Uniswap is a decentralized permissionless exchange built on the Ethereum network, allowing Ethereum wallet users Trade ERC-20 tokens directly using the Automated Market Maker (AMM) method.

The Unifruit example mentioned in the AMM article basically covers the working principle of Uniswap. For an asset pool with tokens A and B, the number of tokens in the pool after the change should satisfy:

(A stock - A consumption) * (B stock + B increase) = k

Where k is a constant. This is often simplified to A * B = k and plotted as a hyperbola (inversely proportional function).

This mechanism ensures that there is always a certain amount of both tokens in the pool, i.e. "unlimited liquidity". Imagine a pool initially has $100 of Ethereum and $100 of stablecoins. As Ethereum's reserves approach 0, the reserve demand for stablecoins approaches infinity, making buying into a liquidity pool extremely expensive. In short, AMM as a market maker mechanism allows any liquidity provider to put 2 crypto assets (such as ETH + USDC) into a basket to earn trading fees, creating a liquidity pool that other traders can The two assets are "put and taken" according to specific rules (constant product functions). The process of "putting and taking" is the actual trading activity.

In the case of Unifruit, we mentioned that Unifruit users need to place some additional fruit seeds to compensate the basket provider. The same goes for Uniswap.

For Uniswap V2, there is a 0.3% transaction fee for each transaction added directly to the pool. Therefore, the product k actually increases after each transaction.

Uniswap V3 has 3 fee tiers, and the pool reserves will not be increased by charging fees.

Several advantages of AMM:

• Overcoming the shortcomings of slow transaction speeds on the blockchain. By interacting with liquidity pools rather than “bid/sell” on an order book, DEXs enable the same trading experience without the need for high-frequency trading speeds. (It takes about 15 seconds to confirm a trade on Ethereum, while TradFi’s order book can confirm orders in 0.0001 seconds)
• Fair price discovery. Through specific rules (constant product functions), AMM ensures that the prices of the two assets in the liquidity pool are fair prices.
• Sufficient Liquidity. The transaction fee incentive mechanism ensures sufficient liquidity in the pool and provides a trading experience closer to TradFi.
• Scalability. Any two assets can be paired into a liquidity pool for others to trade.

History of Uniswap

Uniswap was founded on November 2, 2018 by Hayden Adams, a former mechanical engineer at Siemens. As of 2022, Uniswap is the most popular decentralized exchange and leads all DEXs in trading volume.

Uniswap has received investment from top venture capital firms, including Andreessen Horowitz, Paradigm Venture Capital, Union Square Ventures LLC, and ParaFi.

The first version (V1) of the Uniswap protocol was released in November 2018, introducing the concept of AMMs (Automated Market Makers) to the market. The second version, V2, was launched in May 2020, and the third version, V3, was launched in May 2021, introducing pooled liquidity: a new liquidity provision method that allocates liquidity within a certain price range.

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