Uniswap, a decentralized trading protocol developed on the Ethereum blockchain, has been taking the market by storm. Surpassing the trading volume of the largest centralized cryptocurrency exchange Coinbase, it’s one of the top DEXs with a total traded volume of nearly $200B. Today, we celebrate a milestone for Uniswap as they launch Uniswap v3.

The ideology of decentralized and open finance

DeFi is a type of finance that “leverages blockchain technology to deliver services with no human intermediation” (Financial Times). It relies on the principles developed by early cypherpunks and creators of Bitcoin and vital for the Ethereum community today: 

  • Open peer-2-peer finance that anyone can use and build on.
  • Wealth redistribution empowering the unbanked, retail investors, and entrepreneurs.
  • Excluding the middleman and custodians, like banks, brokers, and governments.
  • Absolute ownership of one’s assets without custodial oversight or possibility of control and seizure.
  • Automating transactions, contracts, and governance, without space for human errors, corruption, or fraud.

From CEX to DEX

For DeFi to thrive, it needs a peer-to-peer network to trade assets. However, a P2P exchange can be slow and inefficient and require technical know-how.

Many users rely on CEXs (Centralized Exchanges) like Coinbase or Binance. However, the custodial nature of intermediaries nullifies essential crypto assets’ properties being: permissionless, trustless, and decentralized. CEXs take total ownership of the coins and tokens for the duration of their stay on the platform. They conform to KYC/AML procedures requiring users to share sensitive data with unknown parties.

CEXs used to be the only viable alternative for crypto trading. The recent technological advances in DeFi, made DEXs (Decentralized Exchanges) efficient and safe, fulfilling the cypherpunk dream of a P2P economy. 


Challenges of creating a DEX

CEXs are based on an order book, a current list of pending transactions (aka mempool), and a central matching algorithm connecting buyers and sellers.

Execution of DEXs using on-chain order books used to be challenging due to the low liquidity and the cost and inefficiency of on-chain order books.

Submitting any information onto the blockchain costs miner fees and the block sizes are limited. More extensive databases are usually stored off-chain and referred to through sets of hashes. Part of the DEX challenge was to write smart contract protocols that would enable the off-chain order books. 

It turned out, the first successfully on-chain DEX, Uniswap, went a step further and did away with the order book altogether, creating a new market maker paradigm

Uniswap, the first successful on-chain DEX

Uniswap is the first DEX solution to combine Liquidity Pools and AMMs (Automated Market Maker Algorithms) to launch a decentralized exchange protocol completely on the Ethereum blockchain; Ideas, previously theorized by Nick Johnson and Vitalik Buterin

Uniswap launched on November 2nd, 2018, and acquired $1million liquidity within its first day. Since then, it grew exponentially to nearly $6billion in Total Value Locked (TLV) as of April 2021.

TLV is a measurement used to describe DeFi projects using the unique they obtain liquidity. DEXs and DeFi platforms utilize liquidity pools where anyone can deposit or “lock” pairs of crypto assets for others to trade.

Total locked value in USD since the start of Uniswap (DeFi Pulse). 

The Uniswap platform also made strides to improve the user interface, simplify the UX (User Experience) and improve adoption, which was immediately hailed by the project supporter and the Ethereum blockchain co-founder, Vitalik Buterin.

In the spirit of the Ethereum blockchain, Hayden made the Uniswap protocol open-source and encouraged users to build APIs. Over 300+ DApps (Decentralized Applications) developed on Uniswap, facilitating various functionalities on top of the protocol. Many of Uniswap’s competitors stem from Uniswap’s protocol v2 forks, i.e., Sushiswap

The on-chain automated market makers

Uniswap got rid of the order book and introduced a new exchange paradigm, the AMM algorithms. AMM was a concept previously put forward by Vitalik Buterin in a 2016 Reddit post and partly accredited to Nick Johnson, economist Robin Hanson, and the existing prediction markets, like Augur and Gnosis.  

AMM is a mathematical logarithm running on the blockchain that automatically sets asset prices within a given liquidity pool consisting of pairs of two tokens. Deposited tokens are traded at the value continuously adjusted by the pricing algorithms. The AMMs vary depending on the platform. 

Uniswap’s AMM formula (Constant Product Market Maker) is similar to Vitalik’s initial equation. Within the liquidity pool of two assets A and B, X is an amount of Token A, Y is an amount of Token B, and K is constant.


The idea is that the value K for each pool stays constant to enable unlimited liquidity. Only the asset ratios change, or how much Token A you can swap for Token B. With high total value locked, AMMs mimic the CEXs exchange rates. Whenever DEX ‘prices’ diverge, the crypto trading bots that scan all exchanges for best deals will execute transactions that naturally bring back pools’ ratios to market prices. 

How does Uniswap work

Uniswap has two primary kinds of users. Liquidity Providers (LPs) lend their money (in ETH and ERC20 tokens) to the system, and Traders use the liquidity pools to trade their assets for a fee.   

LPs deposit two different tokens into the Uniswap liquidity pool for the token pair. In exchange for locking their equity, they receive LP tokens (Liquidity Provider tokens). They represent the share of the liquidity pool and allow users to take out their locked tokens or cash-in the staking fees and other rewards. Typically for the DeFi niche, LP tokens are also used to stake other pools and create multilayered yield farming (aka stake mining) opportunities. 

Both Traders and LPs go to the Uniswap website and connect through Metamask or another Web3 compatible wallet. Web3 is decentralized internet running on the blockchain. Uniswap website is a decentralized exchange with a Web3 interface. Executing transaction on Uniswap’s page allows users to stake or swap coins and tokens directly on the blockchain. 

Uniswap remains one of the most elegant and user-friendly solutions among DEXs and CEXs alike

Uniswap’s Hayden Adams quirky success story

The incredible value rise of Uniswap and DeFi as a whole, together with an almost accidental success of its founder – Hayden Adams, contributes to the feeling of emerging lore reminiscent of Apple’s or Google’s garage-startup beginnings.

Hayden Adams, a mechanical engineer who just has gotten laid off from his first post-uni job at Siemens, gets convinced by his college friend Karl Floersch to become the world expert in Solidity smart contract programming by developing a test project based on one of Vitalik’s ideas. 

Encouraged by a welcoming vibe from the Ethereum community, Adams tours cryptocurrency events in 2017 and 2018, gathering feedback and learning how to develop the protocol better. Soon, he is introduced to Vitalik himself, who suggests Adams switches from Solidity to Vyper programming language and applies for the grant from the Ethereum Foundation, which he received in 2018. 

The 2018 crypto winter with a bear-market drop and stagnation is incidentally the perfect environment for idealistic projects like Uniswap to receive all the love and support from the core community. It’s that community openness and ideology behind Ethereum that convinces Hayden Adams to stay and experiment with the AMMs.

Uniswap is now fully decentralized and managed by governance tokens. Yet, Hayden’s legacy continues through the foundation he laid and the community he built around the blockchain ideology so close to cypherpunks and Ethereum developers: permissionless, trustless, decentralized. 

Uniswap V3 and the search for the agile AMM curve 

The new Uniswap protocol v3 (version 3), which was being developed before the v2 launch, is likely to shake up the DeFi scene. 

The Uniswap introductory blog post promises:

  1. Concentrated liquidity. Liquidity provides will choose the price brackets to allocate their capital. That should unlock liquidity stuck on the fringes of the x*y=k curve and increase LPs capital efficiency up to 4k times, which will yield higher returns per staked capital. Individual LPs choices will place them in different curve groups, offering curve agility rather than one simple constant market maker. 

  1. Multiple fee tiers or higher ‘expressiveness’ of Liquidity Providers. V3 will allow Providers to choose their own risk levels, asset exposure, and liquidity providing strategy, depending on whether they think the token prices will drop, rise, or stay the same. 

The v3 is introducing more choices but also more complexity to what was till now a simple and elegant system. The development team hopes that the new protocol will give even more space to blockchain devs and the market maker strategists to write their protocols and design curves they prefer for the network. 

Uniswap V3 is launching today on May 5th, 2021. 



Author: Natalia Nowakowska

Designer: Ami Tsang

Editor: Eleonore Blanc