Last week Coinbase announced that it would become a public company through a direct public offering (DPO), and at almost the same time, Grayscale announced the registration of a new UNI trust fund product.
Whether this is a coincidence or not is unclear, but what is certain is that Coinbase is proactively embracing the mainstream market and Uniswap is being sought after by the mainstream.
One is the world’s largest centralized exchange and the other is the world’s largest decentralized exchange. Compared to Coinbase, I’d rather talk about Uniswap.
Excluding the FOMO sentiment brought on by the recent UNI price increase, I believe that most people probably haven’t had a chance to properly research it beyond knowing about Uniswap’s AMM mechanism and that $600 million airdrop last September.
But even in a fickle circle like the cryptocurrency world, to get stable investment returns in the long run, we still need to figure out its investment logic. Going deeper to understand a “business” is the right place to start before we can hold it.
So why is Uniswap worth the attention and investment? I have at least 4 reasons. Please read on.
Uniswap represents the direction of advanced productivity
User experience: no KYC or AML required for user registration, which saves users a lot of time and cost, and is ready to use with a simple user interface and operation.
Liquidity: The innovation of the AMM mechanism has changed the operation of the traditional order book model. No need to spend huge amounts of money on liquidity hedging, no need to hire market makers at great cost to enhance liquidity, any ordinary user can become its market maker by staking. Currently, Uniswap’s total value locked volume (TVL) has reached $3 billion, with an average daily trading fee of $3 million.
The efficiency of listing tokens: Any project owner or individual can spend a few minutes to open a liquidity pool of tokens on their own, eliminating a lot of docking time and communication costs, and the exchange has already listed close to 30,000 trading pairs, with over 100 more being added every day, making it hundreds of times more efficient than centralized exchanges.
Some may say that this unlimited token listing may lead to a large number of counterfeit tokens appearing and attracting fraudulent project parties.
But, I would say that this is like us giving up using cars to reduce car accidents, or giving up using the Internet to reduce online fraud. Let’s try to look at things from a development perspective, what is the direction that will represent advanced productivity, and users will vote with their actions.
Uniswap significantly reduces production costs
Coinbase has 1100 employees in 2019 alone, with 100 compliance staff alone, and how many employees does Uniswap have? Only 11 people!
It’s not a 10-fold difference, it’s a 100-fold difference. Why can Uniswap do it? Let’s look at the comparison.
The operation of Coinbase relies on the traditional Internet technology system, which requires paying high server costs, while Uniswap, which uses blockchain technology, has 0 servers and decentralized hosting, which greatly reduces server costs; secondly, the operation of a centralized platform requires employing a large number of operation and maintenance personnel, risk control personnel, security personnel, customer service personnel, marketing personnel, etc., which Uniswap almost doesn’t need any of them.
Here is a particularly specific example, centralized exchanges need to do special wallet development support for different host chain projects, and after development, they also need server resources to run the nodes, and the whole process, as short as one or two weeks for simple ones, and as long as several months for complex ones, is an extremely labor-intensive, material-financial and time-consuming thing.
However, Uniswap, as a decentralized protocol, can graft various wallet tools and cross-chain protocols like building blocks, which greatly reduces development time and cost.
Transparent data on the chain, users own assets in their own hands
Transparent data on the chain: With the progress of the financial industry and the improvement of information technology, users’ demand for information transparency will become more and more significant. Uniswap’s entire business data is on the Ethereum network, which is open and transparent and cannot be tampered with. While even if Coinbase is successfully listed, its operational data and financial data are closed and lagging, not to mention that there are some unreliable listed companies that may use “accounting magic” or even fake data to deceive investors.
User assets in their own hands: Theft of wallets from centralized exchanges happens year after year, and there are force majeure factors from regulation that can stop withdrawals at any time, making people panic. Uniswap does storage in a decentralized way, and all of them are kept by the users themselves. Based on this, there is no single point of entry or single point of failure in terms of security, and it also avoids the freezing of assets due to force majeure factors such as regulation. Decentralization gives users double protection and exponentially increases the security factor.
Uniswap is able to give back the growth dividends of the platform to its users
Uniswap’s AMM mechanism allows every participating user to mine for revenue, while UNI itself, in addition to applying liquidity incentives and trading scenarios, is an important community governance token.
Just 10 days ago, founder Hayden Adams tweeted that the Uniswap community governance pool is now worth more than $500 million (now worth $700 million) and sought advice from the community on how to use the money.
The holders of the community are both ‘shareholders’ and operators, who enjoy the management rights of the platform. They can also take on roles like marketers and service workers. The “tap water” from all over the world is the driving force behind Uniswap, a unicorn that has not only innovated the technical paradigm but also the organizational paradigm.
Opposing views in the market
While Uniswap has achieved tremendous progress, two opposing views remain prevalent in the marketplace:
1. Uniswap’s trading experience is poor and imperfect, and it can only trade long-tail tokens. If centralized exchanges are large supermarkets, Uniswap is like a crowdfunded vending machine.
2. The AMM mechanism determines that Uniswap has no pricing power over tokens, and its price is essentially a mirror image of the centralized exchange, so it is easy to manipulate the price, and it can only be used as an appendage of the centralized exchange.
I’ll try to refute the above two points.
Counter-argument 1: Uniswap is long past the so-called vending machine stage. As things stand now, Uniswap, or the entire DEX ecosystem, is no longer limited to trading long-tail assets.
According to on-chain data, Uniswap’s top 5 tokens have total liquidity of more than $1 billion and a total 24-hour volume of more than $270 million, while its platform-wide average daily trading volume in January was close to $1 billion, accounting for about 1/3 of that of Coinbase, the world’s largest centralized exchange. In September of last year, Uniswap briefly surpassed Coinbase in terms of the weekly trading volume.
Uniswap’s technology has been iteratively improved since its release in 2018, and in the latest official release of the V3 release plan, Uniswap will have the following updates:
1. limit order model.
2. an extension of the Optimistic Rollup scheme.
3. Integration of ZK-SNARk and prevention of preemptive redemption.
4. Cost allocation for UNI holders
To sum it up in one sentence, a more perfect user experience, more powerful technical capabilities, and a better dividend mechanism. If Uniswap V3 is successfully implemented, there is really no advantage for centralized exchanges.
Counter-argument 2: AMM mechanism has no pricing power is purely a misunderstanding. Anyone who knows anything about exchanges knows that the pricing power of tokens has always followed liquidity, and the price will follow whoever has more liquidity. In centralized exchanges, the top 3–5 exchanges in terms of trading volume are included in the index price as a reference weight by other exchanges, one, to stabilize the price, and two, to prevent investment losses caused by fluctuations in the price of a single weighted token in extreme quotes.
Clearly, even on centralized exchanges, it doesn’t matter who is attached to whom, liquidity is that element that has the most say.
So, with that in mind, let’s assume that 95% of the volume of a given token comes from Uniswap, does the price of the centralized exchange still matter at this point?
This issue of price manipulation arises at this stage is because AMMs are still very early stage, so it may be easier to change prices on AMMs than on the order book, due to capital inefficiencies, but it won’t be there for long, and in the future, AMMs will be much more expensive to manipulate than centralized exchanges.
Article from Arthur Wang
Translated by Yang(Mengyan Fiance)