Uniswap (UNI)

Uniswap, in simple terms

Uniswap is one of the largest decentralized exchanges for digital money. 

Think of it as a big vending machine for cryptocurrencies, where you can swap one type of digital money for another anytime you want.

The "vending machine" has three main parts:

1. Liquidity Pools: Imagine a giant pool of cryptocurrencies, say ETH, DOGE, and USDT. This pool is equivalent to the items in the vending machine.
2. Trading Made Simple: Let's say you're thirsty. Instead of finding some random guy with a bottle of Coca-Cola and entering negotiations, you can simply put money into the wending machine and pull out a bottle. Similarly, if you want some ETH, you can just put some USDT into the liquidity pool and pull out some ETH. You don't have to find someone willing to sell ETH directly.
3. Rewards for Contributing: If you decide to put your coins in one of these pools, without taking anything back, you can earn a little bit of money every time someone makes a trade with your coins. This reward is like a tip for keeping the pool full and ready for others to make trades.

In summary

Uniswap lets you swap cryptocurrencies easily and it can even reward you if you help out by adding your coins to the pool.

It is a big, automatic, unbiased machine where everyone can trade their digital coins smoothly and quickly.

Uniswap and competition

As I said in the beginning, Uniswap is one of the largest decentralized exchanges (DEXs). 

The competition is tough with many DEXs scrambling to attract costumers. 

So let's see how Uniswap is doing compared to them. 

Total Value Locked

An important metric when comparing dexes is "Total Value Locked" (TVL).

TVL is just the size of the liquidity pool (the items in the vending machine). 

Think of it like this: 

Higher TVL = more liquidity = better trading experience.

One way in which the trading experience gets better is that a larger liquidity pool allows users to execute larger trades without significantly impacting the price of the asset. 

Below you see the TVL on Uniswap and the largest competitors:

Uniswap: 4.8 billion

PancaceSwap: 1.9 billion

Curve DEX: 1.9 billion

Raydium: 1.6 billion

Aerodrome: 1.3 billion

Uniswap is more than twice as big in terms of TVL compared to the closest competitors PancaceSwap and Curve DEX.

In other words, except PancaceSwap and Curve DEX, the competition is basically non-existent.

Volume comparison

Liquidity is one measure of how well a DEX is doing. Another is "trading volume" (how much trading is going on).

Remember, the function of a DEX is to facilitate trading.

Hence, trading volume is one of the most important measures to value a DEX. 

Below you see the different DEXs compared in terms of weekly volume:

1. Uniswap: $10,500 Million
2. PancaceSwap: $5,500 Million
3. Raydium: $4,700 Million
4. Aerodrome: $3,000 Million
5. Curve DEX: $1,000 Million 

Uniswap's $10.5 Billion volume is 2x higher than the closest competitor PancaceSwap.

The gap has decreased (in August 2024, Uniswaps volume was more than 5X that of Pancaceswap), but is still significant.

Future Value of Uniswap

Again, to value a DEX, we need to look at volume.

To see if a DEX is expensive or cheap, one can look at how the price/volume has developed in the past and compare it to the current ratio.

Here's what I mean:

When we take Uniswaps total market value and divide it by the volume, we get a number.

This number helps us understand if Uniswap is expensive or cheap compared to how much it's being used.

By looking at this number, we can decide if Uniswap is expensive or cheap and whether it might be a good or bad investment.

Furthermore, we can use it to make a price prediction and calculate the potential ROI of buying at the current price. 

By using historical data about the volume and market cap, I created a graph showing you whether Uniswap is cheap or expensive.

It works like this: the higher the chart, the more expensive it is. 

Uniswap was quite cheap as of January 2024:

We see a huge spike in the first half of 2021. This makes sense as the mania phase of the previous bull market started around that time.

Altcoins were exploding left and right, most of them only available at decentralized exchanges like Uniswap.

This explosion in decentralized trading, combined with the massive hype in the mania phase, led to an overvaluation of Uniswap.

In 2021, market cap / volume peaked at over 0.4.

As of October 2024, the relationship is at 0.13 so the protocol is still cheap compared to 2021. 

In fact, with volumes at about half the highs of 2021, Uniswap is about 2 times cheaper now.

Will Uniswaps value (MC/volume) ever return to 2021 levels...?

Who knows, but let's entertain the scenario:

1. We enter a new mania phase, like the first half of 2021.
2. The monthly volume on Uniswap reaches $200 Billion (roughly 2.3x the previous all-time high).
3. The market cap / volume reaches 2021 levels (0.4), putting the market cap at $80 Billion.

Given a circulating supply of 600,000,000 UNI, the price can be calculated as follows:

$80,000,000,000 / 600,000,000 UNI = $133.33

Given that the monthly volume on Uniswap reaches 2,3x 2021 levels and that the MC/volume reaches 0.4, the price of Uniswap will increase to $133.33.

This is just an estimate based on a thought experiment, but it gives you an idea of the potential ROI.