Liquidity pools

• From (as of 1-2020) DeFi Rate:

"In practice, Uniswap leverage liquidity pools to make unique markets for supported assets according to a deterministic algorithm. By using an automated market maker (AMM), the exchange can quote prices to the end-user according to some predefined ruleset. In the case of Uniswap today, a variant called the “Constant Product Market Maker Model.” is used, particularly due to a feature that enables the exchange to always provide liquidity, no matter how large the order size nor how tiny the liquidity pool.

For this to work, the spot price of any given asset increases as the desired quantity increases. While this does result in larger orders suffering from increased spot prices, the system never has to worry about running out of liquidity. Stated another way, Uniswap always maintains an aggregate supply in its smart contracts, meaning that the larger the liquidity pool gets, the lower the slippage across any trading pair is likely to be."