How Does Uniswap Make Money?

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Contributor, Benzinga
March 25, 2022
verified by Ryan McNamara

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If you are looking to exchange tokens or provide liquidity for a reward, Uniswap is the go-to place for many crypto enthusiasts. However, Uniswap is like any other company in that it must generate revenue and profit to stay afloat. Uniswap brings in cash in a unique way, combining fees and its own token to turn a profit. 

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How Uniswap Makes Money

Uniswap essentially makes money in two separate ways: trading fees and the UNI token.

Uniswap is a decentralized exchange (DEX) that allows users to swap tokens using liquidity provided by other users. Uniswap charges users a small fee whenever a trade is made. These fees vary depending on the size, type and volume of the pool. While Uniswap could take these fees as straight profit, it has an obligation to pay the individuals who are providing liquidity for the pool. Almost all the fees are given back to the liquidity providers, but in certain trading pools, Uniswap takes a small portion of these fees. While this may seem like an insignificant margin, Uniswap generated over $1 billion in revenue in 2021. While most of this revenue was redistributed to liquidity providers, the company was able to achieve revenue of over $40 million. 

The other way Uniswap makes money is through its governance token, UNI. The token allows holders to vote on proposals, such as fee structures, and to trade on the DEX. However, 20% of the UNI supply is reserved for Uniswap employees, totalling over $1.3 billion reserved for the employees.

How Do Liquidity Providers Make Money?

Uniswap is unlike many other liquidity providers in that it has large investors lined up and a large portion of its own token reserved for employees. However, the fee structure is common among liquidity providers as a way to bring in revenue. 

As stated earlier, DEXs charge a fee every time a transaction is completed. However, this fee is largely redistributed to the people providing liquidity. The DEX keeps a small portion of these fees, meaning it pays the liquidity providers slightly less than what they bring in from fees.

Another way that DEXs can make money is by charging a fee each time a new pool is created. For example, a DEX could charge $100 for a user to create an ETH/SHIB pool, allowing it to earn a lot in the beginning, but the revenue would phase out as more pools are created. 

Is Uniswap Worth Investing In?

While Uniswap is a major player in the crypto sphere, hundreds of other DEXs offer similar services. Because of this, Uniswap faces competition and fights for users to trade on its exchange. In the past couple years, the DEX market has grown considerably, and Uniswap has lost some of its market share. As of March 2022, Uniswap is down over 75% from its all-time highs. However, there is still hope for the token to rise again.

Rumors have emerged that Uniswap may collaborate with Robinhood Markets Inc. (NASDAQ: HOOD). If Uniswap could secure the partnership, it would almost certainly increase the price of the token and attract more users to the DEX. 

Uniswap is also able to separate itself from the competition through a devoted user base that could allow it to outlast some of its competitors in the long run.

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Should You Use Uniswap?

If you are looking to provide liquidity, trade on a DEX or have a say in the project moving forward, then Uniswap is certainly worth using. The DEX offers a variety of use cases and is looking for new ways for the token to be used.

One way that UNI has gained use is through its Uniswap Grants Program, which gives developers a chance to receive funding and feedback for their code. This unique method allows developers to earn UNI and contribute to the ecosystem. 

What Does Uniswap Spend Money On?

Uniswap’s highest expenditures are towards its liquidity providers. As stated previously, more than 99% of the revenue it receives in the form of fees is given back to the liquidity providers. However, it is still able to turn a healthy profit from the extremely high volume the DEX has.

Another way Uniswap spends money is on advertising, typically spent on video marketing and social media. Advertising allows Uniswap to attract more users and earn more in fees. 

How Is Uniswap Funded?

Uniswap has attracted numerous investors since its inception. These investors range from small venture capital firms to major players such as Coinbase Global Inc. (NASDAQ: COIN). While the exact amount of funding is unknown, it is certainly in the range of 8+ digits. Uniswap can use this money to further its reach and increase profitability. These investors are also given a share of UNI tokens as they are released.

While many crypto projects use an initial coin offering (ICO) to raise money, Uniswap released its token via airdrop and did not make as much as it could have from the initial release. 

Uniswap Outlook for 2022 and Beyond

As stated earlier, Uniswap faces harsh competition, specifically from larger operations such as SushiSwap and 1inch. However, a strong community may allow Uniswap to outlast this competition and generate a steady income for years to come. However, the inverse could also be true, and the competition could continue to increase until Uniswap is no longer relevant.

Additionally, a potential partnership with Robinhood could launch the token. However, this partnership is purely speculative, showing no hard evidence that it is going to happen. 

On paper, Uniswap has a solid business model that should allow them to generate healthy cash flows. However, non-financial factors could impact its ability to continue growing in the future.

Frequently Asked Questions

Q

What does DEX stand for?

A

A DEX is a decentralized peer-to-peer marketplace where users can trade cryptocurrencies.

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About Caden Pok

Caden has been involved with cryptocurrency for several years. He began trading and investing in crypto in 2018. Now, we mines multiple coins and holds positions in Cardano and Ethereum. He is very experienced with DeFi technology.