UNI is the governance token for the popular Uniswap DEX, one of the biggest AMM platforms by TVL and trading volume today. An ERC-20 token on the Ethereum network, UNI is also among the top 15 cryptocurrencies by market cap, making it extremely important for DeFi, let alone the entire cryptocurrency trading industry.
UNI is a true DeFi token. There was no UNI public sale or listing event (although a sizable portion of the token supply has been set aside for early investors) - at inception on September 16th, 2020, all ERC-20 wallet addresses that interacted with Uniswap received at least 400 UNI tokens, while liquidity providers received more. It was a monumental red letter day for many.
As a governance token, one UNI token acts as a single vote towards decisions on how the Uniswap platform functions and allocates resources. Uniswap as a trading platform has been at the forefront of several developments in the DeFi space, and its UNI token has become its centerpiece.
The Importance Of UNI
To reiterate, UNI is the governance token for the Uniswap DEX, which uses a powerful automated market maker (AMM). AMMs, short for Automated Market Makers, allow Decentralized Exchange (DEX) users to get a price quote for the cryptos they want to trade. They interact with smart contracts on the Ethereum network (in the case of Uniswap) so that you can trade on-chain with your own private wallet.
As of late July, 2021, Uniswap handles some 35.5% of the total trading volume on DEX platforms, and only shows signs of increasing that market share through innovative developments that benefit crypto investors like you. You can therefore see why governance of the platform has become a delicate issue among actors in DeFi.
Looking at the UNI contract on Etherscan, you might wonder why so much of the token supply is owned by relatively few addresses. In short, the Uniswap team expects that the UNI community will grow and diversify enough for distribution to be considered acceptably decentralized. This is a long-game play on its part, and increases the hype that such governance tokens have been fueling until now.
Centralized governance of cryptocurrency platforms has long irked enthusiasts and true believers alike, being at odds with the vision that crypto has laid out for the world. . This is a vision of transparency and accountability, which can be checked in a decentralized fashion. Centralized exchanges have long fallen short of living up to this promise.
The failings of CEX operators prompted developers to create a decentralized financial ecosystem where governance is in the hands of the holders. Uniswap is now tackling this issue with its UNI token, which also aims to take power (such as market share) away from major exchanges like Binance and Coinbase. Ironically, though, both Binance and Coinbase listed UNI for trading.
How Can You Use UNI?
As with so many governance tokens across the DeFi ecosystem, UNI holders stake their tokens to vote for or against proposals for the platform. These can range from decidedly high-impact proposals, such as creating Uniswap volume KPI options to help divest Uniswap’s community treasury into stablecoins, to mundane proposals like the one to lower the proposal submission threshold.
Holding UNI bears with it some responsibility to actively participate in the decision-making for the platform. As UNI tokens become more broadly distributed to crypto users over time, the groundwork that governance participants lay down now for the world’s more popular DEX will become far more apparent. Even seemingly small governance proposals may wind up having a significant impact on functionality, years from now.
By the way, you can check the governance proposals of just about all of your favorite DeFi projects at Snapshot.
A governance token like UNI admittedly has limited uses outside of its native platform. This is not a problem so long as the platform provides measurable value to the ecosystem as a whole, which Uniswap most surely does. That being said, you can still use UNI outside of Uniswap to make some money in the short term.
The most common use for UNI is in speculative trading. The token was valued at around $3 when it was airdropped, then proceeded to shoot up to nearly $45 in a matter of months. At its height, the free airdrop was worth about $18,000! Savvy traders keep their eyes on the price fluctuations on UNI regularly. Often, the way UNI’s chart moves is how the rest of DeFi moves - making it a great indicator of the short-term health of the ecosystem.
There are also dozens of liquidity pool staking opportunities where you can earn rewards for staking UNI. Incentivized pools for UNI exist on Uniswap (of course!), but virtually all major platforms and many of the minor ones include UNI pools in their pool structure. UNI/ETH, UNI/USDC, and UNI/DAI are the most common pools with UNI. Uniswap has also expanded to the Optimism network to increase coverage of decentralized, permissionless trading opportunities.
On SushiSwap, for example, you can make your own pool with UNI and any other token of your choice. Now, no one can guarantee that your new pools on Sushi’s Kashi will attract any users (and therefore any fees), but that’s entirely up to your ability to shill your ideas.
UNI has become one of the most widely-used cryptos in DeFi, solely by virtue of the fact that traders tend to prefer swapping on Uniswap over any other DEX to-date. The founder, Hayden Adams, and the rest of the core team at Uniswap have demonstrated time and time again their devotion to promoting cryptocurrency adoption on as broad a scale as possible.
These days, DeFi trading enjoys a mere 5.3% dominance in the global crypto markets. That amount is expected to grow substantially in the coming years. Uniswap has based the distribution of its UNI token on the market assumption that DeFi growth is inevitable. Therefore, starting in 2024, there will be an annual 2% inflation on UNI to accommodate the larger user base.
As of now, there are several platforms similar to Uniswap that wish to tackle the same or similar issues. However, no platform has yet seen the levels of success achieved by Uniswap. For these reasons, you can expect to see Uniswap (UNI) continue to contribute enormous value in the market for years to come.