Most publicly accessible markets use a central limit order book style of exchange, where buyers and sellers create orders organized by price level that is progressively filled as demand shifts. Anyone who has traded stocks through brokerage firms will be familiar with an order book system.
The UniWSwap protocol takes a different approach, using an Automated Market Maker (AMM), sometimes referred to as a Constant Function Market Maker, in place of an order book.
At a very high level, an AMM replaces the buy and sell orders in an order book market with a liquidity pool of two assets, both valued relative to each other. As one asset is traded for the other, the relative prices of the two assets shift, and a new market rate for both is determined. In this dynamic, a buyer or seller trades directly with the pool, rather than with specific orders left by other parties. The advantages and disadvantages of Automated Market Makers versus their traditional order book counterparts are under active research by a growing number of parties. We have collected some notable examples on our research page.
Swap fees are distributed pro-rata to all in-range liquidity at the time of the swap. If the spot price moves out of a position’s range, the given liquidity is no longer active and does not generate any fees. If the spot price reverses and reenters the position’s range, the position’s liquidity becomes active again and will generate fees.
Swap fees are not automatically reinvested as they were in previous versions of Uniswap. Instead, they are collected separately from the pool and must be manually redeemed when the owner wishes to collect their fees.