Uniswap V3 – The Potential Game Changer

Uniswap V3 – The Potential Game Changer

By paragism | paragism | 31 Mar 2021


Uniswap V1 was launched in November 2018. It was the first proof-of-concept for Automated Market Makers (AMM) and became a hit since its launch due to its novelty. V2 was launched in May 2020 and the upgrade brought significant structural improvement to Uniswap and the platform set the stage for decentralized finance or DeFi adoption. The unbelievable thing happened quickly and it started to compete with the leading centralized exchanges (CEXs) as per trade volume. Uniswap’s trading fee is 0.3% on every trade which is obviously higher than the CEXs but the trading fee goes to the providers of liquidity on the platform. Now the team is working on Uniswap V3 which is supposed to bring a lot of improvements in the AMM protocol.

Layer 1 + Layer 2

DeFi activity on the Ethereum blockchain has increased exponentially. With the increasing transactions, the gas fee also soared up. A 20$ swap may cost 100$ on Uniswap and this a big barrier to mass adoption of the platform. The team recently presented a brief overview of V3 in this blog post. They are targeting Ethereum mainnet launch on 5th May and also working on deployment on Optimism, a layer 2 Ethereum chain. Optimism will provide Optimistic Rollup and thus allow Uniswap to reduce gas fee dramatically as the transactions will be taken off-chain. You will be able to swap your tokens on Uniswap with less than 1 cent fee. Uniswap cofounder Hayden Adams many times stated the importance of layer 2 in an AMM based DEX earlier. It is important to note that the Optimism mainnet has been postponed to July. So, the layer 2 feature may not be incorporated very soon.

More capital efficiency

Uniswap V3 is being designed to improve capital efficiency significantly. It is introducing ‘concentrated liquidity’. The feature basically gives the individual LPs granular control over the price range of capital allocation. The individual positions are aggregated together into a single pool which forms a combined curve for trading. V3 also introduces multiple tier fees. Their blog post says, “LPs can provide liquidity with up to 4000x capital efficiency relative to Uniswap v2, earning higher returns on their capital. Capital efficiency paves the way for low-slippage trade execution that can surpass both centralized exchanges and stablecoin-focused AMMs.”

Improved oracles

Uniswap uses its own oracles. The time-weighted average price (TWAP) oracles of Uniswap served as a critical piece of DeFi infrastructure. The new oracles of V3 will be more efficient and there won’t be any need for the integrators to checkpoint historical values.

Range orders

It is a long-awaited feature. V3 LPs will be customizable and so it will provide a new feature called ‘range order’. The LPs will be able to deposit a single token at a specified price range and thus it will be comparable to the traditional ‘limit order’. The third-party services can integrate with Uniswap to provide a true ‘limit order’ experience.

You get NFTs when you provide liquidity

V3 LP tokens will be non-fungible. This looks like a drastic change. When you provide liquidity, you get NFT. This feature will forbid trading fee reinvestment into the pools.

Uniswap has already proved that it can innovate fast and that is the key for sustenance in the blockchain field where technology changes rapidly. The present governance protocol is also working fine for Uniswap. What about the copies of the protocol? Sushiswap, a fork of Uniswap, did a vampire strike on Uniswap and sucked almost $1B liquidity from it by providing strong incentives to the liquidity providers for migrating their tokens from Uniswap to Sushiswap. Sushiswap’s codebase was a blatant copy-paste of Uniswap. It is really difficult to stop someone to copy open-source projects and generally all DeFi projects are open source. Uniswap V3 is bringing a significant change as v3 Core will launch under the Business Source License 1.1 that will act as a time delay for commercial use of the code ‘for up to two years’. After two years, it will convert to a GPL license in perpetuity. The governance system of Uniswap can accelerate the conversion to GPL anytime through voting. This is really a departure from the open-source ethos and can set the road map for future projects to resist copies. The debate regarding this topic will go on but the developmental roadmap seems to be really exciting for Uniswap.

Note: This post was first published here for Cryptowriter in association with voice.com.

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paragism
paragism

Cypherpunk. Writing content which I love. Creeping on the blockchain. Founder - www.thecoinbuzz.com Twitter - @paragism


paragism
paragism

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