Decentralized Exchange: The Uniswap Automated Market Maker

Abstract

Uniswap is a system of smart contracts on the Ethereum blockchain and is one of the largest decentralized exchanges with a liquidity balance worth up to 4 billion USD and daily trading volume of up to 7 billion USD. It is a new model of liquidity provision, so called automated market making. For this new market form, we characterize equilibrium in the liquidity pools. We collect and analyze data on all 95.8 million Uniswap interactions from its inception to December 2022. We provide evidence that the liquidity pools are stable. We compare this automated market maker to a centralized limit order book (Binance) and document absence of long-lived arbitrage opportunities, and show conditions under which the AMM dominates a limit order market.

Keywords: Blockchain, Decentralized Finance, Automated Market Maker