The Uniswap network is intended to facilitate the buying and selling of crypto assets in a manner similar to that of a regular exchange.
It accomplishes this through the use of smart contracts, which allow crypto traders (known as crypto liquidity providers) to deposit crypto assets into pools. Other crypto traders can then buy and sell these assets thanks to these smart contracts. The "Factory" smart contract includes an exchange registry as well as a way for deploying a "Exchange" contract for a specific ERC20 coin.
As a result, every valid ERC20 token can be exchanged on Uniswap using their own unique exchange contract. Each ERC20 token has precisely one exchange contract, and if a token does not yet have an exchange, one can be created by anyone using the Uniswap factory contract.
The first liquidity provider in a freshly established liquidity pool establishes the initial price of the assets in the pool by supplying an equal value of both tokens.
Do Uniswap Have Real Liquidity?
Uniswap has four times the daily revenue of Bitcoin and is now the second-largest cryptocurrency in terms of revenue, after only Ethereum.
Each contract has an ETH reserve as well as an ERC20 token reserve. Users of Uniswap can exchange ERC20 tokens for Ethereum, Ethereum for ERC20 tokens, or ERC20 tokens for other ERC20 tokens. Because of its relevance in offering a basic DeFi functionality of asset exchange, Uniswap is integrated with practically all major DeFi protocols.
When a liquidity provider contributes liquidity to a contract, Uniswap's native liquidity tokens are created to monitor the relative fraction of total reserves given by each liquidity source.
The Automated Market Maker (AMM) Technology
The Automated Market Maker, or AMM technology, is the driving factor behind the Uniswap DEX protocol. It is essentially a smart contract that is used to manage liquidity pools and provide tokens that are used to facilitate trades. The AMM system eliminates the need for buyers and sellers to wait for another party to complete a transaction.
The AMM algorithm aids in determining the effective price of a token based on the interaction between token supply and demand in liquidity pools. The Uniswap decentralized exchange charges a simple 0.30 percent fee for each transaction on the platform, which is automatically deposited into the liquidity reserve.
With the AMM method, the price of each asset is determined by the highest buyer and the lowest seller.
The Automated Market Maker method uses a popular mathematical equation to modify asset prices based on supply and demand. The mathematical equation works by altering the price of a coin based on the quantity of tokens in each pool.