Investing is not as hard as you think. Yes, it may cost little but the output is also good. Defi space with liquidity pools such as UNISWAP and Mooniswap is in a trend today for investment in blockchain.
Firstly, the question arises: what is UNISWAP?
It is a decentralized exchange protocol that is built on Ethereum. In short, this is an automated liquidity protocol. In this, there is no order book or centralized party required to make a trade. UNISWAP allows the user to do the trade without the intermediaries but the person must have an Ethereum wallet to exchange tokens. It may have some limitations.
How does trade happen without an order book?
UNISWAP works with the models which have liquidity providers creating liquidity pools. A decentralized pricing mechanism essentially smooths out order books at depth also there is no listing process at all. ERC-20 token may be launched as long as there is a liquidity pool available for traders. Because of that UNISWAP doesn’t take listing fees.
How does it work?
The work can be done with an Automated Market Maker (AMM) design. Which is a variant of Constant product market maker design? AMM holds liquidity pools that traders can trade against. Who deposits the equivalent value of two tokens in a pool is a liquidity provider. Traders have to pay the fees to the pool which is contributed to the liquidity providers according to their share in the pool. For calculating the total liquidity in the pool UNISWAP takes two quantities and multiplies.
It is a myth that UNISWAP makes money but it doesn’t.
It is a decentralized protocol without a native token. Around 0.3% is the charge taken by liquidity providers.
How to use UNISWAP protocol?
This open-source protocol is a frontend application.
For using this download/open https://app.UNISWAP.org or https://UNISWAP.exchange.
- Firstly, go to the UNISWAP interface then connect your wallet. (Trust wallet etc.)
- Choose the token from which you would exchange and click on the swap.
- Now confirm the transaction request which is pop-up in your window.
- Wait a while and then check your status on https://etherscan.io.
1inch Launches AMM Mooniswap protocol –
They improve the AMM algorithm by a considerable amount also they managed to decrease the slippage that is happening on decentralized exchange and by doing this they can increase the rewards that liquidity providers get through trading fees by 50-200%. Because the decentralized market is going to earn more income. This protocol is the latest protocol from the rest.
So, basically, most of the liquidity pools will be earning a lot more rewards from the liquidity providers on the Mooniswap exchange.
Know how to use the Mooniswap exchange?
The process is the same as UNISWAP. But the smart contract fees are quite higher.
Risk in liquidity pool and impermanent loss?
This is the most important part to know about. But firstly, know what is impermanent loss?
It is the number of gains that anyone received by just huddling one of the tokens in the trading pair. In short, the price which can sometimes go up and sometimes down is an impermanent loss. The more they go up the higher impermanent loss seen. Risk in the liquidity pool is almost based on the definition. But, not always.