UNIUSD
UNI / United States dollar
crypto

Uniswap is a decentralized exchange built on Ethereum that utilizes an automated market making system rather than a traditional order-book. Instead of matching individual buy and sell orders, users can pool together two assets that are then traded against, with the price determined based on the ratio between the two. Uniswap is a protocol that facilitates the exchange of tokens on Ethereum. Unlike most other DEXs, there is no native token and every action occurs on-chain. Typically, exchanges function by using an order-book where market makers set the price at which they are willing to buy and sell an asset. The difference between these prices is how they get paid for this work. Uniswap does away entirely with the order book and instead opts to have market makers deposit assets into a pool that traders can then trade against. The price is determined algorithmically based on the proportion of the two assets being traded. Price mechanism Uniswap uses what's known as a Constant Product Market Maker that is designed to always provide liquidity regardless of the order size or amount of funds in the pool. This is achieved by asymptotically increasing the price as the size of the buy order increases, leading to potentially significant slippage on large orders. Trading pools consist of an ERC-20 token and an equivalent amount of ETH, with the product between the two sums remaining constant. Any given transaction increases one sum while decreasing the other and the price changes based on the ratio between the two. Users can also swap between two ERC-20 tokens, however, Uniswap will perform two separate actions with each of their respective pools. Providing liquidity When liquidity providers add to a pool, they receive newly minted liquidity tokens entitling them to their proportion of the total pool as well as the 0.3% fee generated off each trade. These tokens are not speculative and simply keep track of how much of the pool is owed. Liquidity providers need to supply both assets in the same proportion they are currently at, otherwise, they will change the ratio and thus price. This would result in the immediate loss of money as the price change should get arbitraged out by trading bots. Even if providers supply the correct ratio of each asset, large price changes can result in the loss of money. (Details on how this work can be found here). Therefore, providers are hoping for substantial volume of trading around the price they entered such that the fees generated account for any potential losses.