Uniswap: 5 billion market value, 11 employees

This article was published on the WeChat public account Arthur Investment Notes, authored by Wang Arthur.

Last week, Coinbase announced that it would become a publicly listed company through a Direct Public Offering (DPO), and almost simultaneously, Grayscale announced a new registered UNI trust fund product.

Whether this is a coincidence, we cannot know, but what is certain is that Coinbase is actively embracing the mainstream market, while Uniswap is being sought after by the mainstream market.

One is the world's largest centralized exchange, and the other is the world's largest decentralized exchange. Compared to Coinbase, I would prefer to talk about Uniswap.

Excluding the FOMO sentiment brought about by the recent surge in UNI's price, I believe that most people, apart from knowing about Uniswap's AMM mechanism and the $600 million airdrop last September, may not have had the chance to study it thoroughly.

However, even in such a restless circle as the cryptocurrency world, to achieve stable investment returns in the long term, we still need to clarify its investment logic. Understanding a "business" in depth is the correct starting point, which will allow us to hold on.

So why is Uniswap worth paying attention to and investing in? I have at least four reasons. Please read on.

/ Reason 1 /

Uniswap represents the direction of advanced productivity

User experience: Users can register without KYC or AML, saving users a lot of time costs, and it is ready to use immediately with a simple user interface and easy operations;

Liquidity: The innovation of the AMM mechanism has changed the operation mode of the traditional order book model. There is no need to spend huge amounts of money on liquidity hedging or to hire market makers to enhance liquidity; any ordinary user can become a market maker by staking. Currently, Uniswap's total value locked (TVL) has reached $3 billion, with daily trading fees averaging $3 million;

Token listing efficiency: Any project team or individual can open a liquidity pool for a token in just a few minutes, saving a lot of integration time and communication costs. Currently, nearly 30,000 trading pairs have been listed on exchanges, with over 100 new pairs added daily, making it hundreds of times more efficient than centralized exchanges.

Some may argue that this unrestricted token listing method could lead to a large number of fake coins and attract fraudulent project teams.

I would say this is akin to giving up using cars to reduce traffic accidents or abandoning the internet to reduce online fraud. Let us try to look at issues from a developmental perspective; what represents the direction of advanced productivity will be voted on by users through their actions.

/ Reason 2/

Uniswap greatly reduces production costs

Coinbase had 1,100 employees in 2019, with 100 of them in compliance roles, while how many employees does Uniswap have? Only 11!

This is not just a 10-fold difference, but a 100-fold difference. How can Uniswap achieve this? Let's compare:

Coinbase operates based on a traditional internet technology system, requiring high server costs, while Uniswap, using blockchain technology, has zero servers and decentralized hosting, significantly reducing server costs. Additionally, centralized platforms need to hire a large number of operations, risk control, security, customer service, and marketing personnel, which Uniswap hardly requires.

Here’s a very specific example: centralized exchanges need to develop specialized wallet support for different main chain projects, and after development, they still need server resources to run nodes. The entire process can take as little as a week for simple tasks and several months for complex ones, consuming a tremendous amount of human, material, financial, and time resources.

In contrast, Uniswap, as a decentralized protocol, can integrate various wallet tools and cross-chain protocols like building blocks, greatly reducing development time and costs.

/ Reason 3/

On-chain data transparency, user assets are under their own control

On-chain data transparency: With the advancement of the financial industry and the improvement of information technology, users' demand for information transparency will become increasingly significant. All business data of Uniswap is on the Ethereum network, publicly transparent and immutable, while even if Coinbase successfully goes public, its operational and financial data remain closed and lagging. Moreover, some unreliable public companies may use "accounting magic" or even data fraud to deceive investors;

Users control their own assets: Hacks of centralized exchange wallets happen every year, and there are uncontrollable regulatory factors that may stop withdrawals at any time, causing panic among users. Uniswap stores assets in a decentralized manner, with all assets managed by 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 asset freezes caused by regulatory or other uncontrollable factors. Decentralization provides users with double protection, exponentially increasing security.

/ Reason 4/

Uniswap can return the growth dividends of the platform to users

Uniswap's AMM mechanism allows every participating user to earn platform profits through mining, and UNI itself, besides being applicable for liquidity incentives and trading scenarios, is also an important community governance token.

Just ten days ago, founder Hayden Adams tweeted that the Uniswap community governance fund is now worth over $500 million (now valued at $700 million), seeking community suggestions on how to use this money.

Community token holders are both "shareholders" and operators, enjoying management rights over the platform. They can also take on roles similar to marketing personnel and service staff. The "water" from around the world is the driving force behind Uniswap's progress; Uniswap has not only achieved innovation in technological paradigms but also in organizational paradigms.

/ A topic that must be discussed /

Contradictory views in the market

Although Uniswap has made tremendous progress, there are still two opposing views in the market:

1. Uniswap's trading experience is poor and incomplete, only able to trade long-tail coins; if centralized exchanges are large supermarkets, then Uniswap is like a crowdfunding vending machine.

2. The AMM mechanism means Uniswap has no pricing power; its prices essentially mirror those of centralized exchanges and are easily manipulated, making it merely a subsidiary of centralized exchanges.

I will attempt to refute these two points.

Rebuttal to Point 1: Uniswap has long surpassed the so-called vending machine stage. From the current development perspective, Uniswap, or the entire DEX ecosystem, is no longer limited to trading long-tail assets.

According to on-chain data, the total liquidity of the top 5 tokens on Uniswap exceeds $1 billion, with a total trading volume of over $270 million in 24 hours, and the average daily trading volume for the entire platform in January has approached $1 billion, accounting for about one-third of Coinbase's trading volume. In September last year, Uniswap's weekly trading volume even briefly surpassed that of Coinbase.

Since its launch in 2018, Uniswap's technology has been iteratively improved. In the latest V3 version plan released by the official team, Uniswap will have the following updates:

1. Limit order model;

2. Optimistic Rollup expansion plan;

3. Integration of ZK-SNARK and prevention of front-running;

4. Fee distribution for UNI holders.

In summary, this means a more perfect user experience, stronger technical capabilities, and a more complete dividend mechanism. If the Uniswap V3 version is successfully implemented, centralized exchanges will truly have no advantages left.

Rebuttal to Point 2: The claim that the AMM mechanism lacks pricing power is purely a misunderstanding. Anyone with some knowledge of exchanges knows that pricing power has always followed liquidity; whoever has greater liquidity will have their prices followed. In centralized exchanges, the top 3-5 exchanges by trading volume are included in the index price as a weight reference by other exchanges, firstly to stabilize prices and secondly to prevent investment losses caused by extreme price fluctuations of a single weighted asset.

It is evident that even in centralized exchanges, there is no such thing as one being a subsidiary of another; liquidity is the most influential factor.

So, under this premise, let’s assume that 95% of a certain token's trading volume comes from Uniswap; does the price on centralized exchanges still matter?

The current issue of price manipulation arises because the AMM is still in its early stages, making it easier to change prices on AMM than on order books due to low capital efficiency, but this will not last long. In the future, the manipulation costs of AMM will be much higher than those of centralized exchanges.

/ Finally /

Let’s talk about token prices

Finally, let’s discuss token prices.

Recently, the BTC market has been unpredictable, yet UNI's price has soared, surprising many. From a previous low of nearly $2 to now $18, it has increased by a full 9 times. Now, whenever I post on social media, people immediately ask me if they can still buy UNI.

My answer is that if you are looking at the short term, the odds may not be great, but if you look at the long term, it is worth having. Because $18 is just the beginning.

Taking Coinbase as a reference, Uniswap's average daily trading volume is about one-third of Coinbase's. In terms of market valuation, compared to Coinbase's current market valuation of $28 billion, Uniswap's $5 billion market cap still has considerable room for growth. Furthermore, in terms of growth potential, Coinbase was established in 2014, while Uniswap has only been around for two years, leaving much more room for future development.

Investment returns come from personal understanding, but having the correct understanding does not necessarily guarantee returns. When everyone knows, and you also know, the returns are minimal; when no one knows, and you know in advance, you become the one to be envied.

May we all become those who are worthy of envy.