Uniswap V2

Market Making

Uniswap is one of the largest decentralized exchanges that allows anyone to trade crypto assets and provide liquidity to earn trading fees. Uniswap v2 allows users to buy and sell ERC-20 tokens using an automated market maker (AMM) model and liquidity pools.

Risk Rating
Good
Protocol Code Quality
Protocol Maturity
Protocol Design
Summary
What we like
The team at Uniswap transformed the concept of a decentralized exchange (DEX) into one of the most game changing DeFi building blocks created thus far.
What we like less
The developer team still has a lot of control on the protocol's future through back-door switches and difficult governance thresholds.
What it means for you
Uniswap is the most popular DEX in DeFi, and provides an amazing opportunity for you to generate yield through market making given the high volumes at low risk.
Information
Exploit/Hacks
None
Info
  • Website
  • Token: UNI
  • Tags: Market Making
Key Metrics
  • TVL: $2.3B (Rank #10)
  • TVL Ranking by Market Making: #0
  • Blockchain: Ethereum, Base, Binance, Arbitrum, Avalanche, Polygon, Optimism, Celo
  • Chain TVL
    • Ethereum: $2.28B
    • Base: $1.23M
    • Binance: $87.89K
    • Arbitrum: $50.81K
    • Avalanche: $11.78K
    • Others: $12.37K
Risk Assessment
Good
Protocol Code Quality
  • Code reviewed by at least one experienced auditor; ConsenSys Diligence audited in January 2019
  • Public team promotes accountability
  • No documented protocol hacks since launch
Protocol Maturity
  • Core protocol launched in 2020; maturity over one year minimizes technical risk as smart contracts are well battle-tested
  • Top 5% by total value locked reduces risk
  • Core contracts require on-chain voting for parameter updates
  • Timelock is at least 48hrs, which provides users with sufficient time to exit if any malicious upgrades are approved
  • Low voting power concentration reduces risk
Protocol Design
  • No death spiral concerns
  • This protocol is susceptible to risks related to decentralized exchanges (DEXs), such as impermanent loss
  • Uniswap is one of the most copied protocols in DeFi as it pioneered the concept of automated market makers (AMMs), as well as the concept of concentrated liquidity (Uni V3) that lets you choose your own price range to provide liquidity
Things to know about Uniswap V2

How Uniswap V2 works

Uniswap enables the creation of liquidity pools to swap one token for another. Investors can provide liquidity in pools directly from their wallets and earn yield on swaps. All interactions with Uniswap are fully transparent as they are on-chain. It is based on the Automated Market Maker (AMM) model which uses a constant product curve (x * y = k) to determine the exchange rate based on the ratio between the two assets, the trade size and the amount of liquidity within the pool. The liquidity pools charge a fee on every trade. The latest version (Uniswap V3) offers users the ability to select the lower and upper price ranges where they wish to provide liquidity on a specific pool (a.k.a. concentrated liquidity).

How Uniswap V2 makes money

Uniswap makes money via protocol fees that can be optionally turned on by UNI holders through a community governance proposal. Whenever a liquidity pool is created, protocol fees are set to 0 by default. Uniswap could then receive a fraction of these transaction fees. Currently, the protocol does not charge protocol fees and all fees are earned by liquidity providers.

How you make money on Uniswap V2

In order to incentivize users to create trading markets on their platform, Uniswap must pay these users who are providing liquidity into these pools in the form of swap fees. Uniswap currently distributes all of the swap fees earned for each pool directly to the liquidity providers that is proportional to the amount they deposited. For Uniswap V2, there is a 0.3% fee for swapping tokens that is fully allocated to liquidity providers.