Munich Personal RePEc Archive

Uniswap and the rise of the decentralized exchange

Lo, Yuen and Medda, Francesca (2020): Uniswap and the rise of the decentralized exchange.

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Despite blockchain based digital assets trading since 2009, there has been a functional gap between (1) on-chain transactions and (2) trust based centralized exchanges. This is now bridged with the success of Uniswap, a decentralized exchange. Uniswap's constant product automated market maker enables the trading of blockchain token without relying on market makers, bids or asks. This overturns centuries of practice in financial markets, and constitutes a building block of a new decentralized financial system. We apply ARDL and VAR methodologies to a dataset of 999 hours of Uniswap trading, and conclude that its simplicity enables liquidity providers and arbitrageurs to ensure the ratio of reserves match the trading pair price. We find that changes in Ether reserves Granger causes changes in USDT reserves.

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