanges work

There are two main types of cryptocurrency exchanges: centralized and decentralized. If you're relatively new to crypto investing, you're probably more familiar with centralized exchanges like Coinbase or Gemini.

Centralized exchanges act as a middleman to facilitate buying and selling. Most have know-your-customer (KYC) requirements, so users have to validate their identities by submitting personal information. Many use custodial crypto wallets, meaning investors can leave their crypto assets on the exchange. And they often have a relatively limited number of coins available to trade.

Decentralized exchanges like Uniswap don't have a middleman. Traders can swap tokens directly with one another. DEXs use smart contracts to facilitate trades and don't use custodial wallets. And instead of the more traditional order books with a buyer and a seller, most DEXs use liquidity pools.

Liquidity pools contain pairs of tradable currencies. For example, an investor might put Ethereum (ETH) and Uniswap into a liquidity pool on Uniswap. They'd then get paid a percentage of the trading fees each time people swapped ETH for UNI or UNI for ETH. Uniswap users can earn UNI by providing liquidity on the platform.

One way to profit from owning UNI is to hold it in the belief the price will increase in the long term. But if you're considering buying it, it makes sense to understand how to earn interest as well.

Understanding the competitive environment

With any investment, you need to evaluate how it stacks up against the competition. Uniswap is one of the top DEXs, but it's also worth looking at:

• SushiSwap (SUSHI)
• 1inch (1INCH)
• PancakeSwap (CAKE)

The platforms are similar (since the code is open source, several of them are based on the same code). The main areas of difference are trading fees, the number of tradeable tokens, and the number of users.

Two issues to be aware of with all DEXs are regulation and gas fees:

• Gas fees are different from trading fees. The trading fees on most DEXs are minimal, but the gas fees -- the ETH you pay to make the transaction on Ethereum's network -- can really add up. For example, to trade $70 of ETH to UNI on Uniswap at the time of writing, I'd have had to pay over $10 in Ethereum gas fees. PancakeSwap runs on the Binance Smart Chain, which is less congested and charges lower gas fees.
• Authorities may crack down on DEXs. Regulation is a hot topic right now, as authorities look for ways to control the sprawling industry that is cryptocurrency. One concern is how to prevent money laundering through anonymous trading -- which could have a big impact on DEXs.

Uniswap is based in the U.S., and right now, U.S. residents can trade on the platform. That's a big advantage over other DEXs which are not allowed in the U.S. It also recently launched a v3 upgrade, which has a feature called concentrated liquidity. This lets investors set their own liquidity price range (so you might opt to only provide UNI-ETH liquidity when ETH is worth more). It gives it another advantage in the marketplace as the code is exclusive to Uniswap for the first two years.

Should you buy it?

As you can see from the above, Uniswap (UNI) has a lot going for it. There are even rumors it might enter a partnership with Robinhood, though it's not clear what form that might take.

Like many cryptocurrencies, UNI's price has decreased significantly since reaching an all-time high of $44.97 on May 3. Even so, it's up over 270% since the start of this year. According to CoinMarketCap data, it's trading at $19.25 as I write.

All cryptocurrencies are high-risk investments. Not only are they volatile, meaning they could see heavy losses as well as dramatic gains, but it is such a new industry, we don't yet know how it will unfold.

As an investor, it is important to think about whether Uniswap could perform well in the long term -- and whether you're comfortable with the risks involved. Moreover, ask yourself if you think it can perform better than other investment opportunities.

WANT TO LEARN MORE? Check out Motley Fool Money's complete Uniswap review.