Uniswap UniswapV3 UniswapV2 – How is the Price of a Token Calculated on Uniswap and Other DEXes?

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I have just started learning about Uniswap. I have a question, How a price of a token is calculated? I know the x*y = k which defines the price of 2 assets from a pool but how the value of a single token is being calculated by Uniswap. For example, when we go to the Uniswap app here the price of eth on Uniswap is 1,823.37 atm. How this price is calculated?

Best Answer

The price of anything is calculated against something else. Nothing has value by itself.

Remember the first time man traded a cow for a chicken. One gives a cow value in chickens. So the next time someone will do the same, he knows the price already.

But... chickens and cows have a limited amount in the village ( the pool ) so when one is exchanged in favor of the other, the price raises to keep proportion.

A cow by a cow have no absolute value. Don't forget that the money itself is something that you buy and sell.

When you throw some tokens to the pool, you must give something to represents the other side of the scale ( BNB,ETH or BTC ). The initial proportion of tokens/coins will define the initial price.

When you put one and remove other (to take one you must give other) the proportion changes and the price changes too.

If you have much more on one side than the other, we say it is "undervalued". You need to put much less to buy much more.

This process defines the value of anything we humans trade.

It is duplicate anyway: How the price of a token is defined?

Related Solutions

[Ethereum] Uniswap Price Feed.- Get price of a Token in a Solidity contract

Uniswap has an SDK through which you can fetch the gas price. See their example in their documentation :

    import { ChainId, Token, WETH, Fetcher, Route } from '@uniswap/sdk'
    
    const DAI = new Token(ChainId.MAINNET, '0x6B175474E89094C44Da98b954EedeAC495271d0F', 18)
    
    // note that you may want/need to handle this async code differently,
    // for example if top-level await is not an option
    const pair = await Fetcher.fetchPairData(DAI, WETH[DAI.chainId])
    
    const route = new Route([pair], WETH[DAI.chainId])
    
    console.log(route.midPrice.toSignificant(6)) // 201.306
    console.log(route.midPrice.invert().toSignificant(6)) // 0.00496756

[Ethereum] Computing the Uniswap V3 pair price from Q64.96 number

    function getPrice(address tokenIn, address tokenOut)
        external
        view
        returns (uint256 price)
    {
        IUniswapV3Pool pool = IUniswapV3Pool(factory.getPool(tokenIn, tokenOut, FEE);
        (uint160 sqrtPriceX96,,,,,,) =  pool.slot0();
        return uint(sqrtPriceX96).mul(uint(sqrtPriceX96)).mul(1e18) >> (96 * 2);
    }

Returns spot price with 1e18 precision. Be careful to use spot price because it is a subject for a flash loan attacks. Either use TWAP price or check that price hasn't move much before using spot price. Also, I haven't tested this code for precision loss and upper/lower boundaries. Because Uniswap v3 use Q64.96 notion for decimals but it doesn't seem that practical. The output of the function is a number with e18 precision. It depends which decimal lib you use in your project.

Best Answer

Related Solutions

[Ethereum] Uniswap Price Feed.- Get price of a Token in a Solidity contract

[Ethereum] Computing the Uniswap V3 pair price from Q64.96 number

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