How Does Uniswap V2 Work?

Classic constant-product AMM with uniform liquidity across the full price range (0, infinity)

The original widely-deployed AMM design. While pioneering at launch (2020), the constant-product formula is now the most battle-tested and widely forked DEX model in DeFi.

Fixed 0.3% swap fee on all pairs; 0.05% protocol fee now active (UNIfication, Dec 2025) directing fees to token jar redeemable by burning UNI

Fixed 0.3% swap fee on all pairs; 0.05% protocol fee activated for V2 in December 2025 via the UNIfication governance vote (passed near-unanimously Dec 25, executed Dec 28). LPs now receive 0.25%; 0.05% goes to the token jar. Anyone can burn UNI via the fire pit contract to redeem a proportional share of token jar assets. Additionally, 100M UNI (15.8% of circulating supply, ~$596M at execution price) was permanently burned on Dec 28, 2025.

Cumulative price oracle updated every block, providing time-weighted average prices for external consumption

V2 TWAP oracle was a DeFi primitive used by many protocols for pricing. Vulnerable to manipulation in thin-liquidity pairs.

UNI token governance inherited from Uniswap governance framework, covering both V2 and V3

Shared governance with the broader Uniswap ecosystem. Low participation rates remain a concern.

Fungible ERC-20 LP tokens minted proportional to share of pool liquidity deposited

Fungible LP tokens are highly composable — usable as collateral in lending protocols, yield farms, and other DeFi primitives.

Atomic flash swaps allowing users to borrow any amount of assets and repay within the same transaction

Flash swaps enable arbitrage and liquidation without upfront capital, but also facilitate sandwich attacks and oracle manipulation.

Predictable price impact from the x*y=k formula combined with public mempool allows sandwich bots to extract value from every swap. Estimated 90% of Uniswap V2 blocks are vulnerable to front-running, with individual losses reaching $215K per attack.

Flash swaps can temporarily manipulate spot price within a block. While TWAP smooths manipulation over time, low-liquidity pairs can be persistently manipulated at modest cost, affecting downstream protocols relying on V2 oracles for collateral pricing.

Uniform liquidity distribution means most capital sits idle far from the current price, generating minimal fees relative to capital deployed. For volatile pairs, impermanent loss regularly exceeds fee income, causing net losses for passive LPs.

LP tokens used as collateral in lending protocols create cascading liquidation risk — a sharp price move causes IL, reducing LP token value, triggering liquidations that further depress prices in the underlying pool.