Uniswap is a decentralized exchange built on Ethereum that allows for easy and quick swapping of ERC-20 tokens at market prices using an automated market-making protocol.

Decentralized trading is made possible by users who provide liquidity in the form of asset pools. These pools consist of two ERC-20 tokens deposited in a 50:50 value ratio, for example Ether and Dai.

When a user wishes to buy Ether with Dai, the pool provides the Ether and receives the user's Dai, slightly changing the overall balance of the pool and the values of the two assets in the pool.

In return for providing this liquidity, the pool participants (liquidity providers) receive a 0.3% transaction fee and in some cases, UNI tokens which Uniswaps native token.

Pool participants hope that the transaction fees will outweigh any potential losses in value the pool incurs as a result of providing liquidity for trades that are unfavorable to the balance of the pool (also known as impermanent loss).