Finance leader with CPA & CMA credentials, experienced in Fortune 500 and startups across Internet, Green Energy, Retail, Education, and Bio
Finance leader with CPA & CMA credentials, experienced in Fortune 500 and startups across Internet, Green Energy, Retail, Education, and Bio
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April, 2025
In the minds of many, decentralized exchanges (DEXs) are a cornerstone of the blockchain utopia. However, few have clearly articulated what the positioning of a DEX truly is or why its existence is necessary.
Let’s imagine a scenario without DEXs: when Xiao Ming wants to trade digital assets, finding a suitable counterparty is challenging. Even if a counterparty is found, price negotiations may fail, preventing the trade from happening.
This scenario highlights two key pain points:
Digital assets are not daily necessities; not everyone has a trading need. Individual traders must independently find counterparties, often incurring significant costs.
The variety of digital assets is vast. For less commonly used assets, information asymmetry makes it difficult to reach a consensus on price.
These pain points correspond to the two primary functions of an exchange: trade matching and price discovery. This is the raison d'être of exchanges.
The core objective of operating an exchange is to sustain revenue through high transaction volume by collecting fees. Specifically:
From the trade matching perspective, the key question is: How to efficiently utilize liquidity pools?
From the price discovery perspective, the key question is: How to ensure price fairness?
The DEX that best addresses these two core issues will thrive.
This report analyzes the operational logic of DEXs through these two perspectives and evaluates the future prospects of two leading DEXs: Uniswap and PancakeSwap.
The success rate of trade matching hinges on sufficient liquidity. Greater liquidity leads to faster trade execution, lower slippage, and higher matching success rates. This dynamic represents the first equilibrium game for DEXs.
Liquidity pools are funded by two sources: retail investors and institutional investors. From the exchange’s perspective, a large retail investor base ensures liquidity stability, mitigating the impact of individual retail withdrawals. Institutional investors form the backbone, and the exchange must prioritize their capital safety and profitability. However, over-reliance on institutions risks control or capture, so a robust retail base is essential to handle contingencies (e.g., a major institutional withdrawal). DEXs must balance retail and institutional liquidity providers.
Beyond liquidity, another critical factor affecting matching success is transaction fees. Higher fees deter traders, while fees that are too low reduce the appeal for liquidity providers (LPs). This creates the second equilibrium game for DEXs.
How do Uniswap and PancakeSwap, two leading players, perform in the trade matching perspective? We’ll start with a preliminary analysis of Total Value Locked (TVL), trading volume, and fees, followed by a more comprehensive discussion after covering the pricing perspective.
TVL and trading volume are closely but non-linearly related.
TVL is the foundation of trading volume, reflecting liquidity at a given point. As of April 18, 2025, Uniswap and PancakeSwap’s TVLs are $3.85 billion and $1.57 billion, respectively, ranking them as the top two DEXs.
Trading Volume reflects transaction amounts over a period. From 2021 to 2024, the share of Uniswap and PancakeSwap’s trading volume relative to the total DEX market has generally declined. In 2024 and Q1 2025, despite significant year-over-year growth in total trading volume, their combined share was less than 40%, indicating intensified competition in the sector.
Combining TVL and trading volume reveals liquidity utilization efficiency. Similar to the financial metric of asset turnover, a higher Volume/TVL ratio indicates more frequent user trading and better liquidity utilization. Uniswap’s ratio significantly outperforms PancakeSwap’s.
TVL and trading volume are mutually reinforcing. Higher trading volume attracts more LPs seeking fee revenue, increasing TVL, and vice versa.
Fees are a critical tool for attracting LPs and a key factor influencing traders’ platform choice. From 2022 to 2025, Uniswap’s fee rates have remained below 0.15%, lower than PancakeSwap’s (0.15%–0.25%). This contradicts common market perceptions, which we’ll explore further later.
Is the relationship between liquidity and trading volume strictly positive? Is there a diminishing marginal effect, given that trading demand has a ceiling while liquidity is theoretically unlimited? Could an optimal ratio between the two be explored? I’ll address this in a future report.
With the vast variety of digital assets, reaching price consensus directly between trading parties is challenging, necessitating “rules.” The term “rules” carries a centralized connotation, but as long as two conditions below are met, this centralization does not undermine the decentralized utopia:
The rules are widely accepted. In a market-driven economy, this is easily validated—better rules gain higher acceptance, while poor rules don’t survive long-term.
Rule execution is not subject to the operator’s subjective influence. This is where DEXs differ from centralized exchanges (CEXs). DEXs encode rules into protocols or smart contracts, which is an effective approach.
Pricing rules currently fall into two main categories:
Order Book: This model does not prioritize transaction completion, failing to address the core issue of ensuring high trading volume. Even with professional market makers, exchange operators realize there’s no need to share profits with them. As a result, this model is rarely used by DEXs today.
Automated Market Maker (AMM) Formula: This model facilitates trades without relying on order books or market depth. Both Uniswap and PancakeSwap use the constant product formula (x*y=k) for AMM. AMM’s advantages are clear, making it the dominant design for DEXs. However, it has two key limitations: (1) LPs face a high likelihood of impermanent loss, and (2) capital efficiency is low. Addressing these limitations has been the focus of DEX evolution.
After less than a decade of evolution, what has the DEX sector achieved? As a pioneer, Uniswap serves as a prime case study.
Let’s briefly review Uniswap’s major evolutionary milestones:
November 2018: V1 launched as an initial proof-of-concept.
May 2020: V2 allowed users to create liquidity pools for any token pair and set custom fee rates. It improved the price oracle and introduced flash loans.
May 2021: V3, a complete code rewrite, enabled users to concentrate liquidity within specific price ranges, boosting capital efficiency but increasing impermanent loss during high volatility.
August 2024: V4 introduced Hooks, allowing developers to innovate on Uniswap’s liquidity and security protocols.
These are just highlights. What’s the underlying strategic thread? Below, I offer a high-level interpretation from a strategic perspective.
In one sentence: Uniswap’s strategy is clear and exhibits remarkable discipline.
An exchange is a business, and its essence lies in liquidity and pricing. Uniswap’s major iterations reflect an unwavering focus on this essence, never deviating from its core mission. Its journey in liquidity management and pricing rules has progressed from inception to refinement, and from macro to micro. The development trajectory is as follows:
V2 established countless liquidity pools from scratch.
V3 addressed low capital efficiency in liquidity pools. “Concentrated Liquidity” moved pool management beyond its primitive stage, from existence to optimization.
V4 ushered in a micro-era of liquidity management. Uniswap broke down the liquidity pool lifecycle into temporal segments, seeking opportunities to enhance capital efficiency at every key stage. Achieving this level of lean management was beyond Uniswap’s internal capacity, so it took a new approach: providing tools. Hooks embody this philosophy, enabling countless developers to co-build a thriving liquidity ecosystem, a true manifestation of decentralization.
Beyond segmenting the liquidity pool lifecycle temporally, are there other dimensions to segment?
This evolution has not only kept Uniswap at the forefront of industry TVL but also given it a competitive edge in transaction costs. As noted earlier, Uniswap’s fee rates from 2022 to 2025 have been below 0.15%, lower than PancakeSwap’s (0.15%–0.25%), contrary to market perceptions. This may stem from Uniswap’s decision to allow users to set custom fee rates, with many opting for lower rates. The rationale: higher trading volume increases liquidity utilization, boosting total fee revenue. Indeed, from 2021 to 2024, Uniswap’s average Volume/TVL ratio was 124, meaning its liquidity was used 124 times annually, compared to PancakeSwap’s 79.
So why does the market still perceive PancakeSwap as cheaper? Total trading costs on DEXs include transaction fees and blockchain network fees (gas fees). PancakeSwap’s gas fees on BNB Chain (a few cents) are far lower than Uniswap’s on Ethereum ($5–$50 during 2022–2023 peaks), reinforcing the “Pancake is cheaper” perception. However, Uniswap has made remarkable strides here. In V3, each liquidity pool had its own contract, generating significant gas costs for pool creation and cross-pool trades. V4 introduced a singleton contract and flash accounting, reportedly reducing gas fees by up to 99%, though real-world results remain under observation.
This raises a deeper question: Which is more critical for an exchange’s sustained growth—underlying technology development or tokenomics?
My view: Underlying technology is paramount. An exchange’s foundation lies in liquidity and pricing rules, both reliant on protocol design and code iteration. Tokenomics, even if well-designed, is merely supplementary. Platform tokens can attract LPs in the short term but fail to address core issues like capital efficiency. Moreover, tokens are a double-edged sword: rising token prices, coupled with mining rewards, rapidly attract new users and liquidity, but price declines—triggered by external uncontrollable factors—can devastate liquidity. Token-driven liquidity isn’t a stable base, as it’s often motivated by speculation rather than long-term fee revenue. When expectations aren’t met, withdrawal is imminent. Thus, this report omits a deep dive into the tokenomics of Uniswap and PancakeSwap.
In the Web3 industry, there are only two true technological innovations: blockchain and smart contracts. Most other “innovations” create fleeting hype without lasting value.
From a business ethics standpoint, DEXs are the least reliant on tokenomics. They can capitalize on industry bubbles but must avoid creating them.
Simplicity and focus lead to excellence. For sustainable growth, DEXs must steadfastly prioritize their core functions: trade matching and price discovery. The failures of wayward players like SushiSwap remain cautionary tales. Fortunately, Uniswap’s excellence gives us confidence in the future of DEXs.
About the author:* Andrew LIU is a finance leader with CPA & CMA credentials, experienced in Fortune 500 and startups across Internet, Green Energy, Retail, Education, and Biotech.*
April, 2025
In the minds of many, decentralized exchanges (DEXs) are a cornerstone of the blockchain utopia. However, few have clearly articulated what the positioning of a DEX truly is or why its existence is necessary.
Let’s imagine a scenario without DEXs: when Xiao Ming wants to trade digital assets, finding a suitable counterparty is challenging. Even if a counterparty is found, price negotiations may fail, preventing the trade from happening.
This scenario highlights two key pain points:
Digital assets are not daily necessities; not everyone has a trading need. Individual traders must independently find counterparties, often incurring significant costs.
The variety of digital assets is vast. For less commonly used assets, information asymmetry makes it difficult to reach a consensus on price.
These pain points correspond to the two primary functions of an exchange: trade matching and price discovery. This is the raison d'être of exchanges.
The core objective of operating an exchange is to sustain revenue through high transaction volume by collecting fees. Specifically:
From the trade matching perspective, the key question is: How to efficiently utilize liquidity pools?
From the price discovery perspective, the key question is: How to ensure price fairness?
The DEX that best addresses these two core issues will thrive.
This report analyzes the operational logic of DEXs through these two perspectives and evaluates the future prospects of two leading DEXs: Uniswap and PancakeSwap.
The success rate of trade matching hinges on sufficient liquidity. Greater liquidity leads to faster trade execution, lower slippage, and higher matching success rates. This dynamic represents the first equilibrium game for DEXs.
Liquidity pools are funded by two sources: retail investors and institutional investors. From the exchange’s perspective, a large retail investor base ensures liquidity stability, mitigating the impact of individual retail withdrawals. Institutional investors form the backbone, and the exchange must prioritize their capital safety and profitability. However, over-reliance on institutions risks control or capture, so a robust retail base is essential to handle contingencies (e.g., a major institutional withdrawal). DEXs must balance retail and institutional liquidity providers.
Beyond liquidity, another critical factor affecting matching success is transaction fees. Higher fees deter traders, while fees that are too low reduce the appeal for liquidity providers (LPs). This creates the second equilibrium game for DEXs.
How do Uniswap and PancakeSwap, two leading players, perform in the trade matching perspective? We’ll start with a preliminary analysis of Total Value Locked (TVL), trading volume, and fees, followed by a more comprehensive discussion after covering the pricing perspective.
TVL and trading volume are closely but non-linearly related.
TVL is the foundation of trading volume, reflecting liquidity at a given point. As of April 18, 2025, Uniswap and PancakeSwap’s TVLs are $3.85 billion and $1.57 billion, respectively, ranking them as the top two DEXs.
Trading Volume reflects transaction amounts over a period. From 2021 to 2024, the share of Uniswap and PancakeSwap’s trading volume relative to the total DEX market has generally declined. In 2024 and Q1 2025, despite significant year-over-year growth in total trading volume, their combined share was less than 40%, indicating intensified competition in the sector.
Combining TVL and trading volume reveals liquidity utilization efficiency. Similar to the financial metric of asset turnover, a higher Volume/TVL ratio indicates more frequent user trading and better liquidity utilization. Uniswap’s ratio significantly outperforms PancakeSwap’s.
TVL and trading volume are mutually reinforcing. Higher trading volume attracts more LPs seeking fee revenue, increasing TVL, and vice versa.
Fees are a critical tool for attracting LPs and a key factor influencing traders’ platform choice. From 2022 to 2025, Uniswap’s fee rates have remained below 0.15%, lower than PancakeSwap’s (0.15%–0.25%). This contradicts common market perceptions, which we’ll explore further later.
Is the relationship between liquidity and trading volume strictly positive? Is there a diminishing marginal effect, given that trading demand has a ceiling while liquidity is theoretically unlimited? Could an optimal ratio between the two be explored? I’ll address this in a future report.
With the vast variety of digital assets, reaching price consensus directly between trading parties is challenging, necessitating “rules.” The term “rules” carries a centralized connotation, but as long as two conditions below are met, this centralization does not undermine the decentralized utopia:
The rules are widely accepted. In a market-driven economy, this is easily validated—better rules gain higher acceptance, while poor rules don’t survive long-term.
Rule execution is not subject to the operator’s subjective influence. This is where DEXs differ from centralized exchanges (CEXs). DEXs encode rules into protocols or smart contracts, which is an effective approach.
Pricing rules currently fall into two main categories:
Order Book: This model does not prioritize transaction completion, failing to address the core issue of ensuring high trading volume. Even with professional market makers, exchange operators realize there’s no need to share profits with them. As a result, this model is rarely used by DEXs today.
Automated Market Maker (AMM) Formula: This model facilitates trades without relying on order books or market depth. Both Uniswap and PancakeSwap use the constant product formula (x*y=k) for AMM. AMM’s advantages are clear, making it the dominant design for DEXs. However, it has two key limitations: (1) LPs face a high likelihood of impermanent loss, and (2) capital efficiency is low. Addressing these limitations has been the focus of DEX evolution.
After less than a decade of evolution, what has the DEX sector achieved? As a pioneer, Uniswap serves as a prime case study.
Let’s briefly review Uniswap’s major evolutionary milestones:
November 2018: V1 launched as an initial proof-of-concept.
May 2020: V2 allowed users to create liquidity pools for any token pair and set custom fee rates. It improved the price oracle and introduced flash loans.
May 2021: V3, a complete code rewrite, enabled users to concentrate liquidity within specific price ranges, boosting capital efficiency but increasing impermanent loss during high volatility.
August 2024: V4 introduced Hooks, allowing developers to innovate on Uniswap’s liquidity and security protocols.
These are just highlights. What’s the underlying strategic thread? Below, I offer a high-level interpretation from a strategic perspective.
In one sentence: Uniswap’s strategy is clear and exhibits remarkable discipline.
An exchange is a business, and its essence lies in liquidity and pricing. Uniswap’s major iterations reflect an unwavering focus on this essence, never deviating from its core mission. Its journey in liquidity management and pricing rules has progressed from inception to refinement, and from macro to micro. The development trajectory is as follows:
V2 established countless liquidity pools from scratch.
V3 addressed low capital efficiency in liquidity pools. “Concentrated Liquidity” moved pool management beyond its primitive stage, from existence to optimization.
V4 ushered in a micro-era of liquidity management. Uniswap broke down the liquidity pool lifecycle into temporal segments, seeking opportunities to enhance capital efficiency at every key stage. Achieving this level of lean management was beyond Uniswap’s internal capacity, so it took a new approach: providing tools. Hooks embody this philosophy, enabling countless developers to co-build a thriving liquidity ecosystem, a true manifestation of decentralization.
Beyond segmenting the liquidity pool lifecycle temporally, are there other dimensions to segment?
This evolution has not only kept Uniswap at the forefront of industry TVL but also given it a competitive edge in transaction costs. As noted earlier, Uniswap’s fee rates from 2022 to 2025 have been below 0.15%, lower than PancakeSwap’s (0.15%–0.25%), contrary to market perceptions. This may stem from Uniswap’s decision to allow users to set custom fee rates, with many opting for lower rates. The rationale: higher trading volume increases liquidity utilization, boosting total fee revenue. Indeed, from 2021 to 2024, Uniswap’s average Volume/TVL ratio was 124, meaning its liquidity was used 124 times annually, compared to PancakeSwap’s 79.
So why does the market still perceive PancakeSwap as cheaper? Total trading costs on DEXs include transaction fees and blockchain network fees (gas fees). PancakeSwap’s gas fees on BNB Chain (a few cents) are far lower than Uniswap’s on Ethereum ($5–$50 during 2022–2023 peaks), reinforcing the “Pancake is cheaper” perception. However, Uniswap has made remarkable strides here. In V3, each liquidity pool had its own contract, generating significant gas costs for pool creation and cross-pool trades. V4 introduced a singleton contract and flash accounting, reportedly reducing gas fees by up to 99%, though real-world results remain under observation.
This raises a deeper question: Which is more critical for an exchange’s sustained growth—underlying technology development or tokenomics?
My view: Underlying technology is paramount. An exchange’s foundation lies in liquidity and pricing rules, both reliant on protocol design and code iteration. Tokenomics, even if well-designed, is merely supplementary. Platform tokens can attract LPs in the short term but fail to address core issues like capital efficiency. Moreover, tokens are a double-edged sword: rising token prices, coupled with mining rewards, rapidly attract new users and liquidity, but price declines—triggered by external uncontrollable factors—can devastate liquidity. Token-driven liquidity isn’t a stable base, as it’s often motivated by speculation rather than long-term fee revenue. When expectations aren’t met, withdrawal is imminent. Thus, this report omits a deep dive into the tokenomics of Uniswap and PancakeSwap.
In the Web3 industry, there are only two true technological innovations: blockchain and smart contracts. Most other “innovations” create fleeting hype without lasting value.
From a business ethics standpoint, DEXs are the least reliant on tokenomics. They can capitalize on industry bubbles but must avoid creating them.
Simplicity and focus lead to excellence. For sustainable growth, DEXs must steadfastly prioritize their core functions: trade matching and price discovery. The failures of wayward players like SushiSwap remain cautionary tales. Fortunately, Uniswap’s excellence gives us confidence in the future of DEXs.
About the author:* Andrew LIU is a finance leader with CPA & CMA credentials, experienced in Fortune 500 and startups across Internet, Green Energy, Retail, Education, and Biotech.*
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