Haseeb Qureshi: How Uniswap became the king of DEXs

Haseeb Qureshi is a managing partner at Dragonfly Capital, a cross-border crypto venture fund. You can find a longer version of this post here.

Imagine if a college friend reached out to you and said, “Hey, I have a business idea. I will run a market making bot. I’ll always quote a price no matter who asks, and for my pricing algorithm I’ll use x * y = k. That’s pretty much it. Do you want to invest? “

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Well, it turns out your friend just described Uniswap. Uniswap is the world’s easiest automated market maker (AMM). Apparently out of nowhere, the volume exploded last year and is crowned the largest “DEX” in the world in terms of volume.

Since the rise of Uniswap, there has been an explosion of innovation in AMMs. A legion of Uniswap descendants has emerged, each with their own particularities.

Trading volume of Uniswap, Balancer and Curve. (Source: Dune Analytics)

Although they have all inherited Uniswap’s core design, they each have their own special pricing feature. Take Curve, which uses a mixture of constant product and constant sum, or Balancer, whose price function for multiple assets is defined by a multidimensional surface. There are even shifted curves that can run out of inventory like the Foundation uses to sell limited edition merchandise.

The stable swap curve used in curve (blue).

Source: curve

Given the growth in AMM volume, it is tempting to assume that AMMs will gobble up all of DeFi’s on-chain volume – that they were meant to win. But I don’t think that was predetermined at all. In fact, there are several very specific, random reasons why AMMs have proven so successful.

Remember, long before we had Uniswap, we had tons of DEXs! Uniswap has decimated DEXs based on order books such as IDEX or 0x. Why?

From order books to ATMs

I believe there are four reasons why Uniswap hit order book exchanges.

First, Uniswap is extremely easy to implement. This means low complexity, low surface area for hacks and low integration costs. Not to mention the low gas costs! This is really important if you are implementing all of your trades in addition to a decentralized graphing calculator.

This is not a small point. As soon as the next-generation blockchains arrive with high throughput, the order book model will likely dominate at some point, as is the case in the normal financial world. But will it be dominant on Ethereum 1.0?

The exceptional limitations of Ethereum 1.0 are chosen for the sake of simplicity. If you can’t do complex things, you just have to do the best. Uniswap is a pretty good simple thing.

Second, Uniswap has a very small regulatory surface. (This is the same reason Bram Cohen believes Bittorrent was successful.) Uniswap is trivially decentralized and does not require any out-of-chain input. Compared to order book DEXs, which have to tiptoe around the perception of the operation of an exchange, Uniswap can be innovative as a purely financial company.

See also: Haseeb Qureshi – The DeFi Flash Loan Attack That Changed Everything

Third, it is extremely easy to provide liquidity to Uniswap. The one-click “set and forget” LP experience is much easier than getting active market makers to provide liquidity on an order book exchange, especially before DeFi picks up any serious volume.

This is vital as much of Uniswap’s liquidity is provided by a small group of charitable whales. These whales are not that sensitive to returns, so the one-click experience at Uniswap makes it painless for them to participate. Crypto designers have a bad habit of ignoring mental transaction costs and assuming that market participants are infinitely diligent. Uniswap made liquidity provisioning a breeze and it paid off.

The final reason Uniswap has been so successful is because it was easy to create pools with incentives. In a pool with incentives, the creator of a pool throws tokens at liquidity providers and juices their LP returns above the standard uniswap returns. This phenomenon was also known as “liquidity farming”. Some of Uniswap’s highest volume pools have been airdropsed, including AMPL, sETH and JRT. For Balancer and Curve, all of their pools are currently stimulated with their own native token.

Recall that one of the three ways traditional market makers make money is through certain market making arrangements that are paid for by the asset issuer. In a sense, an Incentive Pool is a Designated Market Maker Agreement that translates for DeFi: an asset issuer pays an AMM to provide liquidity for their pair, with the payment being made via Token Airdrop.

In 2025, I no longer expect AMMs as they look like today to be the dominant way people act. Such transitions are common in the history of technology.

However, incentive pools have an additional dimension. They have enabled AMMs to be more than just market makers: they now serve as marketing and sales tools for token projects. Using pools with incentives, AMMs create a sybil-resistant way to distribute tokens to speculators who want to accumulate the token while simultaneously booting a liquid initial market. It also gives buyers something to do with the token – don’t just flip it over and sell it, deposit it and get some return! One could call this poor man’s commitment. It’s a powerful marketing flywheel for an early token project, and I expect it will be incorporated into the Token Go-to-Market playbook.

These factors largely explain why Uniswap has been so successful. (I didn’t mention “First DeFi Offers”, but that’s a topic for another day.)

Still, I don’t think Uniswap’s success will last forever. If the limitations of Ethereum 1.0 create the conditions for the dominance of AMMs, more complex markets can flourish with Ethereum 2.0 and Layer 2 systems. In addition, DeFi has risen in star and when mass users and crowds arrive, they will attract serious market makers. I expect this will cause Uniswap’s market share to shrink over time.

What role will AMMs play in DeFi five years from now?

In 2025, I no longer expect AMMs as they look like today to be the dominant way people act. Such transitions are common in the history of technology.

In the early days of the internet, web portals like Yahoo were the first offers to appear on the web. The restricted environment of the early web was perfect for being organized by hand-crafted directories. These portals went like crazy when mainstream users went online! But we now know that portals were a temporary stepping stone in organizing Internet information.

What are AMMs a stepping stone? Will something replace it or will AMMs evolve alongside DeFi? I’ll try to answer that question in a future post.

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