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What is Uniswap Liquidity?

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Uniswap Liquidity is not the most intuitive or easy concept to understand. The concept of a Decentralized-Exchanges (DEX) is what brought Uniswap Liquidity into being. This article will attempt to demystify the critical points you should know about Uniswap Liquidity.

In Centralized-Exchanges (CEX), there are order books that allow for people to trade with each other, without a middle-man. With DEXs, there are no order books. Who or what is going to provide the initial market or the LIQUIDITY for these trades to be even possible?

In short, Uniswap liquidity is the economic energy that is committed to both sides of a liquidity pool to facilitate a trust-less and decentralized trade.

Who Thought Uniswap Liquidity was a Good Idea?

Uniswap liquidity came into existence when Hayden Adams, the great mind behind Uniswap, understood that there needed to be a mechanism that could allow people to trade and make a transaction without permission or trust.

An order book on a decentralized exchange was not an option, and so Uniswap liquidity was born. Hayden Adams realized liquidity pools and market-making was the best way to facilitate a decentralized experience.

How does the Uniswap Liquidy Incentivize LPs?

To get people to commit their liquidity to Uniswap, there needed to be a way to incentivize people to provide the initial liquidity. Liquidity providers (LPs) are rewarded by earning small percentages of each trade that occurs when token owners essentially rent out their tokens in providing liquidity. The incentive is also determined by how much of the overall liquidity you are providing and creating.

The Dangers of Uniswap Liquidity

Even with all the benefits of Decentralized-Exchanges, there are a few things you need to be aware of regarding liquidity. Since liquidity can be provided by anyone, those same providers can also remove that same liquidity, just as easily. If only one or two parties are the only ones providing the liquidity, there is a risk of those parties exiting with no way for buyers to sell these worthless tokens back for a refund. This is known in the cryptocurrency world as a “rug pull”.

Another danger many liquidity providers have encountered is something knows as “impermanent loss”. Impermanent loss happens when one of the assets you are providing liquidity for loses value much faster than expected or never really recovers in price, leaving you as a liquidity provider with less return on your investment.

Should You Be a Uniswap Liquidity Provider?

As you’ve read about Uniswap liquidity, it may sound enticing to become a Uniswap Liquidity provider. However, being a liquidity provider does not come without its pros AND cons. Before you consider providing liquidity to any exchange,

it’s vital to learn as much as you can about the DEX/CEX you are providing liquidity for, to see if they are trustworthy or not. It is also imperative to know if the exchange you want to use has completed any audits. These precautions only mitigate the risk for liquidity providers.

It should be mandatory for you to Do Your Own Research (DYOR) and FULLY understand the risks of becoming a liquidity provider before entering.

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