Decentralized Swap Protocol on Ethereum
22 Sep 2020
Uniswap is a 100% decentralized and permissionless protocol, based on the formula:
x * y = k
x is the number of tokens A.
y is the number of tokens B.
k is the total value of pool A/B.
When k changes, if the values of tokens A and B remain the same, x and y will change.
When x and y change, but k does not change, the values of tokens A and B must change.
For k to change, x and y will need to be changed by the liquidity providers or LPs.
In order for x and y to change, it will need influence from traders through swaps.
Let's say the pool is created named ETH/DAI with 10 ETH and 1000 DAI.
We will have:
x * y = k ⇔ 10*1000 = 10,000.
Price of 1 ETH = 100 DAI and Price of 1 DAI = 0.01 ETH.