Uniswap's institutional ambitions

Running in circles. This is the main criticism levelled today at decentralised finance (DeFi), which still maintains too few links with traditional finance to hope to develop further. And some of its major players, such as Uniswap Labs, are well aware of this.

According to our information, the company behind the most famous decentralised exchange platform (DEX) has been holding a series of meetings over the past few months in Europe, and particularly in France, to find out what financial institutions need.

"They have taken note of the fact that their development will depend on increased collaboration with leading financial institutions", confirms a source at Bercy. The creation of an office in Paris would be envisaged to facilitate discussions with the major European financial players.

What are its arguments to convince?

👉 A revolution for stock market operators

Almost a year ago, Uniswap Labs, the company behind the eponymous decentralised (DEX) platform, closed a $165 million Series B led by Polychain and backed by the prestigious Andreessen Horowitz and Paradigm funds.

If Uniswap has whetted investors' appetites, it is because its AMM (Automatic Market Maker) technology enables digital assets to be exchanged without the intervention of a trusted third party. This is revolutionary given that there are currently several intermediaries when traditional financial securities are traded on the stock market (brokers, clearing houses, stock market operators, etc.). With Uniswap, the protocol takes care of everything.

"AMMs, such as the Uniswap Protocol, allow for increased efficiency through automation of a number of operations and also the removal of counterparty risk. These are topics that often come up in the discussions we have with institutional players," explains Jon Fink Isaksen, Head of Policy in Europe for Uniswap Labs.

Because the aim is now to address this target and go beyond the simple framework of decentralised finance (DeFi) users. "Uniswap's objective seems to be to be both competitive and compatible with traditional finance (TradFi), not just DeFi", confirms Paul Frambot, CEO of Morpho Labs.

In practical terms, users are able to provide liquidity themselves to trading pools managed by smart contracts that ensure the process is automated. In exchange, the liquidity providers receive the fees paid by the traders.

"One of the great advantages of Uniswap is that it offers liquidity on pairs that are not listed by centralised trading platforms such as Coinbase or Binance," explains Cyrille Pastour, CEO of Swaap, a market making protocol on Ethereum.

At the level of decentralised finance (DeFi), Uniswap today concentrates more than 80% of the DEX market share.

In the first half of 2023, it even managed to process more transaction volume than the second-largest platform on the market, Coinbase, in the second quarter. According to a report by Bitwise, Uniswap totalled $265 billion in transactions compared with $235 billion for the US exchange platform over the period.

Even more so as V4 of the protocol allows users greater freedom in the construction of pools. “With v4, the idea is to increase the potential for innovation built directly on top of the Uniswap Protocol by providing customizability for users. This is of interest for all types of projects, from DeFi companies to institutional players.”, says Jon Fink Isaksen.

👉 The most powerful project in the ecosystem

The other major point that would lead to institutional appeal is the launch of UniswapX, whose white paper was published last July.

It is an aggregator that enables investors to find the best prices across the various DEXs while reducing the impermanent loss phenomenon, which has so far been one of the main criticisms levelled at Uniswap.

There are already many on the market such as 1inch or Paraswap. "But Uniswap has succeeded in establishing itself as one of the benchmarks for decentralised finance and it would be wrong not to capitalise on this. The protocol has managed to capture a network of users that enables it to develop its applications and gives it credibility with the traditional players," explains Paul Frambot.

👉 Uniswap Labs is now in the business of making money

As surprising as it may seem, Uniswap was not making any money until last October, with the protocol only paying liquidity providers. Historically, Uniswap Labs has never earned anything from its protocol.

But in October, the company began charging a 0.15% fee related to the use of its interface (which operates the protocol but is owned by Uniswap Labs) and wallet on certain transactions involving the cryptocurrencies generating the highest volume of transactions, such as ETH, USDT, or even DAI.

According to a Dune analysis chart, the introduction of these fees has already earned Uniswap Labs nearly $1.5 million.

Today, DeFi is unable to scale in part because the user experience is still too imperfect. “As Uniswap Labs, one of our key priorities is to build products that are simple, safe and durable. Building the best possible experience in our products - retail and business - could help drive wider adoption from traditional players”, says Jon Fink Isaksen.

An experience that won't be free, and Uniswap Labs intends to use its know-how to penetrate financial institutions.