Introduction

The Uniswap protocol is a peer-to-peer system [1] for trading cryptocurrencies (ERC-20 Tokens) on the Ethereum blockchain. The Uniswap protocol is defined by immutable, persistent, non-upgradable smart contracts that run on Ethereum. It is designed to enable trades without reliance on any trusted intermediaries who may selectively restrict access. The Uniswap protocol is designed to be censorship resistant, secure, and self-custodial. The code is open source for all to read and verify.

As a result of these design principles, the Uniswap protocol will operate in perpetuity with 100% uptime, provided the Ethereum network continues to operate.

How does the Uniswap protocol compare to a typical market?

To understand how the Uniswap protocol differs from traditional trading platforms, it is helpful to compare two dimensions: how Automated Market Maker design deviates from traditional central limit order books, and how permissionless systems depart from conventional permissioned systems.

Order Book VS AMM

Most publicly accessible markets use a central limit order book where buyers and sellers create orders organized by price level that are progressively filled as demand shifts. Anyone who has traded stocks through brokerage firms will be familiar with an order book system.

The Uniswap protocol takes a different approach, using an Automated Market Maker (AMM), sometimes referred to as a Constant Function Market Maker, in place of an order book.

At a very high level, an AMM replaces the buy and sell orders in an order book market with a liquidity pool of two assets, both valued relative to each other. As one asset is traded for the other, the relative price of the two assets shift, and a new market rate for both is determined. In this dynamic, a buyer or seller trades directly with the pool, rather than with specific orders left by other parties. The advantages and disadvantages of automated market makers versus their traditional order book counterparts are under active research by a growing number of parties. We have collected some notable examples on our research page.

Permissionless Systems VS Permissioned Systems

The second departure from traditional markets is the permissionless design of the Uniswap protocol. Permissionless design means that the protocol’s services are entirely open for public use, with no ability to selectively restrict who can or cannot use them: anyone can swap, provide liquidity, or create new markets at will. This is a departure from traditional financial services, which typically restrict access based on geography, wealth status, and age.


1 Ethereum protocols are sometimes referred to as peer-to-contract systems as well. These are similar to a peer-to-peer systems, but with immutable, persistent programs known as smart contracts taking the place of a peer.

A peer-to-contract system facilitates peer-to-peer functionality, but uses immutable, persistent programs known as smart contracts to automate some processes.

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