Decentralized Exchange: The Uniswap Automated Market Maker

Journal of Finance forthcoming

71 Pages Posted: 16 Aug 2021 Last revised: 27 Nov 2023

See all articles by Alfred Lehar

Alfred Lehar

University of Calgary - Haskayne School of Business

Christine A. Parlour

University of California, Berkeley - Finance Group

Date Written: August 14, 2021

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

Suggested Citation

Lehar, Alfred and Parlour, Christine A., Decentralized Exchange: The Uniswap Automated Market Maker (August 14, 2021). Journal of Finance forthcoming, Available at SSRN: https://ssrn.com/abstract=3905316 or http://dx.doi.org/10.2139/ssrn.3905316

Alfred Lehar

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403-220-4567 (Phone)

HOME PAGE: http://homepages.ucalgary.ca/~alehar/

Christine A. Parlour (Contact Author)

University of California, Berkeley - Finance Group ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
510-643-9391 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
2,691
Abstract Views
7,464
Rank
8,746
PlumX Metrics