Uniswap’s functionality is based on the concept of liquidity pools, which are essential to its AMM model. When users trade tokens on Uniswap, they are effectively interacting with these pools. For instance, if you want to trade Ether (ETH) for DAI (a stablecoin), you would do so against the ETH/DAI liquidity pool.The price of tokens on Uniswap is determined by the ratio of the tokens in the pool. If the ETH/DAI pool has more ETH and less DAI, the price of ETH in terms of DAI will rise. This price adjustment mechanism ensures that the pool remains balanced, but it can also lead to slippage during large trades, where the price received is slightly different from the expected price.Liquidity providers (LPs) play a crucial role in Uniswap’s ecosystem. They deposit tokens into these pools and receive liquidity tokens in return, which represent their share of the pool. These liquidity tokens can be redeemed at any time for the underlying assets plus any accrued fees. This model incentivizes LPs to provide liquidity, as they earn a portion of the 0.3% fee charged on every trade.