First a strongly hydrophobic essential oil such as trans-anethole is dissolved in a water-miscible solvent, such as ethanol, and the ethanol itself forms a solution (a homogenous mixture) with water. 
If then the concentration of ethanol is lowered by addition of more water the hydrophobic substance precipitates from the solution and forms an emulsion with the remaining ethanol-water-mixture. The tiny droplets of the substance in the emulsion scatter light and thus make the mixture appear white.
Oil-in-water emulsions are not normally stable. Oil droplets coalesce until complete phase separation is achieved at macroscopic levels. Addition of a small amount of surfactant or the application of high shear rates (strong stirring) can stabilize the oil droplets.
In a water-rich ouzo mixture the droplet coalescence is dramatically slowed without mechanical agitation, dispersing agents, or surfactants. It forms a stable homogeneous fluid dispersion by liquid–liquid nucleation. The size of the droplets when measured by small-angle neutron scattering was found to be on the order of a micron.
Using dynamic light scattering, Sitnikova et al. showed that the droplets of oil in the emulsion grow by Ostwald ripening, and that droplets do not coalesce. The Ostwald ripening rate is observed to diminish with increasing ethanol concentrations until the droplets stabilize in size with an average diameter of .
Based on thermodynamic considerations of the multi-component mixture, the emulsion derives its stability from trapping between the binodal and spinodal curves in the phase diagram. However, the microscopic mechanisms responsible for the observed slowing of Ostwald ripening rates at increasing ethanol concentrations appear not fully understood.