The backbone of a decentralized finance protocol like Uniswap is the liquidity pool. A liquidity pool is a massive collection of tokens highly secured by a smart contract. It is the lavishness of these tokens that facilitates tradeability. The liquidity pool is the financial cushion of any decentralized financial ecosystem and they offer excellent business solutions by eliminating the need for trading volume and taking into consideration the market for a particular swap of a token by the traders..
One of the biggest reasons why decentralized exchange protocol like Uniswap uses liquidity pools is the relatively low gas fee. It also opens up opportunities for anyone to become a liquidity provider and earn passive income through yield farming. Above everything, the entire system becomes automated, not only eliminating intermediaries but also explicitly authorizing passive market making. Uniswap is open-source and is licensed under the GPL (General Public License). This means that if you, as an aspiring entrepreneur, would like to develop your own DeFi protocol like Uniswap, you can make it by using a Uniswap exchange clone script.
Read more at: https://medium.com/security-token-offering/defi-based-decentralized-exchange-protocol-like-uniswap-a-quick-guide-2d3a2fccae83
