Yes, Uniswap [UNI] To become king in 2022, but at what cost?

This year, the cryptocurrency market has seen a significant drop in value, losing more than $1.4 trillion. This decline is attributed to various problems faced by the industry, including failed projects and lack of liquidity.

The industry has faced many challenges, with a number of prominent players in the ecosystem filing for bankruptcy, including BlockFiAnd the percentage VoyagerAnd the Three shares of capitaland recently, FTX and Alameda.

The decentralized finance (DeFi) sector suffered a similar decline as the total value locked (TVL) — the total value of all assets held in a DeFi product — across all protocols fell by 77%. The reason behind the decline of DeFi TVL is not far off.

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In 2020, the US government implemented stimulus packages that increased the supply of US dollars, which led to higher demand and higher prices (inflation) in 2021.

But to combat this rising inflation, the Federal Reserve raised interest rates in 2022. That made it more expensive to borrow money and encouraged investors and consumers to cut back on spending.

As a result, investors have moved away from the speculative asset class (cryptocurrencies) to put their money into risk-free returns on US Treasury bonds. This led to a sharp drop in the value of many crypto assets, and the returns on DeFi investments and DeFi TVL in general.

Source: Defillama

Different versions of Uniswap: 2022 retrospective

Launched in 2018, Uniswap is a decentralized cryptocurrency trading protocol where users can trade cryptocurrency assets.

The initial release of the Uniswap protocol, known as Uniswap V1, was launched as a trial measure to evaluate the effectiveness of the Automated Market Maker (AMM) liquidity model. In May 2020, Uniswap V1 was replaced by Uniswap V2, which brought several improvements and new features to the platform.

Launched in May 2021, Uniswap V3 quickly gained popularity in 2022 bringing a number of significant upgrades to DEX. This included concentrated liquidity, flexible transaction fees and range orders.

This series of upgrades by Uniswap V3 led to its rapid adoption, causing TVL to grow significantly compared to the previous two versions. According to information from DeFiLlamaUniswap V3’s TVL of $2.45 billion represents a 74% share of Uniswap’s total TVL.

By 2022, Uniswap V3 will quickly eclipse the DEX that came before it as increased use increases its share of total DEX trading volume.

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As of January 2022, Uniswap V3 had a 39.4% share of the total trading volume on DEX, data from Dune analytics open. By May, its share of total trading volume peaked at 72%.

Interestingly, the position of Uniswap V3 was threatened during the FTX debacle as other DEXs saw a surge in usage due to investors fleeing centralized exchanges to DEXs. As a result, its share of total DEX trading volume fell to 36.5% on November 11. This was the lowest point in the entire 12-month period.

This recovered soon after and was noted at 46.5% on 29 December. On an annual basis, Uniswap V3’s share of total DEX trading volume grew by 27%.

Source: Dune Analytics

The high trading volume of Uniswap V3 was due to the continuous increase in the number of daily users. According to data from Dune Analytics, its steady increase in daily users has placed it above all other DEXs as the DEX with the most daily users.

When FTX collapsed, Uniswap v3 hit a daily high of 25,552 users on November 9th. It saw the largest influx of users from centralized exchanges amid the market turmoil caused by the unexpected FTX disruption.

As of December 29, Uniswap v3 had a daily user count of 12,949.

Source: Dune Analytics

Despite the huge success seen with the V3 install in 2022, Uniswap could not escape the effects of the severe bear market that caused many DeFi protocols to record declines within a 12-month period.

Uniswap’s monthly trading volume peaked in January when the DEX recorded a trading volume of $71 billion. However, this decreased steadily to $17 billion in December.

Source: Dune Analytics

Uniswap: headline numbers for 2022

Uniswap experienced a sharp decline in trading volume during the first three quarters of the year. According to information from mesariThe leading DEX index ended the fourth quarter of 2021 with a trading volume of $238.28 billion.

By the end of Q1 2022, when the bear market was fully formed and investors started moving capital into US Treasuries, Uniswap’s trading volume had fallen by 21%. It ended the quarter with a volume of $189 billion.

The situation did not improve in the second quarter. The serious demise of Terra LUNA created a contagion that brought down many other players in the industry. DeFi protocol trading volume decreased and DeFi TVL decreased further. Uniswap finished the second quarter with a volume of $172 billion, down 8% qoq.

This was followed by a sharp 30% drop in trading volume at the end of the third quarter, Mesari reported.

In addition to the decrease in trading volume, the liquidity added on Uniswap also decreased. Liquidity at the end of the period amounted to $3.9 billion at the end of the third quarter, and it has declined by more than half of its value since the beginning of the year.

Likewise, Uniswap’s liquidity provider fees have decreased over the course of the year.

Source: Messari

UNI had a hard time

UNI is the governance token of the Uniswap protocol, which allows its owners to vote on changes to the protocol and participate in its decision-making processes. It is also used as a token within the Uniswap platform, allowing users to access certain features and services.

At the beginning of the year, the token was trading at $17.1, according to data from CoinMarketCap. This price level remained UNI’s highest selling point during the 2022 bear market.

UNI’s value appears to have fallen more than 71% in 2022, changing hands at $5.01 at the time of writing.

Source: CoinMarketCap

Final thoughts

Uniswap has had a difficult year due to a challenging macro environment, geopolitical uncertainty, and institutional divestitures. Although DEX saw a drop in trading activity during the year, Uniswap cemented its position in the cryptocurrency industry by creating an investment team and NFT market aggregator. These moves positioned the protocol to remain a major player in the cryptocurrency economy.

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