In 2023, the buzz around decentralized finance, or DeFi, is inescapable. Conversations around DeFi are not limited to just crypto aficionados but have permeated the general populace. Poised to catalyze a transformative shift akin to the internet's impact years ago, DeFi offers a novel approach to traditional finance systems. A standout feature? Governance tokens, empowering DeFi users with the autonomy to mold a project's direction, bypassing conventional boardroom decisions. Given its inherent advantages over centralized counterparts, it's no wonder the DeFi realm has witnessed exponential growth and the emergence of myriad innovative projects, one such being Yearn Finance and its associated YFI token.

Yearn's trajectory in the crypto space has captivated many. Reflecting on its journey, after its public launch in July 2020, the Yearn token's value catapulted from $3,000 to a staggering $67,000 by 2023, with a notable peak of over $90,000 in 2021. Boasting a market capitalization exceeding 2 billion, YFI has solidified its position as the 56th largest cryptocurrency—a commendable feat for a project still in its nascent stages.

Having laid out the foundational understanding of Yearn, it's time to delve deeper: What exactly are the mechanics of the Yearn Finance protocol, and what sets its YFI token apart?

With its native YFI token, Yearn Finance promises to provide an easy way to access high yields for crypto holdings. The project’s founder Andre Cronje, is a South African entrepreneur and tech developer well known in the DeFi community. Cronje came up with the idea for Yearn as a way to solve  yield inconsistencies  on DeFi platforms. 

Admittedly, Yearn Finance can be a little complicated to grasp for newbies in the DeFi space. So let’s break down how it works so you can better understand why Yearn is an important DeFi project. 

As soon as you enter the Yearn platform you are presented with five options on the homepage: 

Through these options, the Yearn protocol provides lending aggregation, yield generation, and insurance on the Ethereum blockchain. In other words, Yearn gives its users alternative finance options through its decentralized protocol. 

The most impressive feature of Yearn is its Vault. This option has been Yearn’s main selling point, and it’s no surprise as to why. With Vaults, users can hold a crypto asset and earn a yield from their deposit. As an example, let’s say you love Chainlink (LINK). Thanks to Yearn , you can deposit your LINK tokens into your Yearn Vault and earn more LINK from your deposit. Depending on the cryptocurrency deposited, the returns can be impressive, sometimes as high as 70-80% in some cases.

Vaults manage to achieve these staggering results via a complicated financial process, that we’ll try to break down as much as possible. First off, users deposit a digital asset into the Vault. Then, Yearn uses the deposit as collateral and borrows stablecoins in its place. The protocol uses these stablecoins to find and invest in yield farming opportunities. It then shifts and rebalances the investment when the market changes.

Profits made from investing yields are then converted back into the token you originally deposited. So, if you put some ETH in the Vault program and receive the yield in COMP, it will convert the gained COMP back to ETH.

One of the best Vault features  is that it’s designed so the community can work together to find, plan, and vote for the best investing strategy.

By structuring the Vault in a collective way, users can minimize one of the biggest problems for the DeFi community, gas fees. By using Vaults, your gas fees will be significantly lower than what they would be if you were to replicate the same yield-farming strategy on your own.

Earn allows users to deposit one of the following stablecoins: 

Yearn Finance transfers your stablecoin deposits among the main DeFi lending protocol platforms. Generally, it oscillates between three different protocols to earn users the highest possible yield: Compound, DyDx, and Aave.

But as Yearn Finance grew, it had to evolve. Earn cannot simply find the highest yield pool and dump all of the funds in one place. Doing so would drastically change the investment yield, as an influx of capital would increase market supply and affect interest rates. Instead, Earn is designed to adjust and find the optimal portfolio allocation.. Since users are continually withdrawing from the pool, Earn automatically rebalances funds to optimize the yield for the entire pool.

But you may ask, why can’t I go to a DeFi lending protocol likeAave and supply the liquidity myself? Of course this is something you could do, but doing so would require you to monitor the investment constantly. With Earn, this hassle is a thing of the past.

The Yearn Zap feature allows users to convert to any available Yearn Finance crypto pools, quickly, conveniently, and with a reduction in cost.  Currently, users have five stablecoins at their disposal BUSD, DAI, USDC, USDT, and TUSD. ZAP can convert that into the y.curve.fi or busd.curve.fi pools. Or users can “Zap” out of the pools into the previously mentioned stablecoins.

Cover is the newest implemented feature, and it’s very interesting. Its main focus is on the  insurance that protects users from losses resulting from Ethereum smart contract hacks or bugs. This is all completed through a decentralized insurance model built on the Ethereum blockchain. Additionally, Cover integrates with a project called Nexus Mutual, a protocol that excels at providing smart contract insurance. This is a great way to protect yourself from any unforeseeable smart contract failures that could result in you losing funds.

What about the YFI coin? And how did it reach $69,000?

In simple terms, YFI is the governance token for the Yearn.finance protocol, and DeFi enthusiasts have loved it from the start. The token immediately caught the attention of investors after the project’s founder Andre Cronje didn't pocket any tokens before the ICO, showing his commitment to the project. He gave it to people involved in creating key liquidity pools essential for the project’s birth.

Situations like this are very rare. But when it happens, the community loves it because it displays a founder’s dedication to creating a fair and equitable token to be shared throughout the community.

You also might be asking why the price of YFI is so high? This is because there is only a circulating supply of 30,000 YFI tokens. With such a low supply, the price has to rise substantially in order to meet demand.. Such a small supply is quite unusual for a DeFi project. Although according to the YFI whitepaper, more can be minted through the protocol’s governance process if needed. However, as of now, the community and the developers have expressed no intention of minting new YFI tokens.

The YFI governance process is easy for holders to participate in; all they have to do is stake their YFI coin to the protocol, and doing so, they earn the right to cast a vote on proposed initiatives. The only downside is that the token holder has to keep their coins staked for at least three days after voting on a proposal. Fortunately, they will earn a reward for doing so.

Yearn Finance charges  users 5% on some types of withdrawals. This is mainly to maintain its treasury, which needs $500,000 to function. Any excess capital in the treasury is distributed among YFI coin holders. This is a great way to incentivize users to hold the YFI token. The more users the network acquires, the more token holders will earn. But remember,  Yearn Finance will only give this dividend to users who participate in the vote.

But what happens to my tokens when I deposit?

When tokens are deposited on Year, the user gets another token back in return for what was given to the liquidity pool. Newbies may be confused at first about how this works, but this is a very important yield farming characteristic.

This process may at first seem like a savings account, but that’s not the case. When you deposit your money in a bank's savings account, all you get back is a receipt of the transaction.

On Yearn Finance, deposits yield tokens. And these tokens allow anyone who holds them to redeem them. This is one of  the main concepts behind DeFi.

For instance, on Yearn, users that deposit their funds will get yDAI back. Similarly, on Aave, they’ll receive aDAI and on Compound cDAI. The tokens, plus any earned interest, can be redeemed whenever the depositor sees fit.

This is game-changing because, in contrast to bank deposits, these tokens can be traded or even deposited in other places. This concept is better known in DeFi as composability.

In the beginning, Yearn Finance could only do this with stablecoins, but as the protocol grew, it developed Vaults for more complex crypto assets such as LINK and ETH.

What can depositors do with their yTokens?

As we previously mentioned, in DeFi, the tokens users receive after they’ve deposited their funds can be in turn traded and deposited elsewhere.

On Yearn Finance, stablecoins are the primary deposits because users can easily see how much they are earning. But keep in mind that when a user deposits a stablecoin like USDT and gets yielded back yUSDT, the second cannot be considered a stablecoin.

Yearn Finance found a way to make it easier for depositors to move their funds between different pools. The platform works with Automated Market Maker (AMM) Curve and creates USDC, yDAI, yTUSD, and yUSDT pools.

Consequently, Yearn Finance users can switch between different tokens on the platform by using Curve, like moving from yDAI to yUSDT as an example. And not only that, on Yearn Finance, a user can increase their yield by adding it to another pool and earning from there. Users will receive gains in yCRV, Curve’s native token.

Aditionationally they can also deposit their yCRV and receive yUSD, also known as yyCRV, in return.

A closer look at the Yearn Finance community

Like all DeFi projects, the Yearn community has a central role in the development and governance of Yearn Finance. Decisions are discussed and developed on Yearn’s governance forum. Community members discuss, create, and vote on new strategies for Vaults. This system incentivizes community members to find the least risky and most profitable strategy as a group as their own profit potential is directly affected by any governance decisions

The Yearn Finance community brings people from all walks of life together and is one of the most active communities in the DeFi space. In addition, if approved by the community, select members can be added to the Yearn multisig, meaning, they have more executive powers within the community. The measure is only temporary to avoid abuses, but it's a great way to help the project build and grow.

And to simplify all the governance processes, Yearn has even set up a portal on Boardroom, a platform for managing Decentralized Autonomous Organizations (DAOs).

It’s difficult for DeFi projects to go mainstream, even if they are growing at a rapid rate within the decentralized finance community. The problem lies with the complexity of how liquidity mining works. Users are rewarded with new tokens every time they lend funds. The question is, will the average person ever really grasp this concept?

Once you look under the hood of a project like Yearn Finance and its YFI coin, you will see many complex operations which aren’t a part of traditional investments like index funds. And participating in the governing process, which is a big part of the project, requires voters to know the procedures and how changes may affect them directly.

It has to be said that Yearn Finance is still growing while providing benefits you don't get from a savings account. Bank depositors can only dream of such high yield on their deposits and complete decentralization. So in time, mainstreet may recognize the benefit of projects like Yearn Finance. What is now understandable only by a relatively small number of people may one day be common knowledge. Only time will tell.

Note: This is not financial or investment advice. Always do your own research before investing in any crypto asset or decentralized protocol. And please remember to trade responsibly and never invest more than you are willing to lose.

Yearn Finance in 2025: Upgrades in Yield Optimization, Governance, and Integration with Trading Bots

Yearn Finance has matured into one of the most resilient and innovation-driven protocols in the decentralized finance (DeFi) sector. As of 2025, the project continues to adapt its architecture, governance, and integrations to support a broader range of trading strategies and capital efficiency tools—including compatibility with automated crypto trading bots and institutional-level DeFi frameworks.

Yearn v3: Multi-Strategy Vaults and Real-Time Yield Distribution

The launch of Yearn v3 in late 2023 marked a major upgrade in how the protocol handles yield generation. This iteration enables a single Vault to allocate funds across multiple strategies simultaneously, allowing users to diversify yield sources and mitigate risk. The modular framework also supports permissionless strategy deployment, opening the door for wider collaboration from the DeFi development community.

From the perspective of automated trading, Yearn v3’s real-time yield streaming is highly compatible with crypto bot trading platforms, allowing bots for trading crypto to track earnings, rebalance assets, or execute vault migrations more responsively. For crypto bot traders using advanced automation tools or API-based strategies, this upgrade reduces latency and enhances control over capital rotation between strategies.

Governance and Tokenomics: The veYFI Model

To align long-term incentives and governance participation, Yearn introduced the veYFI (vote-escrowed YFI) system. Users who lock YFI tokens receive veYFI, which offers governance rights and a proportional share of protocol revenue. This structure is intended to reward long-term participation and stabilize token velocity—an attractive signal for bot trading crypto systems that assess on-chain behavior for volatility and liquidity patterns.

Governance proposals in 2024 and early 2025 have also focused on optimizing protocol-level fees, and the community recently voted to reduce fee burdens for Vault participants using Yearn v3. Such changes directly affect crypto trading bots programmed to monitor net yield performance and adapt strategy parameters in response to shifting fee structures.

Trading Bot Integration and Ecosystem Expansion

Yearn’s architecture now sees increasing interaction with bot for cryptocurrency trading tools that rely on DeFi primitives. Through protocols like Chainlink Automation and integrations with bot-friendly aggregators, Yearn strategies can now be leveraged by a wide range of crypto trading bot software and crypto trading bots for both DCA and arbitrage strategies.

Professional traders using crypto bot trading software can script strategies that factor in on-chain vault data, such as TVL fluctuations or APY shifts, while bots for crypto trading designed for multi-protocol strategies can rotate assets between Yearn, Aave, and Compound based on real-time yield metrics. For asset managers, this opens up the ability to execute yield-maximizing decisions via automated trading bots for cryptocurrency, while maintaining granular control over portfolio exposure.

As of May 2025, YFI trades around $5,423 with a market cap near $183 million. While far from its all-time highs, analysts consider it a core DeFi infrastructure asset. Forecasts range from $5,600 to $7,200 by year-end, contingent on DeFi adoption, protocol revenues, and macroeconomic conditions.

While price forecasts vary, Yearn’s technical adaptability continues to make it a favored choice for asset managers building bot-driven crypto portfolios or deploying cryptocurrency trading bots focused on passive income strategies.

Note: 3Commas, as a software provider, enables seamless integration with major DeFi protocols like Yearn Finance. Traders can utilize 3Commas tools to automate strategy execution, manage risk, and monitor DeFi vault performance across multi-account setups.

What is Yearn.finance (YFI) in 2025? What makes YFI a DeFi cryptocurrency?  Read our guide to Yearn.finance on 3Commas Blog.

All you need to know about Yearn Finance (YFI) in 2025 | 3Commas Blog

Dive into the 2025 updates of Yearn Finance (YFI), including Yearn v3's multi-strategy vaults, the veYFI governance model, and enhanced integration with crypto trading bots for optimized yield generation. Understand the current market overview and future forecasts for YFI.

All you need to know about Yearn Finance (YFI)

It is one of the few emerging decentralized cryptocurrency exchanges (DEX) that operate on the Ethereum blockchain and facilitate token swaps. Before we further explore Uniswap along with Uniswap token, let's first understand the problem it is attempting to solve.

An overwhelming majority of cryptocurrency investment and trading is done through centralized exchanges like Binance or Coinbase. These services are owned and operated by a single organization which yields all the power. As a user, you are required to deposit and store your funds under a single entity's control which relies on a conventional order book for trading digital assets.

Order book system is where trade orders are accumulated and presented in a list that also includes the total amount of each order. The number of open trade orders for a particular cryptocurrency is referred to as 'market depth'. For a successful trade to occur through the order book system, every buy order must have a corresponding sell order featuring the same price and the amount of the digital currency. 

The primary issue with the order book system is its liquidity. It means that at any given point, there might not be enough market depth i.e. the number of trade orders to fulfil every buy and sell order. This results in a poor trading experience as users fail to complete their buy and sell orders.

As mentioned in the introduction, Uniswap is a unique type of cryptocurrency exchange that is completely decentralized. It means that it is not owned and governed by a single organization. Built in 2018 on top of the Ethereum network, the exchange relies on a new trading model known as automated liquidity protocol. Since the exchange uses the Ethereum blockchain, it ensures compatibility with all ERC-20 coins as well as software applications including wallets.

One of the major advantages of Uniswap is that it is an open-source project so anyone can use the code to build their own decentralized crypto exchange. It enables users to list cryptocurrencies on the exchange at no cost which is completely opposite to centralized exchanges that are business-oriented and success-driven. They charge a high commission fee to list new tokens on their exchange. 

Since Uniswap is a decentralized exchange or DEX, it means that traders can exercise complete control over their funds at all times and don't have to give up their private keys which are used to log orders on the centralized exchange's internal database. By having control over private keys, Uniswap reduces the risk of losing your digital assets if the exchange becomes a victim of a security breach. Currently, Uniswap v2 is the fourth largest decentralized finance (DeFi) exchange with more than $3 billion in crypto coins.

Just like any other blockchain, Uniswap also has a native token which is denoted by the initials of UNI and is used for governance primarily. Those who are holding UNI tokens have the right to vote on changes and new developments on the platform including how newly minted tokens should be distributed among the developers and community members along with changes to how the transaction charges are structured. The UNI token was officially launched in September 2020 to prevent users from opting for competing for decentralized exchanges. 

At genesis, 1 billion UNI tokens were minted out of which 60% have been distributed among the existing Uniswap community members while 40% will be distributed among multiple stakeholders including investors, advisors, and team members over a period of 4 years. A portion of community distribution occurs through liquidity mining which means that UNI is given to those who provide liquidity to a wide range of pools including the following.

The Role of Automated Liquidity Protocol in 2025

As we move through 2025, Uniswap's reliance on its automated liquidity protocol continues to offer a robust solution to the liquidity challenges that often beset centralized exchanges. This mechanism gains its efficiency by motivating users of the DEX to become liquidity providers (LPs). In this system, LPs collectively pool their digital assets, forming a consolidated fund designed to handle all buy and sell trades occurring on the platform. Every cryptocurrency available for trading possesses its distinct pool, allowing users the choice to contribute.

The beauty of the automated liquidity protocol is that it eliminates the necessity for both buyers and sellers to wait for a matching counter-order. If the specific cryptocurrency pool they're targeting boasts ample liquidity, their order will be instantly processed at a preset price. LPs, having invested their resources into the pools, receive tokens mirroring their contribution. To illustrate, a $5,000 investment in an automated liquidity pool with a total of $100,000 grants you a token symbolizing 5% of that pool. This token can later be redeemed to claim a proportionate slice of the trading fees.

In terms of fees, Uniswap implements a consistent 0.30% charge on every transaction executed on its decentralized platform, redirecting it to the relevant liquidity pool. When LPs opt to withdraw, they obtain a fraction of the entire pool fees, mirroring their staked sum. Subsequently, the token representing their stake is nullified. Notably, the Uniswap v2 update introduced a discretionary protocol fee, which can be toggled on or off based on community consensus. This fee takes 0.05% from each transaction, funneling it into a Uniswap development fund to propel future advancements.

Since decentralized exchanges don't use the order book system, there is an alternative system used to determine the price of each digital asset. It should be kept in mind that while the order book system matches the lowest seller with the highest buyer, Uniswap relies on an automated market maker protocol. This alternative system adjusts the price of digital coins based on their supply and demand which is determined through a mathematical equation. The equation works by increasing and decreasing the price of a particular digital asset based on the percentage of the coins present in its respective pool.  

It is important to bear in mind that when a user adds a new ERC-20 token to the platform, they are not only required to add a particular amount of their selected ERC-20 token but an identical amount of another ERC-20 token as well to start the automated liquidity pool. The equation that determines the price of the coin is x*y=k, where the amount of the first ERC-20 token is x and the amount of the second ERC-20 token is y. K remains a constant which means its value doesn't change.

For instance, John wants to trade Bitcoin (BTC) for Ripple (XRP) relying on the Uniswap BTC/XRP pool. Now, John will add a large amount of BTC to the pool which will increase the share of BTC in the pool to XRP. Since K is constant, it means the price of XRP will increase while the price of BTC in the pool will decrease. So the more BTC John puts in, the less XRP he gets in exchange because the price of XRP will continue to increase. Another factor that affects the price change is the size of the liquidity pool. The more liquidity there is in a pool, the simpler it is to execute large orders without affecting the price as much.

Arbitrage traders are an important part of the Uniswap platform. These are the trades that find price discrepancies across a number of exchanges and capitalize on the opportunity to pocket a positive result. For instance, if Ethereum was trading on Coinbase for $2,000 and Kraken at $2,050, you can buy Ethereum on Coinbase and sell it on Kraken to make an easy success. If arbitrage trading is done in large volumes, traders can secure a substantial success without taking too much risk.

Arbitrage traders on Uniswap try to find cryptocurrencies that are trading below or above their market price because of large trades that generate asymmetry in the pool leading to price surge or reduction. Then they buy or sell such coins to be successful. What arbitrage traders do is bring the token price to its market price by buying or selling until the price aligns with the market price. This particular phenomenon involving arbitrage traders and an automated market maker system is what keeps Uniswap token prices aligned with the rest of the cryptocurrency exchanges.

Using Uniswap is comparatively easy and straightforward. You will need to set up an ERC-20 supported wallet such as Coinbase wallet, Fortmatic, Portis, WalletConnect, or MetaMask. 

After you have set up one of the ERC-20 wallets, you need to transfer ETH tokens to it that will allow you to start trading on Uniswap and pay for gas (Ethereum transaction fees). Gas payments change from time to time in terms of price and they are usually based on the number of people using the network. 

The majority of ERC-20 compatible wallets give you the options to choose the speed of paying through the Ethereum blockchain including slow, medium or fast. The slow option is the cheapest option while fast will set you back a substantial sum. On the other hand, the medium is somewhere in between the two. This will determine at what speed your transaction is completed by Ethereum network miners.

Step 1 - Go to the official website https://www.uniswap.org.

Step 2 - In the top right corner, you will see the "Use Uniswap" button. Click on that button.

Step 3 - Once again in the top right corner, you will see "Connect Wallet". Use this button to select your wallet.

Step 4 - Now log into your cryptocurrency wallet and let it connect to the Uniswap platform.

Step 5 - After the wallet is connected, you will see an option to swap tokens directly. You can use the drop-down list next to the “to” and “from” sections.

Step 6 - Now you can select the digital coin you want to swap. Enter the amount you'd like to exchange and click "swap".

Step 7 - You will be presented with a preview screen so you can ensure all the details are correct. Once you are sure, confirm the transaction.

Step 8 - Now you will need to wait for the transaction to be processed and added to the Ethereum blockchain.

As a project, Uniswap does not make any money. It is a decentralized exchange protocol operated by Paradigm which is a cryptocurrency hedge fund. All transactional costs go to liquidity providers who can claim them at any time. Founders of the project don't get any cut from the transaction fees. As of now, the transaction fee that is paid to LPs is 0.30% for every trade.

The fee is added to the liquidity pool automatically which can be redeemed by the LPs anytime they want. The fees distributed among LPs is proportional to their stake in the respective pool. In Uniswap v2, a percentage of fees may be deducted for Uniswap development.

In 2025, as the cryptocurrency landscape has matured, conventional exchanges, while acting as pillars supporting cryptocurrency investments and trading internationally, have also unintentionally spotlighted the significant issue of centralization. These platforms wield absolute dominion over users' digital assets, a centralized control that many in the crypto community view with skepticism. Uniswap, seizing upon this concern, provides a solution in the form of a decentralized exchange. Here, trades are not facilitated via a traditional order book but are navigated through an automated liquidity protocol. This approach decentralizes power since the protocol operates based on contributions from a myriad of liquidity providers (LPs), ensuring no singular entity or institution maintains overarching control.

By 2025, Uniswap's trajectory has been nothing short of impressive. While once in its nascent stages, it now ranks as the fourth-largest decentralized exchange, boasting an impressive average daily trade volume of $2 billion. The crypto community, traders, and investors alike are eagerly watching how the project's founders and contributors capitalize on their current momentum and steer Uniswap's future course.

Uniswap in 2025: Expanded Features and Strategic Integration with Automated Trading

Since its early days as a decentralized exchange, Uniswap has remained a core liquidity venue for both individual and institutional participants in DeFi. In 2025, Uniswap v4 introduces features that support deeper integrations with automated crypto trading bots and strategy automation tools used by professional traders, portfolio managers, and software providers like 3Commas.

Customization and Automation for Professional Users

The introduction of customizable hooks in Uniswap v4 allows developers to define advanced trading logic at the protocol level. This architecture enables better synergy with tools like crypto trading bot software, allowing users to deploy AI bot trading crypto strategies that react to market conditions in real time. Rather than relying on static liquidity positions, asset managers can use automated trading bots to adjust exposure dynamically across pairs and timeframes.

With these hooks, it’s now possible to:

Create AI-based crypto trading bot strategies directly tied to Uniswap pools


Incorporate bot signal trading mechanisms that respond to on-chain events


Automate interactions with multiple liquidity pools across Ethereum, Arbitrum, and BNB Chain


Execute cross-DEX arbitrage or correlation trades via auto crypto trading bot configurations


Enhanced Liquidity Management and Execution

Uniswap’s improved gas efficiency and consolidated liquidity architecture also reduce operational overhead for users running crypto auto trading setups or managing multiple bots. Professional traders who rely on crypto ai trading bots can now benefit from lower slippage and faster execution, especially when coordinating large-scale trades across stablecoins, altcoins, and LSTs (liquid staking tokens).

Asset managers leveraging platforms like 3Commas can now route strategies through Uniswap using crypto bot trading platforms that support webhook integrations, automated crypto trading apps, and execution logic tuned for market-making or directional strategies.

These advancements open up new capabilities for:

Algorithmic hedge funds deploying ai crypto trading bots with multi-chain execution logic


Trading desks seeking efficient, transparent access to DeFi liquidity


Firms testing and optimizing automated cryptocurrency trading bot portfolios for risk-managed growth


As decentralized liquidity becomes increasingly programmable, Uniswap's evolution toward a modular, automation-ready infrastructure marks a pivotal shift. Traders no longer need to rely solely on CEX APIs or custodial systems to implement complex execution strategies—Uniswap v4 now supports a range of integrations tailored for crypto automated trading bots and signal-based execution engines.

Do you know what is Uniswap in 2025? 3Commas Blog tell you it's one of the few emerging DEX that operate on the Ethereum blockchain and facilitate token swaps.

What is Uniswap and How Does It Work in 2025? | 3Commas Blog

Airdrop in crypto is a marketing tool based on allocating small amounts of tokens to active wallet addresses. It has become an especially common stunt for new cryptocurrency projects since 2017. 

Airdrop’s main goal is increasing awareness of a new blockchain startup and growing a community around it as fast as possible. This means that crypto projects that use it seek to improve their public image. Thus, no legitimate airdrop requires capital investments; users that have a certain amount of the digital asset in their public wallet before the snapshot or fulfil a simple task like sharing information about the crypto project, automatically become eligible.

While some airdrops happen without previous public announcements, in most cases a promotional campaign on the website, crypto forums and social networks precede the event. Wallet holders on the biggest blockchain networks like Ethereum, Bitcoin or BSC are predominately the target for promotion through airdrop. 

An airdrop is a method for new blockchain projects to stand out in the competition that includes thousands of startups and developed networks. 

Multiple Binance airdrop events prove the efficiency of the marketing tool as it’s simple and relatively cheap in execution. The fact that companies can receive coverage on social media of wallet holders by giving out a small amount of new cryptocurrency makes the effort worth it. 

More people know about the digital asset, higher are the chances of its success. The airdrop might even serve as a viable fundraising method because if well-timed, it can prompt recipients of the new token to educate themselves about it.

Airdrop is also beneficial for eligible wallet holders as it essentially provides free digital assets, which might bring substantial profit in the future.

The trickiest part is establishing a perfect tokens to recipients ratio. Allocating an underwhelming amount of coins might not bring expected marketing results. On the other hand, by giving out too many tokens, the blockchain project risks diluting their value on the market. In fact, the plunge in value can also occur if the recipients sell the coins right away. This damages the reputation of the crypto among real investors.

From the perspective of the recipients, the main drawback is the risk of falling for fraud pump-and-dump schemes that are aimed to inflate the value of the cryptocurrency artificially.

How to distinguish crypto hard forks and airdrops?

Crypto airdrop meaning is different from hard fork, even though these events have some similarities. In fact, in each case, holders of a prior digital asset receive new tokens at a certain ratio to the volume of their current holdings. So what are the key differences?

Hard fork happens when the developers of a given cryptocurrency create a new blockchain network using the same code. It occurs when the factions of the development team, miners, and investors decide to take cryptocurrency in different directions. The newly created asset might adopt changes to the code, implement additional features and switch the protocol, while the preexisting digital currency continues to develop in its own direction. One of the brightest examples of a hard fork is Bitcoin cash. When it was launched, all the holders of BTC were provided with an equivalent amount of BCH.

Airdrop is a marketing mechanism based on allocating cryptocurrency to particular recipients. For instance, ICO airdrop is the delivery of a cryptocurrency to a group of early supporters that participated in the ICO event. 

Moreover, companies usually accrue tokens on the wallets of holders of developed blockchains like Ethereum or Bitcoin. Airdrop is simply a mean of boosting the recognition for a new token or blockchain startup, whereas a hard fork leads to the creation of two separate versions of the existing cryptocurrency.

Over the several years of existence, the marketing stunt of airdrop has taken on different forms. How do crypto airdrops work? To answer this key question properly, it’s necessary to understand the difference between the types of crypto airdrops that startups use for promoting new digital assets.

To become eligible for participating in this event and receive a small amount of new virtual currency wallet holders need to create an account at a startup project or sign up to a newsletter. It’s the most common type of airdrop event. Usually, you will have to complete Know Your Customer (KYC) verification before receiving the drop.

Designed for the most loyal customers of blockchain networks this type of airdrop allows receiving first dibs of new digital assets. Aggregators and special websites like Binance often run exclusive airdrops to give exposure to new promising projects. The main advantage of this type of airdrop is that there are no strings attached. For instance, loyal users of Uniswap were able to participate in the airdrop of 2,500 UNI coins in September 2020.

The main requirement for becoming eligible for this type of airdrop is holding a certain amount of particular digital assets. For instance, Ethereum airdrops offered free tokens to the members of the network’s community when a new project was created on one of their blockchains. Do not confuse these projects with a hard fork as they are entirely new platforms that just use the protocol of the existing blockchain.

As it comes from the name, you need to earn the right to participate in this type of airdrop. More precisely, to get tokens from it you need to share information about the blockchain on your social network profile. It includes re-tweeting posts about it, following the account of the company, creating a post, etc. In other cases, you might have to refer new users to the network to get bounty airdrops.

Even though the issuing company definitely gets the most value out of the airdrops, they still might be potentially profitable for crypto enthusiasts. Successful airdrop is a win-win situation for both sides. Let’s take a look at some real examples.

This airdrop happened in 2018 when ontology gave out its native ONT token to all NEO users. It was also possible to take part in the allocation of 1,000 ONT by just subscribing to the newsletter of the platform. The main purpose of the event was to reward loyal investors of the NEO network for their participation in fundraising. As a result, Ontology gave away 10 million ONT coins (worth 42 million USD at the time). Despite the bear market, the price of the token more than doubled, bringing the value of airdropped ONTs to 100 million USD.

All the users that had used the Uniswap decentralized exchange (DEX) platform and made at least one transaction before the beginning of September 2020 with it were eligible for the airdrop of its native coin UNI. Every recipient received 400 tokens during the event but most of them sold the airdropped coins right away. However, those who HODL definitely made the right decision as the price of UNI has been on a steady increase and has increased more than 15 times since then.

The platform airdropped its OMG native tokens to the ETH holders of the Ethereum blockchain in July of 2017. As a result, 5% of the total liquidity of OMG coins were distributed among recipients at a ratio of 0.075 OMG per 1 ETH. Only wallets that held at least 0.1 ETH at the time of the snapshot were eligible for participating in airdrop.

Another DEX in the list performed a successful airdrop of its native currency. It occurred in December 2020 and included the distribution of 90 million 1INCH coins to 55,000 recipients. Users that traded more than 20 USD or made at least 4 trades before the airdrop day could participate in it. Since the launch of 1INCH tokens, their price doubled, which means its holders eventually made a great profit.

Crypto airdrops are an efficient tool of boosting the exposure of the new blockchain projects by giving out its native tokens to the eligible wallets. It doesn’t require any capital investments but in some cases might bring considerable profits. However, it’s essential to define legitimate airdrops to avoid fraud schemes that appear on the market.

Airdrops in 2025: Strategic Shifts and Regulatory Pressures  


As the cryptocurrency landscape matures, the functionality of airdrops has evolved from marketing tools to more strategic methods of distribution. In 2025, their purpose within user acquisition and tokenomics frameworks has become more nuanced, particularly regarding Layer 2 networks and nascent DeFi protocols seeking to lock in liquidity and cultivate a loyal community.

A notable change is the introduction of pre-token launch “points” systems, which has gained popularity. These programs incentivize active and constructive participation, such as liquidity provision or governance voting, by granting prospective chances for token allocation. Unlike open-ended airdrops, these systems are more targeted and performance-driven, encouraging sustained activity rather than speculative engagement.  

DeFi projects capitalizing on Layer 2 infrastructure are using airdrops to garner liquidity and demonstrate commitment towards decentralization. Anticipated distributions from new rollups and zero-knowledge networks have heightened user interest towards on-chain activity associated with new scalability solutions.


Simultaneously with such technological advancements, the legal environment has emerged as a key concern influencing the design of airdrops. Important regulators, most notably in the US, have indicated that airdropped tokens may be subject to securities laws. Consequently, a lot of projects now specifically exclude certain geographies from eligibility or place stringent KYC/AML thresholds to mitigate exposure.

Taxation is yet another issue that demands attention. In a number of jurisdictions, the US inclusive, the fair market value of airdropped tokens at the point in time of receipt is deemed as taxable income. This means for a professional trader or an asset manager, meticulous documentation is mandatory—not just for compliance, but also for performant reporting.

By 2025, airdrops are no longer just promotional tactics; they have now transformed into strategy reflecting legal priorities, community-building methods, and participant expectations that become more professional. For traders and asset managers, the opportunity to analyze such elements within a managed risk paradigm now forms essential competitive differentiators.

Airdrop in 2025 | Definition: Distribution of digital assets to the public, by virtue of holding a certain token or by virtue of being an active wallet address.

Airdrops in 2025: How do they work?

Liquidity pools play a significant role in the formation of DeFi. They are crucial in automated market-making, borrowing/lending, yield farming, and many gaming projects. But what is a liquidity pools in crypto exactly?

This article explains the idea behind the liquidity pools concept, discusses how they work, and shares why major crypto projects leverage pools. Without further ado, let's have a look at how DeFi has refined the idea of liquidity pools.

In 2023, the concept of a liquidity pool remains fundamentally simple, yet increasingly vital in the rapidly evolving world of decentralized finance (DeFi). Essentially, a liquidity pool is a repository where market participants deposit their assets, creating a large reserve of liquidity to facilitate asset exchange. While in traditional financial systems, big banks serve as these liquidity pools—holding large deposits and even possessing the ability to create additional money—the crypto world offers a more decentralized approach.

A crypto liquidity pool consists of a cache of tokens securely locked in a designated smart contract account. Prominent decentralized exchanges (DEXs) rely on these liquidity pools to enable seamless trading activities. Although Bancor was one of the pioneers in introducing liquidity pools, it was Uniswap that truly popularized the concept. Another standout example in this context is Binance's liquidity solution, known as Binance Liquid Swap.

Fast forward to 2023, and liquidity pools have undergone further innovation, becoming integral parts of complex DeFi products and services. They are now often used in yield farming strategies, token swaps, and even in decentralized lending platforms. Newer blockchain projects are also adopting liquidity pools as a fundamental building block, recognizing their utility in providing depth and stability to the market. Given the expanding use-cases and the need for efficient asset exchange in the burgeoning crypto space, liquidity pools are expected to continue playing a pivotal role in the decentralized financial ecosystem.

A liquidity pool is token storage that provides trading a particular currency pair. Farmers provide liquidity in return for remuneration from the project, depending on the share they have invested. Reliable farming is provided by smart contracts (contracts based on software code), which act as digital agreements to fulfill the conditions of all parties. A liquidity pool is a smart contract filled with cash. 

Decentralized Exchanges (DEX) set orders to buy or sell crypto. The project's smart contract distributes a strictly defined amount of tokens to farmers, depending on their share of the investment. The model is called automated market-making (AMM).

So, if "X" invested $20,000 and "Y" invested the same pair, but at a rate of $10,000, then the total pool is $30,000. The share of the first — 66%, the second — 33%. The exchange allows farmers to buy and sell tokens within the pool at the expense of token liquidity. The higher the demand for the token, the more profitable deal farmers can grab. 

Most centralized exchanges (CEX) are based on a limited order book approach, just like traditional stock exchanges. They rely on market makers to adjust the price gap—the bid-ask spread for a limited order book.

Decentralized exchanges (DEX) typically use a liquidity pool mechanism; they have programmed an automatic market maker in a smart contract to provide balanced liquidity in the pool. DEX prefer liquidity pools, mainly because every time you place an order in a limited order book, there will be a gas charge on the Ethereum network. 

Frequently placing and canceling orders in the order book, just like on traditional exchanges, will significantly increase the commission per transaction for DEX users. However, by applying a liquidity pool, DEX investors can complete a transaction at a minimal cost.

Liquidity is the property of assets to be sold quickly and close to the market price.

Money is the most liquid asset, it’s common, and you can exchange it for any goods, services, or assets at any time. 

Market makers are organizations that facilitate trading by constantly buying or selling a particular asset, boosting liquidity. So users can trade without waiting for another counterparty to appear. The crypto exchange would be illiquid and unusable for users without market makers.

However, MM model is slow and expensive. Market makers usually keep track of the current value of an asset by constantly changing their prices. This leads to a huge number of orders and cancellations. There is a gas fee for every interaction with a smart contract on the Ethereum network, so market makers need a lot of money, constantly updating their orders. 

These and other reasons make exchanging assets using the "order book" model unviable. It was necessary to develop and implement a new working mechanism to ensure liquidity at the exchange. This problem was solved utilizing decentralized finance and liquidity pools.

A DeFi liquidity pool contains two tokens and thus creates a new market to exchange these assets. More often than not, liquidity pools crypto are provided in two tokens in a 50/50 ratio. One famous example is the DAI/ETH exchange market based on Uniswap. The user receives a portion of the commissions from all exchanges going through the pool by providing liquidity. 

When a new pool is created, the first liquidity provider sets a starting rate for exchanging assets within the pool. Each liquidity provider must deposit an equal amount of both tokens into the pool. Suppose the starting exchange rate within the pool is very different from current global prices. This immediately creates the possibility for arbitrage, which can mean a loss of capital for the liquidity provider. The concept of delivering tokens at the right ratio remains true for all subsequent providers who want to send their funds into the pool.

After sending tokens to the pool, the provider receives special tokens (LP tokens)  —  in proportion to how much liquidity they have provided. When a transaction in which the pool participates occurs, the decentralized exchange charges a commission of 0.3% of the transaction. It distributes that commission to all participants in the pool, in proportion to their share. Thus, there are earnings from the provision of liquidity. If a provider wants to get back the invested funds from the pool (along with the accrued income), they must conduct a burn of their LP tokens.

Using the liquidity pool, each exchange of tokens causes the exchange rate to move according to a unique algorithm. This mechanism is also called Automatic Market Maker (AMM), and liquidity pools of different protocols may use slightly different algorithms.

Basic lp pool, such as Uniswap's, use a constant, calculated as the product of the number of both tokens in the pool. That way, the pool can always provide liquidity. Simply, the fewer tokens A remains, the more expensive they become, and the cheaper tokens B become. 

It turns out that if a user buys a lot of ETH in an ETH/DAI pair, user reduces the ETH stock and increases the DAI stock, which is immediately reflected in the exchange rate. The larger the pool volume relative to the transaction size, the less this transaction affects the price.

Larger pools of liquidity create a more stable environment where each transaction has almost no effect on the shift in the exchange rate. This is the ultimate goal of both market participants and liquidity providers (they make money on commissions from transactions, more transactions mean more income). 

Liquidity mining pools are the reason why protocols such as Balancer motivate liquidity providers to invest their tokens in certain small pools. This process is called liquidity mining. The idea is simple enough. Still, it’s tricky within the world of trading and exchanges, as it allows to refuse order books and market makers, distributing revenue from trading activity among all pool participants.

The Uniswap protocol pools we've just described are a basic type of pool. Other open-source projects have continued to work on this technology and have proposed new pooling schemes.

For example, Curve was the first to realize that the mechanism offered by Uniswap was not well suited for exchanging assets whose price should not change, depending on supply or demand. That's because they are backed by real assets, like the U.S. dollar. This type of asset, in particular, includes stabelcoins such as USDT, TUSD, USDC, and others. Curve pools work on a modified algorithm that reduces sensitivity to each transaction, and the exchange rate remains more stable.

Another idea for developing liquidity pools crypto came from the Balancer protocol: the creators of the project realized that developers should not limit themselves to a pair of tokens in a pool, so Balancer allows up to 8 tokens within one pool.

However, the interest per annum in DeFi is not constant and depends on many factors. First of all, the interest depends on the size of the liquidity pool itself  —  as the pool increases, the interest per annum will fall.

Independence from centralized exchanges, third parties, and no account verification (KYC)

DeFi functions on smart contracts, which means no one can stop interacting with them.

It involves constant analysis of new pools, platforms, and redistribution of funds between them, so the skills learned can come in handy many times in the future.

Potentially big profits entail potentially big risks. In addition to the standard DeFi risks, such as smart contract bugs, system risks, and admins' keys, investors and traders get two new types of risks  —  impermanent loss and liquidity pool hacks. 

A DeFi investor's funds are locked into the pool's smart contract and are not on the exchange. This means that the investor will not use classic exchange functionality and order system, so he will not set stop-losses and take-profits.

Despite the perceived danger, a much smaller disadvantage of participating in DeFi is the Impermanent Loss phenomenon. This concept refers to the difference in asset value when simply holding in a wallet versus participating in a liquidity pools crypto. 

Not sure what impermanent losses are? Check out our thorough guide about impermanent losses.

In most cases, the impermanent loss is not a significant factor, and if there is enough time to participate in the pool, it’s compensated by the rewards. However, the impermanent loss may increase significantly. 

Smart contracts also involve higher risks. Namely, risks associated with interacting with a fraudulent smart contract due to negligence and the risk of hacking the pool smart contract itself by attackers. No one is immune to the latter, and in the event of hacking, you stand to lose your money completely.

The idea of liquidity pools and mining is straightforward. At the same time, it completely changes the world of crypto-trading and the work of exchanges, as it allows to abandon the traditional order book, distributing traders' commissions among pool members.

What Are Liquidity Pools in DeFi and How Do They Work in 2023?

What Are Liquidity Pools in DeFi and How Do They Work?

Did you hear about eye-popping yields, sometimes more than 1,000% APY? That’s partially due to AMMs. But what does AMM stand for? AMM or Automated Market Making, plays a big role within the Decentralized Finance because AMMs use liquidity pools to make the DeFi ecosystem liquid 24 hours a day, seven days a week. Rather than depending on conventional buyers and sellers in a crypto market, AMMs bring stability to the table. 

Automated Market Maker (AMM) is a DeFI exchange protocol. Basically, it’s a market-making bot using a mathematical algorithm to establish a price for a specific crypto pair. 

Instead of relying on order books — as traditional exchanges do — AMM uses mathematical formulas, that may differ across AMM protocols. Traditional market making is a viable choice for firms that trade huge volumes as it quotes the best price and most favorable bid-ask spread on exchanges with order books. However, the decentralized nature of AMM protocols unlocks the opportunity of creating new or contributing to existing markets to any user.

Usually, an exchange protocol utilizes a unique formula for calculating the price of the assets in the liquidity pool. In addition, there are some differences in functionality.

Some of the existing AMM protocols are listed below.

One of the most prominent AMM on the market. Absent listing fees, no capital requirements for participants, and low gas fees are the main advantages of the protocol. 

Moreover, Uniswap V2 supports an ERC-20/ERC-20 token pair. UNI is a native AMM coin of this protocol, which gives its holders governance rights.

The supply of the tokens is adjusted according to the constant mean market maker formula (CMMM). It allows creating private liquidity pools with up to 8 different tokens and the custom ratio between assets. Moreover, Balancer features dynamic transaction fees. 

It’s a reliable AMM in terms of Total Value Locked  — more thatn 2B dollars are locked inside the protocol, meaning that no-one can withdraw them instantly. 

A distinctive feature of this AMM model is that not everyone can access the liquidity pool as it requires substantial capital investments. External oracles or parameters of the smart contracts set price on the tokens here, which guarantees increased control of the pool for the market makers, even when the prices fluctuate.

The protocol lost most of the funds recently. Now it’s not as reliable as it once was. 

The pricing mechanism of this protocol relies on the combination of constant product and constant sum formulas. According to it, it’s possible to decrease the risks of slippage and impermanent loss if the underlying assets have stable prices. However, Curve is designed specifically for stablecoins.

What Is an Automated Market Maker (AMM) 2023