Uniswap and the rise of the decentralized exchange

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

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Uniswap, Decentralized exchange, Blockchain, Ethereum, Tokenomics
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D47 - Market Design; D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives

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