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Uniswap V2 Overview

Uniswap V2 is an automated market maker (AMM) protocol that enables decentralized token swaps on Ethereum.

Core Concepts​

Constant Product Formula​

Uniswap V2 uses the constant product formula:

x * y = k

Where:

  • x = reserve of token A
  • y = reserve of token B
  • k = constant product

When you trade, the product k remains constant (minus fees).

Architecture​

Core Contracts​

UniswapV2Pair​

The pair contract holds the reserves for two tokens and implements the core swap logic.

interface IUniswapV2Pair {
    function getReserves() external view returns (
        uint112 reserve0,
        uint112 reserve1,
        uint32 blockTimestampLast
    );
    
    function swap(
        uint amount0Out,
        uint amount1Out,
        address to,
        bytes calldata data
    ) external;
    
    function mint(address to) external returns (uint liquidity);
    function burn(address to) external returns (uint amount0, uint amount1);
}

UniswapV2Factory​

Creates and tracks all pairs.

interface IUniswapV2Factory {
    function createPair(address tokenA, address tokenB) 
        external returns (address pair);
    
    function getPair(address tokenA, address tokenB) 
        external view returns (address pair);
}

UniswapV2Router02​

Helper contract that makes it easier to interact with pairs.

interface IUniswapV2Router02 {
    function swapExactTokensForTokens(
        uint amountIn,
        uint amountOutMin,
        address[] calldata path,
        address to,
        uint deadline
    ) external returns (uint[] memory amounts);
    
    function addLiquidity(
        address tokenA,
        address tokenB,
        uint amountADesired,
        uint amountBDesired,
        uint amountAMin,
        uint amountBMin,
        address to,
        uint deadline
    ) external returns (uint amountA, uint amountB, uint liquidity);
}

Key Features​

1. ERC-20 Pairs​

Any ERC-20 token can be paired with any other ERC-20 token.

2. Price Oracle​

Time-weighted average price (TWAP) oracle built into every pair:

uint public price0CumulativeLast;
uint public price1CumulativeLast;

3. Flash Swaps​

Borrow tokens, use them, and pay them back in the same transaction.

4. Protocol Fee​

Optional 0.05% fee that can be turned on by governance (currently off).

Trading Fees​

  • 0.30% fee on all trades
  • Paid by traders
  • Distributed to liquidity providers

Liquidity Provision​

Adding Liquidity​

  1. Approve tokens for router
  2. Call addLiquidity() with desired amounts
  3. Receive LP tokens representing your share

Removing Liquidity​

  1. Approve LP tokens for router
  2. Call removeLiquidity()
  3. Receive proportional share of pool reserves

Price Impact​

The larger your trade relative to pool reserves, the more price impact:

price_impact = (amount_in / reserve_in) * 100%

Impermanent Loss​

When you provide liquidity, you're exposed to impermanent loss if the price ratio changes.

Formula for impermanent loss:

IL = 2 * sqrt(price_ratio) / (1 + price_ratio) - 1

Security Considerations​

  1. Reentrancy Protection: All state changes before external calls
  2. Balance Checks: Verify balances changed as expected
  3. Deadline Parameters: Prevent transactions from executing at unfavorable prices
  4. Slippage Protection: amountOutMin parameters

Resources​

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