To begin, we should make clear the distinctions between the different areas of "Uniswap", some of which may confuse new users.
- Uniswap Labs: The company which developed the Uniswap protocol, along with the web interface.
- The Uniswap Protocol: A suite of persistent, non-upgradable smart contracts that together create an automated market maker, a protocol that facilitates peer-to-peer market making and swapping of ERC-20 tokens on the Ethereum blockchain.
- The Uniswap Interface: A web interface that allows for easy interaction with the Uniswap protocol. The interface is only one of many ways one may interact with the Uniswap protocol.
- Uniswap Governance: A governance system for governing the Uniswap Protocol, enabled by the UNI token.
The following is a brief overview of the Uniswap protocol
The Uniswap protocol is a peer-to-peer1 system designed for exchanging cryptocurrencies (ERC-20 Tokens) on the Ethereum blockchain. The protocol is implemented as a set of persistent, non-upgradable smart contracts; designed to prioritize censorship resistance, security, self-custody, and to function without any trusted intermediaries who may selectively restrict access.
There are currently three versions of the Uniswap protocol. V1 and V2 are open source and licensed under GPL. V3 is open source with slight modifications, which are viewable here. Each version of Uniswap, once deployed, will function in perpetuity, with 100% uptime, provided the continued existence of the Ethereum blockchain.
To understand how the Uniswap protocol differs from a traditional exchange, it is helpful to first look at two subjects: how the Automated Market Maker design deviates from traditional central limit order book-based exchanges, and how permissionless systems depart from conventional permissioned systems.
Most publicly accessible markets use a central limit order book style of exchange, 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 prices 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.
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.
For research into the economics of AMMs, game theory, or optimization research, check out our research page.
For new features implemented in V3 that expand and refine the AMM design, see the V3 Concepts page.
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.