Uniswap Whitepaper (Automated Market Maker)
Hayden Adams · 2018
"A constant-product automated market maker (x*y=k) enabling permissionless on-chain token swaps without order books."
A traditional exchange (or an early decentralized exchange copying that model) needs to match a buyer's order with a seller's order at an agreed price — a system called an order book. On Ethereum, maintaining a live order book on-chain is prohibitively slow and expensive because every order update costs a transaction fee. Uniswap's whitepaper proposed something structurally different: an Automated Market Maker (AMM), where a smart contract holds a pool of two tokens, and prices are set automatically by a simple formula rather than by matching human orders at all — anyone can trade against the pool at any time, and anyone can deposit tokens into the pool to earn a share of trading fees.
The mechanism is the constant-product formula, x times y equals k: the smart contract holds reserves of two tokens (x and y), and enforces that the product of the two reserve amounts must always equal a constant (k) after any trade. If you trade token A for token B, you're adding to the A side of the pool and removing from the B side — and because the product must stay constant, removing a larger amount of B (as the trade gets bigger) requires disproportionately more A, meaning the price you get worsens as your trade size grows relative to the pool. This makes pricing fully automatic and requires no counterparty on the other side of your specific trade — you're always trading against the pool itself, governed only by the formula, with liquidity providers earning a small fee (commonly 0.3%) on every trade in exchange for supplying the reserves.
How does Uniswap determine the price of a trade, given that there's no order book matching buyers and sellers?
Read more about the topic
The explanation above is written with AI assistance. These are the originals — go to them to check it.
- Uniswap Whitepaper (v1, original concept document)Hayden Adams
- Uniswap v3 Core whitepaperuniswap.org
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