What is the working mechanism of Uniswap in the context of digital currencies?

1 answers

• Mehdi MirzapourFeb 20, 2024 · 2 years ago
  Uniswap is a popular decentralized exchange protocol that allows users to trade digital currencies directly from their wallets. It has gained significant traction in the DeFi space due to its unique mechanism. Unlike traditional exchanges, Uniswap doesn't rely on order books. Instead, it uses liquidity pools to facilitate trades. These pools are filled with tokens by liquidity providers, who earn fees in return. When a user wants to make a trade, Uniswap automatically matches their order with the available liquidity in the pool. The price is determined by a constant product formula, which ensures that the ratio of tokens in the pool remains constant. This mechanism provides a decentralized and efficient way to trade digital currencies without the need for intermediaries like centralized exchanges.
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