UNISWAP: Impermanent Loss and Risk Profile of a Liquidity Provider

Understand

Uniswap is a decentralized exchange (DEX) and was first launched on November 2, 2018 on the Ethereum mainnet [1] and is part of an Ecosystem of products in Decentralized Finance (DeFi).

• It replaces a traditional order book type of trading common on centralized exchanges (CEX) with a deterministic model that swaps currencies (or tokens/assets) along a fixed price function determined by the amount of currencies supplied by the liquidity providers.
• Liquidity providers can be regarded as investors in the decentralized exchange and earn fixed commissions per trade.
• They lock up funds in liquidity pools for distinct pairs of currencies allowing market participants to swap them using the fixed price function.