How does Uniswap work?

Uniswap is a decentralized exchange protocol built on the Ethereum blockchain.

It allows users to trade Ethereum-based tokens without the need for a centralized exchange. Uniswap works by allowing users to create liquidity pools of tokens, which are then used to facilitate trades between buyers and sellers. When a user wants to trade tokens, they first deposit an equal amount of both tokens into a liquidity pool.

This creates a pool of liquidity that can be used for trading. When someone wants to buy or sell tokens, they can do so directly from the pool without having to go through an intermediary. The price of the token is determined by an algorithm based on the amount of each token in the pool and its relative demand and supply.

The fees for using Uniswap are relatively low compared to other exchanges, as there is no middleman taking a cut from each transaction. Instead, Uniswap uses an automated market maker (AMM) system that charges a small fee for each transaction in order to incentivize liquidity providers and cover operational costs. This fee is distributed among all liquidity providers in proportion to their contribution to the pool.

In addition, Uniswap also provides tools for developers who want to create their own decentralized applications (dApps) on top of its protocol. These dApps can be used for anything from creating new token pairs and trading them on Uniswap, to creating custom automated market makers (AMMs) with different fee structures or even creating entirely new decentralized exchanges based on Uniswap’s protocol.