Network Analysis of Uniswap: Centralization and Fragility in the Decentralized Exchange Market
Tao Yan, Claudio J. Tessone
TL;DR
The paper analyzes Uniswap V2 as a token network where nodes are tokens and edges are liquidity pools, revealing a scale-free, core-periphery structure and a pronounced centralization in both connectivity and TVL distribution. Using daily networks from 2020 to 2023, it applies power-law fits, betweenness centrality, k-core decomposition, and robustness tests to show increasing fragility over time, especially when high-betweenness tokens are removed. The study contributes a comprehensive network-analytic framework for DeFi markets, identifies key tokens and pools that maintain connectivity, and demonstrates robustness to random failures but vulnerability to targeted attacks, with implications for systemic risk and decentralization debates. The findings offer a foundation for risk assessment, arbitrage/portfolio strategies, and router- or protocol-level optimizations within decentralized exchanges.
Abstract
The Uniswap is a Decentralized Exchange (DEX) protocol that facilitates automatic token exchange without the need for traditional order books. Every pair of tokens forms a liquidity pool on Uniswap, and each token can be paired with any other token to create liquidity pools. This characteristic motivates us to employ a complex network approach to analyze the features of the Uniswap market. This research presents a comprehensive analysis of the Uniswap network using complex network methods. The network on October 31, 2023, is built to observe its recent features, showcasing both scale-free and core-periphery properties. By employing node and edge-betweenness metrics, we detect the most important tokens and liquidity pools. Additionally, we construct daily networks spanning from the beginning of Uniswap V2 on May 5, 2020, until October 31, 2023, and our findings demonstrate that the network becomes increasingly fragile over time. Furthermore, we conduct a robustness analysis by simulating the deletion of nodes to estimate the impact of some extreme events such as the Terra collapse. The results indicate that the Uniswap network exhibits robustness, yet it is notably fragile when deleting tokens with high betweenness centrality. This finding highlights that, despite being a decentralized exchange, Uniswap exhibits significant centralization tendencies in terms of token network connectivity and the distribution of TVL across nodes (tokens) and edges (liquidity pools).