An order can be executed (at least partially) if it matches or crosses the
best price on the other side of the order book.[9]
If a limit order to buy cannot or can only partially be executed
because the price set by the buyer is lower than the highest price set by
sellers, the order - or part thereof - will appear on the bid side of the
order book.[10]
Conversely, a limit order to sell will appear on the ask side of
the order book if it cannot be (entirely) executed.[11]
A market order, on the other hand, will be filled instantly at
whatever price the market will bear.[12]
Considering the hypothetical order book shown in Figure 1, an
investor placing an order to buy 550 shares of company A specifying an
upper limit of USD 50.50 will only be partially executed since only 500
shares are listed on the ask side of the order book for a price lower or
equal to this price.[13]
The remaining 50 shares will then appear on the bid price of the book.
In dealer markets, buyers and sellers do not interact directly.[14]
Rather, investors must trade with dealers (also known as
market makers), i.e., market participants who quote bids and ask prices of an
asset they maintain in inventory. In order to share the so-called inventory
risk, i.e., the risk of loss of value of the inventory that each
dealer has to maintain, market makers trade with each other.[15]
Hence, a dealer market typically comprises two segments: the
retail segment, in which dealers trade with investors, and the wholesale segment
(or interdealer market), in which dealers trade with each other.[16]
Unlike limit order markets, trader markets do not enforce price priority.
Instead, investors are free to choose the dealers they want to trade with,
and market participants may very well bargain over price and quantity. In
some dealer markets, information on quotes is available to the public. In
others, this is not the case.[17]
b) Liquidity
In a perfectly liquid market, any order of any given size could be executed
for the exact same price on both sides of the market. Most financial
markets, however, are not perfectly liquid. In the example shown in
Figure 1, an investor seeking to buy 500 shares of company A can do so at an
average price of USD 50.462.[18]
Meanwhile, a market participant seeking to sell the same quantity of shares
can do so at an average of only USD 50.36.[19]
A good indicator of a market's liquidity - or lack thereof - is the
difference between the best bid and the best ask price (so-called
bid-ask spread).[20]
In our example, the bid-ask spread amounts to USD 0.05.[21]
In limit order markets, liquidity is typically provided by buyers
and sellers themselves. Any buyer or seller who submits a
limit order
supplies liquidity by replenishing the order book.[22]
Market participants submitting market orders, on the other hand,
are said to "consume" liquidity by depleting the order book, hence widening
the bid-ask spread.[23]
By contrast, in dealer markets, liquidity is provided by market
makers.[24]
All buyers and sellers seeking to place orders on the retail segment of the
market are liquidity users. Market makers make a profit by taking advantage
of the bid-ask spread as well as by making trades for their own account.
Because of the key role they play, they are often registered with
exchanges[25],
and their activity may be regulated.[26]
Companies may also enter into agreements with LPs to increase the liquidity
of their shares or other instruments. By committing to continuously quote
bids and asks, market makers facilitate the trading of such instruments.[27]
2. Liquidity in DeFi
DEXs are peer-to-peer marketplaces in which market participants trade
cryptocurrencies. While centralised exchanges (CEXs) - such as
Coinbase or Kraken - act as custodians of assets deposited by Traders, this
is not the case with DEXs. Users of DEXs never entrust a third party with
their assets; they keep control of them. Further, unlike CEXs on which
participants may also exchange fiat currencies (e.g. Swiss francs) for
cryptocurrencies, DEXs only allow Traders to trade cryptocurrencies for
other cryptocurrencies. By way of example, the current largest liquidity
pool on Uniswap is the pool USDC[28]/ETH[29], i.e., a pool in which participants
may exchange USDC of ETH and vice versa.[30]
While CEXs typically use an order book to match asks and bids, many DEXs
depart from the order book model. Instead, they rely on
liquidity pools, each consisting of a pair of tokens. Each liquidity pool is managed by a
smart contract, i.e., "computer code that automatically
executes all or parts of the transaction steps of an oral or written
agreement between two parties".[31]
The pairs act as automated market makers (AMMs). Whenever a trader
wants to withdraw a certain quantity of one of the tokens from the
liquidity pool, the smart contract automatically determines the
corresponding number of the other token that must be deposited. Hence, the
ratio depends on the formula used by the smart contract.
On Uniswap v1 and v2,[32]
one token is only accepted if the so-called "constant product formula" is
preserved. Such a formula, expressed as x × y = k, states that
trades may not change the product k of the reserves x and y of two tokens,
A and B. Correspondingly, the price of token A can be expressed as
y
x
× B. For any token A, if Traders want to withdraw from the liquidity pool,
they must deposit a quantity of tokens B corresponding to
y
x
. Assuming
that the liquidity pool A/B contains 500 tokens A (x = 500) and 750 tokens
B (y = 750), the price of A would be 1.5 × B. Importantly, the price of
each token only changes when the reserve ratio changes, which happens
anytime a trade is made. External prices, i.e., prices according to other
exchanges on which the tokens are being traded, do not directly
affect the price determined by the smart contract on the DEX. Anytime a
token trades above or below its value on external markets, however, an
arbitrage opportunity arises.[33]
Using the example of the liquidity pool A/B, if the ratio falls from A =
1.5 × B to A = 1 × B on external markets (e.g ., because the price
of token A fell from USD 3 to USD 2 while the price of token B remained
stable), arbitrageurs may purchase tokens A on other platforms and sell
them on Uniswap at a better price, making a profit. This will occur until
the level of reserves y equals x and the price on Uniswap reaches A = 1 ×
B. Hence, Uniswap advises users not to set a ratio of tokens that
corresponds to a price that is different from the external market price in
order to avoid to "[create] immediately a profitable arbitrage opportunity,
which is likely to be taken by an external party".[34]
While market makers in CeFi are specialised intermediaries registered with
an exchange, regulated, and/or hired by companies seeking to increase the
liquidity of their financial instruments, essentially anyone can
become an LP on DEXs. Figure 2 shows how easily anybody can create
a pair on Uniswap by selecting two tokens and depositing amounts of the
chosen tokens from their wallet. On Uniswap v3, LPs must, additionally,
select a fee tier as well as the price range within which liquidity is to
be provided.[35]
If a liquidity pool between both selected tokens does not exist, it will be
automatically created. Consequently, the number of pairs that can be traded
on DEXs are virtually limitless.[36]
Hundreds if not thousands of pairs can currently be traded on the largest
DEXs, and such numbers continue to increase as LPs create new pairs.
From a legal standpoint, the question arises whether there is a contract -
and, if so, what type of contract - between the involved stakeholders,
i.e., DEX Operators, LP, and Traders.
To answer this question, a conflict of laws analysis must be conducted to
determine what law is applicable. Noteworthily, it seems that large DEXs
that operate from the United States would like U.S. laws to apply to the
relationships with any person using the platform. By way of example,
Uniswap's Terms of Service hold that the platform is operated from the
United States and that the laws of the State of New York govern the
agreement under which any person may access and use the interface.[55]
In the following sections, we assume that Swiss law is applicable. Hence,
we define a contract as referring to the mutual assent of parties that
creates at least one obligation for one or both parties, such as the
obligation to deliver the purchased object or to pay the purchase
price.[56]
1. Relationship Trader - DEX Operator
DEX Operators essentially provide an interface that gives users access to a
decentralized protocol, which can be run on various blockchains, allowing
them to trade certain digital assets. Despite the decentralized nature of
the liquidity pools and the pseudonymity of the transactions, an argument
can be made that DEX Operators and Traders would like to be bound by a
contract. A clear sign of this intent is the use of Terms of Use by the DEX
Operators, which sets forth the parties' obligations.[57]
For example, the UniSwap Terms of Service hold that there is a binding
contract between the users and Uniswap: "To access or use the Interface,
you must be able to form a legally binding contract with us".[58]
The primary obligation of the DEX Operator is to provide an interface that
allows users to access the protocol. Usually, DEX Operators make clear that
they have no control over the protocol itself or the underlying blockchain.
For instance, Uniswap's Terms of Service hold that "Uniswap Labs does not
control or operate any version of the Protocol on any blockchain network".[59]
From the perspective of Traders, except for the fact that DEXs normally only
allow the exchange of cryptocurrencies for other cryptocurrencies (and not
fiat currencies), there seems to be no fundamental difference between CEXs
and DEXs. In essence, Traders may use the interface for a fee - whose
payment constitutes the Traders' main obligation - part of which goes to
the LPs and part to the DEX Operators (infra, N 9 ff.). However,
contrary to CEXs, DEXs do not require Traders to place assets in their
custody. Rather, Traders maintain custody of their tokens at all times. The
Terms of Service of Uniswap reflect this by holding that the interface is a
"purely non-custodial application" that owes "no fiduciary duties or
liabilities" to Traders.[60]
Hence, the contract between Traders and DEX Operators can hardly be
qualified as a contract of bailment.[61]
Under Swiss law, two types of contracts may fit the characteristics of the
relationship between Traders and DEX Operators, i.e., a contract for work
and services and an agency contract.[62]
The main difference between both types is that the former entails an
obligation to obtain a result, whereas the latter (merely) entails an
obligation to perform diligently and faithfully.[63]
Because DEX Operators arguably promise - "and Traders expect" - a certain
result, i.e., the use of the protocol to make (a) certain transaction(s), a
qualification as a contract for work and services seems to be more
appropriate.
2. Relationship LP - DEX Operator
As we have seen, the entire system put in place by DEXs relies on LPs: DEXs
could not operate without liquidity pools and, hence, without the
participation of LPs. In other words, without the participation of LPs, the
interface operated by DEX Operators would be useless.
The function of LPs is similar to the one played by market makers in
traditional financial markets. Noteworthily, market makers in CeFi are
mandated by operators of centralised exchanges to ensure that
liquidity is provided on the market by quoting bids and asking prices of
assets they maintain in inventory.[64]
Market makers typically enter into binding contracts with exchanges in
which the terms of their appointment are specified. Under EU law, there may
even be a duty to enter into such agreements,[65]
the content of which is also regulated.[66]
Unlike market makers in CeFi, LPs are not expressly mandated by anyone to do
anything. Rather, as discussed (supra, N 15), anybody can become an
LP within minutes - "if not seconds" - without contractual negotiations.
However, strictly speaking, neither the fact that the process is fully
automated and instantaneous nor the absence of negotiations speaks against
the existence of a contract. Rather, the relationship between DEX Operators
and LPs looks like a contractual arrangement, i.e., an agreement creating
mutual obligations. Here, too, the main responsibility of the DEX Operator
is to provide an interface to access the protocol. In the case of Uniswap,
this is expressly stated in the Terms of Service.[67]
While LPs also use the platform, their role is different from that of
Traders. Essentially, in exchange for depositing tokens A and B
into a liquidity pool, LPs receive LP tokens that give them the right to
redeem a portion of each of the tokens A and B available in the
pool and of the fees collected. Still, considering that the primary
obligation of DEX Operators is to provide an interface to access the
protocol, it is tempting to characterise the legal relationship between DEX
Operators and LPs as a contract for work and services
(Art. 363 ff. CO).[68]
Alternatively, LPs could be understood to be vicarious agents of DEX
Operators.[69]
3. Relationship LP - Traders
As we have seen, tokens are not exchanged between two Traders but rather
between a Trader and a liquidity pool. Although Traders and LPs use the
protocol they access through the interface, they do not interact directly
with each other. Indeed, there is no direct exchange between individual LPs
and Traders. Rather, funds are "pooled" in a decentralised pool managed by
a smart contract deployed on the blockchain. There is no purchase or
exchange between the LP and the Trader when the LP provides liquidity and
receives, in exchange, LP tokens. Indeed, the LP tokens are minted
automatically by the smart contract, which determines the amount of LP
tokens to which the LP is entitled on the basis of the liquidity provided.[70]
The LPs are the original holders of the LP tokens, following their minting
by the smart contract. Therefore, we are of the opinion that there is no
contractual relationship between Traders and LPs.
IV. Compensatory claims of Traders and LPs
1. Frequent Risks Related to the Use of Liquidity Pools
The question arises as to what risks are associated with the use of
Liquidity Pools and could give rise to claims for Traders and LPs.
Among the risks commonly associated with trading tokens on DEXs, the
vulnerability of smart contracts is often
mentioned.[71] As
noted by Schär, "[w]hile the deterministic and decentralised execution of
smart contracts does have its advantages, there is a risk that something
may go wrong. If coding errors exist, these errors may create
vulnerabilities that allow an attacker to drain the smart contract's funds,
cause chaos, or render the protocol unusable. Users have to be aware that
the protocol is only as secure as the smart contracts underlying
it."[72]
Defaults in smart contracts can be manifold. Because of the existing
discrepancy in technical knowledge between smart contract developers and
many of the users of DEXs, such defaults will usually not be visible to
users.[73]
Hence, there is a risk that users rely on smart contracts that prove to be
faulty at some point.
In particular, smart contracts are not immune to errors and hacking.[74]
For instance, the DAO was hacked a few months after its launch in 2016 as
vulnerabilities in the underlying code were exploited.[75]
Here, too, it is to be expected that the average user will not be able to
assess the platform's security. Audits and insurance services may offer a
partial solution to this problem.[76]
Uncertainty, however, remains.[77]
2. Legal Basis for Reparation Claims
a) Breach of Contract
As shown above (supra, N 16 ff.), Traders or LPs, on the one
hand, and DEX Operators, on the other hand, are arguably bound by a
contract. Therefore, in the event that users (i.e., Traders and LPs) lose
money, they may seek compensation from the DEX Operators for a breach of
contract. However, the conditions for liability may not be met. Under Swiss
law, a compensation claim generally requires, in addition to a breach of
contract, a fault, a causal link and damage.[78]
In practice, the requirement of a breach of contract and fault will often be
an obstacle to a reparation claim.
First, it will often be difficult for Traders or LPs to demonstrate that
the DEX Operator breached the contract. Indeed, the DEX Operators insist
that their contractual obligation is to provide an interface allowing
Traders and LPs to access the (open source) protocols, but not to
create or operate the protocol itself. In the case of Uniswap, the Terms of
Service hold: "The Interface is distinct from the Protocol and is one, but
not the exclusive, means of accessing the Protocol. […] Uniswap Labs does
not control or operate any version of the Protocol on any blockchain
network. By using the Interface, you understand that you are not buying or
selling digital assets from us and that we do not operate any liquidity
pools on the Protocol or control trade execution on the Protocol".[79]
If the obligation of DEX Operators is understood as the mere obligation to
operate an interface, irrespective of the underlying
protocol, a DEX Operator can hardly be held responsible for a breach of contract.
Indeed, the risks mentioned above mainly concern either the protocol layer
(e.g., the Uniswap protocol) or the blockchain layer (e.g., Ethereum), but
not the interface.
Second, contractual liability requires a fault of the DEX
Operator.[80]
Noteworthily, harm does not need to be intentionally inflicted for this
condition to be met. Rather, negligence is sufficient.[81]
To determine the appropriate level of care that a person must show in order
not to be considered negligent, several criteria can be taken into account,
including experience or knowledge.[82]
In case of a vulnerability exploited by a hacker, it is doubtful whether the
behaviour of a DEX Operator" - or developer affiliated with the operator or
otherwise acting as vicarious agent" - would be considered to be at fault.
b) Torts
Another question is whether compensatory claims can be made in torts.
Noteworthily, there is currently no legislation on the liability of
suppliers of 'algorithmic' services, neither at the Swiss nor the European
level.[83]
Hence, when examining issues of tort liability arising in connection with
errors in smart contracts and cyberattacks, the general provisions
applicable to tort liability are applicable. In Switzerland, four
conditions must be met to trigger the key provision that governs tort
liability[84]:
(i) a tortious act, (ii) damage, (iii) fault, and (iv) causal link.
Concerning claims made by LPs or Traders against DEX Operators, two of
these conditions will often be difficult to meet., i.e., a tortious act and
a fault.
A tortious act is understood as a violation of either a statutory provision
aimed at protecting the injured party or an absolute right. However, rights
to wealth or assets (Vermögen) do not qualify as absolute rights
in the sense of this definition. Therefore, a tortious act requires a
provision to protect against damages of the type that have occurred. In
certain situations, such as in the case of hacking, the faulty commission
of a tortious act of the hacker can easily be established.[85]
However, in case of a technical error affecting the interface, it is
doubtful whether a relevant provision could be identified. In particular,
no criminal law provision is violated as long as the default in the smart
contract is due to a coding error. Hence, at least under a framework with a
relatively narrow definition of tortious acts, the conditions for tort
liability will likely not be met in case of an unintentional coding error.
Regarding fault, see the section on contract law (supra, N 29
ff.).
c) Limitation of Liability
Unsurprisingly, the terms of service of DEX Operators contain provisions
that seek to limit - if not fully eliminate - the operators' liability. For
instance, Uniswap's Terms of Service hold that Uniswap Labs will not be
liable to the interface's users "for any indirect, punitive, incidental,
special, consequential, or exemplary damages [...] arising out of or
relating to any access or use of the Interface, nor will we be responsible
for any damage, loss, or injury resulting from hacking, tampering, or other
unauthorised access or use of the Interface or the information contained
within it".[86]
In particular, the Terms of Use of DEXs normally exclude any liability for
damages incurred as a consequence of errors in the protocol or hacking.[87]
Acknowledging that certain risks exist, the terms seek to allocate such
risks to the users.[88]
As noted by Uniswap in its Terms of Service, some jurisdictions do not
allow the exclusion of certain warranties. In Switzerland,
Art. 100 para. 1 CO
provides that no exclusion of liability is permitted for gross negligence
or intentional fault.[89]
If the limitation of liability clause is contained in generic terms and
conditions, Art. 8 UCA[90], which prohibits abusive clauses,
may apply. Hence, an agreement purporting to exclude liability fully is
partly invalid, i.e., invalid to the extent that it excludes liability for
gross negligence and intentional fault.[91]
Accordingly, the limitations outlined in the DEX Operators' terms of service
may not apply.[92]
V. Concluding Remarks
1. The Existing Legal Bases and Legal Concepts Are Ill-Suited for
DeFi
Our analysis of the current law shows that the existing framework does not
provide an appropriate response to the risks associated with the use of
liquidity pools (supra, N 26 ff.).
The issue is of a general nature: the existing legal framework is
ill-suited to apprehend the realities of the DeFi ecosystem.[93]
Indeed, the attempt to make a transnational, decentralised system fit into a
domestic legal framework that was obviously conceived under very different
technological circumstances is doomed to fail. In the words of Peter Van
Valkenburgh, "referring to 'DEXs' as a category of things that exist in the
world (rather than actions) does the entire technology a disservice: it
wrongly portrays software tools as persons or businesses with agency and
legal obligations. Corporations and persons - legal or natural - definitely
have agency and obligations; software tools do not. Corporations and
persons can be held responsible for their actions; software tools cannot."[94]
While this observation does not necessarily call for legislative
action,[95],
the legislator could develop a set of rules that would specifically apply
to the DeFi ecosystem. For the time being, however, if a dispute arises
between any of the stakeholders, the current legal framework would have to
be applied despite its inappropriateness.
2. The Difficulties of Law Enforcement in DeFi
The phrase 'code is law', which appears to have its origin in Lawrence
Lessing's book 'Code and other laws of the cyberspace', has existed for
more than 20 years.[96]
However, a literal understanding of the phrase" - i.e., that computer code
has the same normative value as laws passed by the competent body" - finds
little support in legal scholarship.[97]
Law and technology are two different analytical
realms.[98]
Only the law's realm, i.e., actions of legislators and decisions by courts,
can decide to what extent its own digitalisation is permissible.[99]
Regarding the 'legal' nature of code, legal scholars do not refer to the
normative character of the computer code but rather to the fact that this
code can, just like the rules of law, influence human behaviour. Samer
Hassan and Primavera De Filippi rightly pointed out that legal rules
stipulate what people shall or shall not do, whereas technical rules
determine what people can or cannot do in the first place.[100]
In fact, code takes all its importance and is de facto the only
relevant realm in situations where law cannot be enforced. When law
enforcement is burdensome or even impossible, participants (e.g., Traders
or LPs) or state bodies (e.g., criminal authorities) will often refrain
from taking relevant law enforcement steps. This is particularly true in
DeFi, for the following reasons:
-
Multiple, mostly pseudonymous participants. As discussed at the
outset, liquidity pools require the involvement of at least the
following categories of participants: DEX Operators, LPs, and
Traders. However, there are often additional relevant parties,
such as developers of the smart contracts, issuers of
cryptocurrencies, oracles, blockchain developers on which the DeFi
protocol operates, etc. In general, all stakeholders - except DEX
Operator, which may be an incorporated entity (supra, N 15) -
are interacting in a pseudonymous way. Thus, for example, it does
not appear when reading the public distributed ledger that Jane
Doe, with domicile in New York, USA, but that the address
0x163B8837CA436A3eD7CE88603BC0bC82442396ze (without apparent link
to Jane Doe) added liquidity to the liquidity pool. It is striking
that the use of multiple pseudonymous participants is a
significant barrier to law enforcement. In particular, it may make it
particularly difficult to
determine jurisdiction and applicable law. Moreover, apart from
the terms of service of DEX Operators, no contractual
documentation with a choice of law and jurisdiction is available.
-
Irreversible transactions. One important feature of blockchain
operations is their immutability: Such operations cannot be reversed.
Let's imagine that an LP provided liquidity by mistake. From a legal
perspective, it may be in a position to invalidate this operation.[101]
In the DeFi world, however, it would be impossible to reverse the
performed operations, such as the deposit of cryptocurrencies in
exchange for LP tokens at a determined exchange rate.
3. Possible Legislative Action
As mentioned (supra, N 26 ff.), Traders and LPs already have
possibilities to reduce their risk or obtain reparation, such as using
protocols audited by third parties, using various protocols or concluding an
insurance plan. If such possibilities are not considered to be sufficient,
legislative action should be taken. Two approaches may be considered:
-
First, legislators may envisage subjecting the activities related
to DeFi to strict conditions (e.g., an authorisation procedure
similar to a CEX) or even prohibit them. In our opinion, this
approach is not appropriate. Indeed, the particularity of DeFi is
that it allows the different stakeholders to act from wherever
they want and in a pseudonymous way. A national ban on activities
related to DeFi or a rigid regulation would likely result in the
relocation of actors to other countries where activities are not
(or less) subject to scrutiny. Hence, this approach would not
result in better protection for Traders and LPs.
-
Second, strict compulsory liability (not based on fault) of
stakeholders who benefit from DeFi activities may be introduced,
i.e., in particular, DEX Operators. This would remedy the
unsatisfactory situation under current law, where the conditions
for liability, especially a faulty breach of contract or a faulty
tortious act, are hardly ever fulfilled. Such mechanism could have
a reparatory role in case of losses related to the use of DeFi
(e.g., vulnerable smart contract), but also a preventive role (DEX
Operators would have a real incentive to prevent risks related to
DeFi). These rules would be more efficient if the possibility that the
DEX Operators exclude their liability contractually is limited
(supra, N 35 f.).
[3] Thierry Foucault
/ Marco Pagano / Ailsa Röell, Market Liquidity: Theory, Evidence,
and Policy, 2nd edit., New York 2023, p. 17 ff.; Deniz
Ozenbas / Michael S. Pagano / Robert A. Schwartz / Bruce W. Weber,
Liquidity, Markets and Trading in Action: An Interdisciplinary
Perspective, Montclair et al. 2022, p. 32 ff. (distinguishing between
continuous order-driven markets, periodic order-driven markets, and
continuous dealer markets).
[4]
Foucault/Pagano/Röell (n. 3), p 31 ff.;
Ozenbas/Pagano/Schwartz/Weber (n. 3), p. 34.
[5]
Foucault/Pagano/Röell (n. 3), p. 17 f.;
Ozenbas/Pagano/Schwartz/Weber (n. 3), p. 32.
[6]
Foucault/Pagano/Röell (n. 3), p. 18; Ozenbas/Pagano/Schwartz/Weber
(n. 3), p. 32.
[7]
Foucault/Pagano/Röell (n. 3), p. 18; Ozenbas/Pagano/Schwartz/Weber
(n. 3), p. 24.
[8]
Foucault/Pagano/Röell (n. 3), p. 18 f.
[9]
Foucault/Pagano/Röell (n. 3), p. 18 f.;
Ozenbas/Pagano/Schwartz/Weber (n. 3), p. 32.
[10]
Foucault/Pagano/Röell (n. 3), p. 21.
[11]
Foucault/Pagano/Röell (n. 3), p. 21.
[12]
Ozenbas/Pagano/Schwartz/Weber (n. 3), p. 24.
[13]
300 shares at USD 50.45 and 200 at USD 50.48.
[14]
Foucault/Pagano/Röell (n. 3), p. 27; Ozenbas/Pagano/Schwartz/Weber
(n. 3), p. 33 f.
[15]
Ozenbas/Pagano/Schwartz/Weber (n. 3), p. 24 f.
[16]
Foucault/Pagano/Röell (n. 3), p. 28.
[17]
In case such information is not displayed to market participants,
prospective buyers and sellers have no choice but to contact dealers
in order to inquire as to the price of an order. While metrics
provided by companies such as Bloomberg or Thompson Reuters are
useful, such information is not binding on the dealers.
[18]
50.45 × 300 + 50.48 × 200.
[19]
50.40 × 200+50.36 × 100 + 50.32 × 200.
[20]
Ozenbas/Pagano/Schwartz/Weber (n. 3), p. 30.
[21]
USD 50.45 - USD 50.40.
[22]
Ozenbas/Pagano/Schwartz/Weber (n. 3), p. 24.
[23]
Foucault/Pagano/Röell (n. 3), p. 21; Ozenbas/Pagano/Schwartz/Weber
(n. 3), p. 24.
[24]
Ozenbas/Pagano/Schwartz/Weber (n. 3), p. 88.
[26]
In the U.S.: see, e.g., Exchange Act Rule 11Ac1-1, 17
C.F.R. § 240.11Ac1-1. In
France: AMF decision no.
2018-01
of 2 July 2018 establishing liquidity contracts on equity
securities as accepted market practice (the AMF Decision) and all
other provisions referred to therein. In Switzerland:
Art. 41 FinIA
(Federal Act on Financial Institutions of 15 June 2018 [Financial
Institutions Act, FinIA;
SR 954.1]).
[28]
USD Coin or USDC is one of the world's most prominent stablecoin,
i.e., a coin pegged to a fiat currency (in the case of the USDC,
the United States dollar).
[29]
Ethereum or ETH is the world's second largest cryptocurrency by
market capitalization.
[32]
Uniswap v3 departs from the constant product market maker formula.
Arguing that such a formula is inefficient, the drafters of the
Uniswap v3 White Paper introduced the concept of "concentrated
liquidity", under which LPs can concentrate their liquidity to
arbitrary price ranges instead of having to provide liquidity
across the entire price range in accordance with the constant
product market maker formula. Hayden Adams et al.,
Uniswap v3 Core, March 2021.
[33] Timo Frick,
Das liechtensteinische Tokendarlehensunternehmen, AJP 2023, p. 952.
[35]
See supra, Adams et al. (n. 32).
[38] David Meirich,
Regulatorische Einordnung von Decentralized Finance, Zurich 2023,
p. 114 f., n. 394.
[39] Meirich (n.
38), p. 395, n. 396.
[40]
Because the fee is added to the reserves x and y, each trade
increases k. Uniswap,
How Uniswap works.
[41]
See Adams et al. (n. 32), at p. 3 (noting that the flat
fee was too high for pools including two stablecoins and too low
for pools of highly volatile tokens). The collapse of Terra USD a
few months ago, however, shows that coins described and widely
understood as "stablecoins" may not be as stable as previously
assumed. See, e.g., Euronews from 25 May 2022
(Terra Luna crash: What are
'stablecoins' and how stable are they really?).
[42]
See Adams et al. (n. 32), p. 3.
[43]
While the fees were directly added to the reserves in the pool
under Uniswap v2, fees are "held by the pool as individual tokens"
in v3. See Adams et al. (n. 32), p. 3.
[44]
Heimbach/Wang/Wattenhof (n. 36).
[45]
Heimbach/Wang/Wattenhof (n. 36).
[48]
Kim (n. 2), fn. 74 and fn. 94.
[51]
Kim (n. 2), p. 342 f. and p. 346 f.
[53]
Heimbach/Wang/Wattenhof (n. 36), showing that more than half of the
liquidity in popular pools on Uniswap v2 is provided by LPs who
only contribute to one liquidity pool, indicating that "DEXes are
not controlled by oligopoly and professional market makers".
[56] Regarding
contract formation in a smart contract environment,
see generally
Florian Möslein, Smart Contracts im Zivil- und Handelsrecht, ZHR
2019, p. 270 ff.; Rolf H. Weber, Smart Contracts: Vertrags- und
verfügungsrechtlicher Regelungsbedarf, sic! 2018, p. 293 ff.
[57] Weber (n. 56),
p. 293 ff.
[61]
Under Swiss law, such statutory provisions are found in
Art. 472 ff. CO
(Swiss Code of Obligations, Federal Act on the Amendment of the
Swiss Civil Code [Part Five: The Code of Obligations] of 30 March
1911 [CO; SR 220]).
[63]
BGE 127 III 328
consid. 2; David Oser / Rolf H. Weber, in: Widmer Lüchinger/Oser
(eds.), Basler Kommentar, Obligationenrecht I, 7th
edit., Basel 2019, Art. 394 N 28; Franz Werro, in: Thévenoz/Werro
(eds.), Commentaire romand, Code des Obligations I, 3rd
edit., Basel 2021, Art. 394 N 5 (cit. CR CO-Author).
[64]
Decision of the Swiss Federal Supreme Court
4A_305/2021
from 2 November 2021 consid. 4.1; Decision of the Zurich Commercial
Court
HG200001-O
from 22 April 2021 consid. 2.2.
[65]
Art. 17(3)(b) and
Art. 48(2) Directive 2014/65/EU
(Directive 2014/65/EU
(MiFID II) of the European Parliament and of the Council of 15 May
2014 on markets in financial instruments and amending Directive
2002/92/EC and Directive 2011/61/EU (recast) [Directive
2014/65/EU]).
Art. 4(7) of Directive 2014/65/EU
defines a "market maker" as "a person who holds himself out on the
financial markets continuously as being willing to deal on own
account by buying and selling financial instruments against that
person's proprietary capital at prices defined by that person".
[66]
Art. 2 Regulation 2017/578
(Commision Delegated Regulation (EU)
2017/578
of 13 June 2016 supplementing Directive 2014/65/EU of the European
Parliament and of the Council on markets in financial instruments
with regard to regulatory technical standards specifying the
requirements on market making agreements and schemes [Regulation
2017/578]).
[68] See,
e.g., CR CO-Chaix, Art. 363 N 45.
[69] Under Swiss
law, the relevant provision would be
Art. 101 CO. See, e.g., CR CO-Thévenoz, Art. 101.
[73]
Schär (n. 72), p. 170.
[74] Frick (n. 33),
p. 952.
[76]
Schär (n. 72), p. 170.
[80] In Switzerland,
there is a legal presumption that the party who breached the
contract is at fault. However, said party remains free to prove
that this wasn't the case.
[81]
CR CO-Werro/Perritaz, Art. 41 N 56.
[82]
CR CO-Werro/Perritaz, Art. 41 N 57.
[85] Hacking is
considered a tortious act according to
Art. 143 ff. SCC
(Swiss Criminal Code of 21 December 1937 [SCC;
SR 311.0]). See Mark Spas, Phénomènes cybercriminels, Descriptions
et réponses juridiques, Jusletter 10 November 2014, N 21.
[88]
See Buonanno (n. 83), p. 11.
[89]
The regime is even stricter if the contractual partner is
considered to be in a "dependent relationship" with the author of
the limitation of liability clause, a hypothesis that does not
apply here.
[90] Federal Act on
Unfair Competition of 19 December 1986 (Unfair Competition Act,
UCA; SR 241).
[92] If smart
contract developers and LPs are considered vicarious agents,
liability for acts of such agents can generally be limited. Indeed,
the only general restriction that applies to the ability to limit
liability under contract law pertains to situations in which the
contractual partner is considered to be in a "dependent
relationship" with the author of the limitation of liability
clause, which is not the case with smart contract developers and
LPs. See
Art. 101 para. 2
and para. 3 CO.
[93]
Humbel (n. 2), p. 18.
[94]
Van Valkenburgh (n. 47). But see Lukas Müller / Reto
Seiler, Smart Contracts aus Sicht des Vertragsrechts, AJP 2019, p.
328.
[95]
On this question, see Möslein (n. 56), p. 274.
[97]
See Buonanno (n. 83), p. 6 ("Ultimately, the hard fork
attests to reality being different from what is commonly
advertised: blockchain does not bypass all meddling humans and code
is not law").
[98] Jan Oster, Code
is code and law is law - the law of digitalization and the
digitalization of law, International Journal of Law and Information
Technology 2021, p. 115.
[99] Oster (n. 98),
p. 114.
