📌 Uniswap Technical Analysis Series #1: Exchanges Made by Mathematics Hello, this is BQ Developer. @BQ_Developer Every time I use Uniswap, I feel amazed. How is it possible to have an exchange that runs 24 hours a day without a single person? Starting today, we'll take a look at what technical choices Uniswap made this "impossible" possible. First, let's take a look at why the Uniswap team created an exchange with a single mathematical formula instead of a traditional order book. 🤔 How to create an exchange on Ethereum? When Hayden Adams first conceived Uniswap in 2018, The most natural approach would have been to move traditional exchanges to blockchain. But soon you will run into a fundamental problem. To raise an order on Ethereum, you need to pay a gas fee, and you also have to pay a gas fee when you modify or cancel an order. When the market moves fast, you have to keep adjusting orders, and if you pay $20-30 each time, who will do marketing? What's even more fatal is that real-time order matching is not possible in an environment where blocks are created every 15 seconds. Traditional exchanges process orders in milliseconds, which is structurally impossible on blockchain. ⚙️ Automatic exchange made of two buckets of water Uniswap's answer was simple. I got rid of the order altogether. Instead, imagine two connected water reservoirs. One is full of ETH and the other is full of USDC. Trading is like scooping liquid from one bucket of water (taking ETH) and pouring the corresponding amount into the other (putting in USDC). The key here is that the relative water level of the two water reservoirs determines the price. The more ETH you take, the lower the water level in the ETH bucket, and the price of ETH, which has become relatively scarce, will automatically rise. All of this process is controlled by a simple mathematical formula called x * y = k. x is the amount of ETH, y is the amount of USDC, and k is the product that must remain constant. If you take one side, you have to put more of the other side to keep the product constant. 🧠 A system that works without a person The most elegant thing about this design is its full automation. Traditional exchanges require market makers to constantly adjust their quotes, but Uniswap doesn't have to. The price is automatically adjusted whenever a trade occurs, and you can trade at any price from zero to infinity. When the price of ETH rises in the external market, arbitrageurs buy relatively cheap ETH on Uniswap, and the price of the pool automatically matches the market price. No human intervention is required in all of this. 💭 The reality of trade-offs Of course, this elegant solution also has a price. The biggest problem is slippage. The larger the trade, the more exponentially the price can move, leading to a more unfavorable price than expected. In addition, most of the liquidity in the pool is actually lying dormant at extreme price points, making capital less efficient. But even taking these limitations into account, I think what Uniswap has created is a great achievement. It replaced the complex financial system with a simple mathematical formula and created a global exchange that runs 24 hours a day. ✏️ In the next part, I created an exchange with x*y=k, but when I actually used it, I saw a fatal problem. It was that 90% of the money in the pool was sleeping in an extreme price range that no one spended. How did Uniswap V3 solve this problem? --- Your likes and shares are 🥰 love #BQ개발자 #유니스왑 #AMM #DeFi