Growing interest among DeFi plays, and decentralized exchanges in particular, could drive value creation in UNI.
Automated liquidity pools provide a unique passive income stream to buy and hold investors on the Uniswap platform.
Uniswap's high growth rate has been both a good and bad thing lately.
In the race for global crypto market share, Uniswap (CRYPTO: UNI) has become a go-to investment for many crypto enthusiasts of late. Indeed, the fact that UNI has become one of the top 20 cryptocurrencies by market capitalization is made even more incredible when one considers the fact that Uniswap was created less than three years ago.
Built as a decentralized finance protocol, Uniswap has recently become the largest decentralized exchange (DEX) in the world. This cryptocurrency has grown in importance as a core building block of how crypto investors facilitate peer-to-peer transactions in the crypto world. Indeed, without liquid decentralized markets to trade cryptocurrencies, investors would be reliant on a handful of centralized exchanges for such purposes. This goes against the idea that cryptocurrencies can stand on their own as completely decentralized ecosystems outside of the hands of regulators, governments, and other powers looking to profit off of this space.
Let's dive into what makes UNI unique, and why crypto investors may want to consider this cryptocurrency in light of all the options available right now.
Dark background with an electric-blue graph line crossing its length. In the middle is a set of hands using a tablet.
Image source: GETTY IMAGES.
1. Decentralized exchanges growing in importance
As the native token of the Uniswap decentralized exchange, UNI is a governance token. This allows owners of UNI to participate in decisions on how the network operates, as well as benefit from the rising value of decentralized exchanges over time. In essence, the value of UNI tokens correlates with the inherent value investors see with the Uniswap exchange. That's important to consider for those looking at UNI as an investment.
Decentralized exchanges have grown in importance due to regulations surrounding centralized exchanges. Two of the most common examples of centralized exchanges are Coinbase and Binance. These massive exchanges facilitate fiat-to-crypto purchases, as well as the trading of various mega-cap cryptocurrency tokens. However, many alt coins and other more speculative crypto assets aren't available for trading on these exchanges. This limited number of coins available to be traded has opened the door for decentralized exchanges to fill the void.
Uniswap, being completely decentralized, allows for peer-to-peer crypto trading. This DEX is able to accomplish this using smart contracts (it's built on the Ethereum protocol). Via the use of liquidity pools (we'll get to that in a second), Uniswap is able to seamlessly allow crypto traders to swap more than 30,000 different crypto assets. Accordingly, crypto investors looking for big gains are increasingly seeking out more obscure investments, using decentralized exchanges like Uniswap to facilitate these transactions.
2. Liquidity pools -- flexibility and passive income
As mentioned, liquidity pools are the basis upon which decentralized exchanges such as Uniswap can operate. Essentially, crypto investors can lock in pairs of tradable securities to earn passive income. Each successful trade using a given investor's liquidity pays out a 0.3% transaction fee to the investor staking his or her crypto. Earning a yield for sitting on crypto assets one expects to appreciate over time is akin to free money for many long-term crypto holders.
In the case of Uniswap, investors can earn UNI tokens simply by contributing to the liquidity pool supporting this decentralized exchange. Accordingly, those banking on Uniswap's popularity as a means of exchange in the crypto world may benefit from a broader investor base owning these tokens.
Generating passive income with any investment is a big deal. Indeed, these automated liquidity pools provide the potential for meaningful income for long-term buy and hold investors in a similar way to dividends one receives from stock ownership.
3. Uniswap is growing quickly
As the global crypto ecosystem continues to get built out, it's conceivable that decentralized crypto exchanges could see volumes explode. Indeed, the fact that the global crypto market has recently approximated $2 trillion (that's a lot of capital) suggests the influx of new investors in the crypto space could continue.
Of course, transaction volumes are a key driver of the value of the Uniswap DEX as well as UNI token. Over recent 24-hour periods, Uniswap has facilitated an average of approximately $1.5 billion in transactions. That's every day.
Accordingly, investors looking to jump aboard a fast-moving train may want to consider Uniswap right now. Of course, there's some risk to jumping on a fast-moving train. Indeed, Uniswap's impressive volumes have enticed regulators to scrutinize these transactions of late.
Investing in cryptocurrencies tied to decentralized exchanges offers many benefits to investors bullish on the crypto boom continuing. Indeed, the DeFi movement is strong, and cryptocurrencies such as UNI could represent the future of exchange for investors.
However, these crypto exchanges have come under scrutiny by regulators of late. Whether the SEC, or any regulatory body for that matter, cracks down on Uniswap or any of its peers in a meaningful way remains to be seen. However, for now, investors ought to take a cautious approach with respect to investing in UNI or any other DEX-related token.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.