Unwrapping The Money Machine: Liquidity Pools and Yield Farming

A Peek into The Mechanics Behind the Money via Uniswap

The Concept

If you were the “Bank of You” and all of your cash was tied up in stocks and bonds and the market was going up — and you wanted to keep it in the market — your ability to support large customer withdrawals, or purchase additional hot securities would be limited if you relied on your accounts, alone.

If the “Bank of Me” allowed you to tap into our cash to support withdrawals and securities purchases — in exchange for a reasonable fee — your management team would — more than likely — be ok with that arrangement.

In our example, The Bank of Me is providing the Bank of You liquidity. We’re providing you access to our liquidity pool — and in return, you pay us a fee. Banks around the world do this every single day.

Let's figure out how it works in Decentrialzed Finance (or “DeFi”), together.

The Trick is in the Swap

One cannot participate in a Uniswap Liquidity Pool unless they have acquired a “coin pair” via a swap.

Uniswap creates a market for coin projects that want to be traded on their decentralized exchange (“dex”). They run what’s called an “automated market maker”…