Crypto lending and financial services firms have spearheaded the latest industry controversies since the collapse of the Terra stablecoin, with many parallels between the web3 financial system and wider markets in 2008. But not all protocols are created equal, and many who have suffered hefty losses in the wake of that fiasco are centralized entities that indeed operate in much the same way as traditional market makers.
This week on chain reaction, we interviewed Mary-Catherine (MC) Lader, chief operating officer of Uniswap Labs, the team behind one of the largest decentralized crypto exchanges. You can listen to the full interview below.
Lader explained that Uniswap itself is a non-custodial, open-source protocol managed by holders of its UNI token. This structure distinguishes Uniswap from “centralized financial” platforms such as Celsius and Voyager, which hold users’ assets in custody on their behalf.
Uniswap Labs, the entity Lader works for, is a team of people dedicated to building and improving the Uniswap protocol, she said, noting that other teams can also develop on it due to its open-source nature. .
“If Uniswap Labs went away and our whole team started doing other things, then the underlying protocol will remain,” Lader said.
With a centralized exchange, the responsible entity typically has a central limit order book that tracks and compares purchases, sales, bids and other offers, Lader said. The centralized exchange then takes a portion of each order in exchange for developing the technology to match trades and determine execution prices, she added.
“TThe fundamental difference in Uniswap’s core innovation is that anyone can create a market for anything, and [let] everyone becomes a market maker instead of relying on centralized and dedicated teams to be market makers in an exchange,” said Lader.
“What that means is that the whole activity… to let you exchange stuff, instead of it being run by a group of people and the technology they’ve developed, you just swap with someone and create a pool on this kind of open- source software on the Uniswap protocol,” said Lader. Pricing is algorithmically determined through the Uniswap protocol itself, and the 0.3% fee users pay to exchange tokens on the platform currently accrues to liquidity providers on the platform, while the protocol itself is not being discounted, she added. .
However, the Uniswap community is currently considering a proposal to add a protocol fee that would allow payouts to UNI token holders, a debate that has raised questions about what the decentralized exchange’s path to profitability might look like.
“That’s the part of what makes the protocol decentralized is that this is all done transparently in the open and [through] a governance forum where all the people who would benefit or could be affected by it can voice their opinion,” Lader said.