What is a Uniswap liquidity provider?Uniswap is a cryptocurrency exchange. You’re probably familiar with a few already. However, Uniswap works quite differently to most of the exchanges you’re used to. An ordinary exchange brings together buyers and sellers to trade with one another. Traders use an orderbook to record the prices at which they wish to buy or sell a token. Once the orderbook matches a buyer and a seller, the trade executes, and the coins change hands. Uniswap does not use an orderbook to match buyers and sellers. Instead, it relies on a unique system known as an automated market maker. An AMM is essentially a smart vault that holds two assets, for example, Bitcoin and Ether, and allows traders to trade with the AMM. For example, say Todd has Ether and wishes to swap it for Bitcoin.
- On a regular exchange, he would place a sell order on his Ether, and the exchange would find someone who wants to buy his Ether at his specified price.
- On Uniswap, Todd would send Ether to the ETH-BTC automated market maker instead of finding a counterparty to buy his Ether. The AMM then sends Todd an amount of Bitcoin according to a dynamic exchange rate.