Uniswap is a decentralized exchange built on two contracts on the Ethereum blockchain. 1 contract is called «Exchange» and the other «Factory». For people who do not understand what decentralization is, in short, there are protocols which are made without a central management mechanism. No one is sitting on a kill button, or can change rules without consensus one of the token owners. All procedures are automated and can therefore scale without increased costs.
On Uniswap you can exchange ERC-20 tokens, which are standard protocols at Ethereum. This means that in case you discover a token you want to buy, you are able to pay with Ethereum and receive what you wanted to purchase. The trade happens on-chain, with no intermediary or interference from a third party, right contrary to the liquidity community. The cost of 0.3 percent goes to people who create liquidity, and this is the key.
Action has exploded on this decentralized market, which has taken over one of the largest crypto exchanges in the last week.
Automated market making
The reason why you have to insert similar worth in ERC-20 and Ether is that you need to represent either side of the marketplace. In the end, it is market which you earn money on. By being a large liquidity provider in a contract using higher activity, the income can be very large. It is like having a stock exchange without needing to bear the expense of investing.
Earlier this week we see that the decentralized «stock exchange» Uniswap had a higher trading volume compared to the regulated exchange Coinbase Pro. It’s a result of 9 weeks of growth and there’s not any good reason for this momentum to reduce immediately. Many people therefore wonder how Uniswap functions and why it’s so popular.
At Uniswap, you who own a token may place your investment and the corresponding sum in Ether at a liquidity community and get fees. It functions as an automated market maker. Let us say you own 10,000 XYZ, and you’re wondering how you can make money on the place outside of the appreciation. You’re discovering that there is a growing market on Uniswap with this token. You deposit 10,000 XYZ and equivalent in Ether from the liquidity community and thus get your pro-rata share of their trading charges from transactions in this arrangement.