How did Uniswap create a market value of 5 billion with just 11 employees?

Original title: "Uniswap: 5 billion market value, 11 employees"

Original source: Arthur's Investment Notes

Last week, Coinbase announced that it would become a listed company through a direct listing (DPO). Almost at the same time, Grayscale announced the new registration of the UNI trust fund product.

We don’t know whether this is a coincidence or not, but what is certain is that Coinbase is actively embracing the mainstream market, and 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 like to talk about Uniswap more.

Excluding the fomo sentiment caused by the recent increase in UNI coin price, I believe that most people, apart from knowing about Uniswap's AMM mechanism and the $600 million airdrop in September last year, may not have had time to study it carefully.

But even in a fickle circle like the cryptocurrency world, if we want to obtain stable investment returns in the long term, we still need to understand its investment logic. A deep understanding of a "company" is the right start, which will allow us to hold on to it.

So why is Uniswap worth paying attention to and investing in? I have at least 4 reasons. Please read on.

Uniswap represents the direction of advanced productivity

User experience: No KYC or AML is required for user registration, which saves users a lot of time and is ready to use. The user interface is simple and easy to operate.

Liquidity: The innovation of 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, and there is no need to spend a lot of money to hire market makers to strengthen liquidity. Any ordinary user can become a market maker through staking. Currently, Uniswap's total value locked (TVL) has reached 3 billion US dollars, and the average daily transaction fee has reached 3 million US dollars;

Token listing efficiency: Any project party or individual can open a token liquidity pool by themselves in a few minutes, saving a lot of docking time and communication costs. Currently, the exchange has launched nearly 30,000 trading pairs, and more than 100 new ones are added every day. The efficiency is hundreds of times that of centralized exchanges.

Some people may say that this unlimited listing method may lead to the emergence of a large number of counterfeit coins and attract fraudulent project parties.

What I want to say is that this is like giving up using cars to reduce car accidents, or giving up using the Internet to reduce online fraud. Let us try to look at the problem from a development perspective. What is the direction that represents advanced productivity? Users will vote with their actions.

Uniswap greatly reduces production costs

Coinbase had 1,100 employees in 2019, 100 of whom were compliance officers. How many employees does Uniswap have? Only 11!

This is not a 10-fold difference, but a 100-fold difference. Why can Uniswap do this? Let's look at the comparison:

The operation of Coinbase relies on the traditional Internet technology system, which requires high server costs. Uniswap, which uses blockchain technology, has 0 servers and decentralized hosting, which greatly reduces server costs. Secondly, the operation of a centralized platform requires the employment of a large number of operation and maintenance personnel, risk control personnel, security personnel, customer service personnel, marketing personnel, etc., which Uniswap hardly requires.

Here is a very specific example. Centralized exchanges need to provide special wallet development support for different main chain projects. After development, they also need server resources to run nodes. The whole process can take as short as one or two weeks or as long as several months for a complex project. This is an extremely time-consuming and labor-intensive process.

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

The data on the chain is transparent, and users’ assets are controlled by themselves

On-chain data transparency: With the advancement of the financial industry and the improvement of informatization, users’ demands for information transparency will become more and more significant. All business data of Uniswap is on the Ethereum network, which is open, transparent and cannot be tampered with. Even if Coinbase is successfully listed, its operating data and financial data are closed and lagging. What’s more, there are some unreliable listed companies that may use "accounting magic" or even data fraud to deceive investors;

Users control their own assets: Wallets in centralized exchanges are stolen every year, and there are also force majeure factors from regulators, which may stop withdrawals at any time, causing panic. Uniswap uses a decentralized way to store assets, which are all 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 asset freezes caused by force majeure factors such as regulation. Decentralization gives users double protection and the safety factor is increased exponentially.

Uniswap can return the platform’s growth dividends to users

Uniswap's AMM mechanism allows every participating user to obtain platform revenue through mining, and UNI itself, in addition to being suitable for liquidity incentives and trading scenarios, is also an important community governance token.

Just 10 days ago, founder Hayden Adams tweeted that the value of the Uniswap community governance treasury has exceeded $500 million (now worth $700 million), and sought advice from the community on how to use the money.

The token holders in the community are both "shareholders" and operators, and enjoy the management rights of the platform. They can also assume roles such as marketers and service personnel. The "tap water" from all over the world is the driving force for the unicorn Uniswap to move forward. Uniswap has not only achieved innovation in the technical paradigm, but also innovation in the organizational paradigm.

Opposing views in the market

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

1. Uniswap’s trading experience is poor and imperfect, and it can only trade long-tail currencies. If centralized exchanges are large supermarkets, then Uniswap is like a crowdfunded vending machine.

2. The AMM mechanism determines that Uniswap has no pricing power for the currency price. Its price is essentially a mirror image of the centralized exchange, which is easy to manipulate the currency price, so it can only be a vassal of the centralized exchange.

I will try to refute the above two viewpoints.

Counterargument 1: Uniswap has long passed the so-called vending machine stage. Judging from the current development, Uniswap or the entire DEX ecosystem is no longer limited to the trading of long-tail assets.

According to on-chain data, the liquidity of Uniswap’s top five tokens totaled more than $1 billion, with a total 24-hour trading volume of more than $270 million. The average daily trading volume of the entire platform in January was close to $1 billion, accounting for about 1/3 of the world’s largest centralized exchange, Coinbase. In September last year, Uniswap’s weekly trading volume even briefly surpassed Coinbase.

Since its release in 2018, Uniswap has been continuously improving its technology. In the latest official V3 version plan, Uniswap will have the following updates:

1. Limit order model;

2. Optimistic Rollup expansion solution;

3. Integrate ZK-SNARk and prevent preemptive redemption;

4. Fee Distribution for UNI Holders

To sum it up in one sentence, it has a more perfect user experience, stronger technical capabilities, and a more complete dividend mechanism. If Uniswap V3 is successfully implemented, centralized exchanges will really have no advantages.

Rebuttal 2: It is a pure misunderstanding that the AMM mechanism has no pricing power. Anyone who has a certain understanding of exchanges knows that the pricing power of currency prices has always followed liquidity. The price follows whoever has greater liquidity. In centralized exchanges, the top 3-5 exchanges in terms of trading volume will be included in the index price as a weight reference by other exchanges. First, it is to stabilize the currency price, and second, it is to prevent investment losses caused by fluctuations in the price of a single-weighted currency under extreme market conditions.

It can be seen that even in centralized exchanges, it does not matter who is a vassal of whom, and liquidity is the factor with the most say.

So, under this premise, let’s assume that 95% of a token’s trading volume comes from Uniswap. At this time, does the price of the centralized exchange still matter?

The problem of price manipulation arises at this stage because the current AMM is still in its early stages, so it may be easier to change prices on the AMM than on the order book. This is due to capital inefficiency, but it will not exist for long. In the future, the manipulation cost of AMM will be much higher than that of centralized exchanges.

Talk about the price of currency

Finally, let’s talk about the price of the currency.

Recently, the BTC market has been volatile, but the price of UNI has been rising, which is beyond many people's expectations. From the previous low point of nearly 2 US dollars to the current 18 US dollars, it has increased by 9 times. Now as long as I post on WeChat Moments, someone will immediately ask me, I want to buy UNI, can I still get on board?

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

Taking Coinbase as a reference, Uniswap's average daily trading volume accounts for about 1/3 of Coinbase. In terms of market value, compared with Coinbase's current market valuation of US$28 billion, Uniswap's market value of US$5 billion still has considerable room for growth. In terms of growth potential, Coinbase was established in 2014, while Uniswap has only been established for two years, so there is still much room for development in the future.

The return on investment comes from personal cognition, but correct cognition does not necessarily mean a return. When everyone knows it and you know it too, the return is very small; when no one knows it but you know it in advance, you are the person who deserves envy.

May we all become people worthy of envy.