Uniswap is a decentralized exchange protocol that allows users to swap ERC20 tokens, peer-to-peer. These are tokens built on top of the Ethereum blockchain. In this article, we will explain how Uniswap and its liquidity pool work.
As a decentralized exchange protocol, Uniswap does not rely on the traditional order book model which is adopted by centralized exchanges. Instead, Uniswap uses exchange contracts that hold a pool of specific ERC20 tokens and ETH that users can swap with each other.
Anyone can initiate an exchange contract to register a new token for trading. To trade ETH for a token, a user first sends ETH to the contract’s pool, the location of which is specified by the exchange contract address.
The amount of token that is returned is based on an automated market maker formula, a curve that defines the price as a function of supply. The more the token is in demand, the higher the price. Conversely, a supply glut will drive down the token’s price. In other words, the price is based on the ratio of ETH to token in the pool.
The pool maintains the correct price relative to external markets through arbitraging by third parties. For example, when the token price in the Uniswap pool is cheaper relative to centralized exchanges, buy from the pool and sell on the exchange, driving the price of the pool back up.
It’s like anything else. If you have a small supply of something and one person takes a large portion of it, very little is left for others to take. It’s not balanced or even. It is inequitable. But, if you incentivize users to add to the liquidity pool (as Uniswap does by rewarding them with fees) then even if someone trades a large amount, it doesn’t have the same impact on the remainder of the pool. There is still plenty there to provide balance and stability.
In summary, Uniswap has pioneered a way for users to create / add liquidity to a pool to earn fees and trustlessly swap ERC20 tokens. So what does this mean for the $COIN pool on Uniswap?
To begin, Coin has locked $4M in liquidity to ensure token holder security and piece of mind. As indicated by Unicrypt, this is the largest locked liquidity pool on Uniswap and in the entire industry: https://v2.unicrypt.network/pair/0xff62e62e8b3CF80050464B86194e52c3eAd43bb6
As the value of the $COIN token increases, the amount of liquidity in the pool will continue to increase proportionately in value. Our goal is to have this pool increase by hundreds of millions in value as the price and market capitalization for $COIN increase. This strategy eliminates any risk of rug pulls and enables token holders to know that they have a guaranteed means to trade $COIN now and for the future. We, at Coin, hope that this demonstrates our commitment to token holders and the overall industry. This is a long-term journey wherein we are creating value and continued growth for decades to come.
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