Uniswap — liquidity pools

When it comes to researching exchanges and buying first crypto, it is very difficult to chose the concrete one. There are plenty of them, including Uniswap.

This characteristic unicorn attracts beginning investors, mainly because of fame, but it has more to offer…

Agenda:

• intro,
• definition,
• structure,
• how it works,
• liquidity pool,
• conclusion.

Definition

Uniswap is the decentralized exchange, which enables peer to peer transfers. Moreover, the same name is used for cryptocurrency which represents this company, it’s symbol is UNI.

Structure

The blockchain of uniswap is built on top of ethereum and govern by holders of UNI. What is worth to mention, uniswap blockchain is entirely open sourced, it means that code is available for anyone.

Such an approach shows that security aspect is more important than owning and not sharing structure of this exchange.

Uniswap supports the exchanging any digital asset in ERC-20 token standard. To achieve that, platform is constructed upon the smart contracts. It results with automatic execution of transactions in the market.

How it works

Uniswap allows to trade different digital assets by making swaps via liquidity pools. After every transaction balance is automatically restored.

Liquidity pool

Liquidity pool is some amount of cryptocurrencies locked in smart contracts. In traditional financial system, selling some assets can be impossible in different moment. In uniswap, there are always assets to exchange, provided by pool.

Let’s consider an example of liquidity pool for trade ETH/USDC. ETH portion is presented as “x”, USDC as “y”.

Uniswap multiplies these two values and obtains “k”. K is a total liquidity in this pair of holdings.

The main idea is to have “k” constant. It means that, if somebody buys 1 ETH for 2000 USDC, there is more USDC in the pool and less ETH.

To have balance constant, price of eth should increase. This mechanism determines pricing.

How liquidity is provided?

Mainly, liquidity is provided by users, who locks their assets in Uniswap smart contract for some reward. Users received part of fees, when their pool is used.

Conclusion

Uniswap is one of the most famous crypto exchange available on the market. Liquidity pools are providing possibility to trade assets, even when users do not want to exchange with their holdings.