While, in the general sense, Uniswap market making is an interesting investment opportunity for retail investors, this doesn’t come without a catch. Market making, in general, is a complex activity which has the risk of losing money (compared to just hodling) in the case of big directional moves of the underlying asset price. This is also true for the Automated Market Making (AMM) protocol used by Uniswap. It uses a method known as Constant Product Market Maker which keeps the product of ETH and DAI in the pool constant. The price of ETH/DAI pair is determined as the ratio between the ETH pool size and the DAI pool size in the smart contract. For example, if the contract has 130,000 DAI and 1000 ETH, the ETH price is 130 DAI. If the market price of ETH increased to say $150, the Uniswap smart contract won’t be aware of the price change and will keep offering ETH at the 130 DAI price. Arbitragers will then jump to the Uniswap exchange to buy ETH using DAI (decreasing ETH pool size and increasing DAI pool size). In the process, they gladly pay the 0.3% trading fees and the Ethereum network gas fees. This arbitrage opportunity is what attracts volume to the Uniswap exchange. The question here is whether MMs are making money out of this trading activity.