The third iteration of the market-leading decentralized exchange Uniswap comes in the spring of this year. This emerges from new details of the so-called v3 launch, which was released on Tuesday.
Last week, Hayden Adams, the founder of Uniswap, tweeted the spirit of anticipation for the long-awaited details of v3: “If I have to go another week without publicly announcing details of Uniswap v3, I could go crazy . “
Adams was far from being alone. Across the industry, market experts have pondered the enhancement features of version 3 over version 2, the current version. The new details, which were published on Tuesday, should be implemented in May.
Central to the upgrade is the ability of liquidity providers (LPs) to enter markets within customer-specific price ranges, an approach known as concentrated liquidity. LPs are responsible for placing their assets in pools of liquidity that Uniswap users trade against. This is similar to Wall Street Market Makers who provide liquidity and thereby help traders get in and out of positions.
Previously, LPs had to have ready capital for an infinite price range (e.g., ETH trading from unlikely prices like $ 500,000 to $ 1 million), meaning they had to sit idle rather than work to earn fees for more specific prizes. As such, the only fee-generating capital for LPs would be that determined for the prices at which a particular asset is traded.
“In Uniswap v3, LPs can allocate capital within custom price ranges while creating custom price curves,” the company said in a document shared exclusively with The Block prior to release. For example, an LP might decide to provide liquidity only for airwaves if, for example, it is trading at $ 1,800-2,000.
“The story of Uniswap v3 is that execution quality will improve by an order of magnitude, if not more,” said Adams.
The new approach effectively makes the work of a liquidity provider more capital efficient. LPs can focus their liquidity on the price range in which trades take place and, in turn, achieve a higher return on investment.
“You can raise the same amount of capital to earn more fees or use the marginal capital saved to invest in another strategy of your choice,” said Teo Leibowitz, head of Uniswap strategy. This change is intended to reduce the slippage at Uniswap, which would improve the overall trading experience. From a strategic point of view, this focus on capital efficiency may further consolidate Uniswap’s dominant position.
Uniswap already accounts for 20% to 25% of transactions on Ethereum on any given day. Last month, the project had a trade volume of more than $ 30 billion. The platform accounts for 60% of the DEX market and has about 15x more users than any other Ethereum DEX.
Efficiency, efficiency, efficiency
The LP capital efficiency problem is one that Uniswap has been addressing since its inception. In a broader sense, it is a problem that in some ways sums up DEX’s previous development arc.
Across the market, competing projects from Curve to DODO to Balancer have investigated the same problem: How can the provision of liquidity for DEX be made more efficient? Most of the other issues related to DEXs – such as slippage and trade execution – are due to this issue, in addition to the scaling limitations inherent in the Ethereum network.
Curve, for example, has made some progress on this front. The efficiencies achieved, however, only applied to transfers from stable coins to stable coins. Balancer has now made it easier to provide liquidity to weighted crypto baskets. But in Uniswap’s view, no one has addressed the crux of the problem.
In terms of scaling, the project aims for a mainnet launch of Ethereum Layer 1 on May 5th with a deployment of Optimistic Rollup on Layer 2 in mid-May. This particular Layer 2 application, which emerged from the Optimism scaling start, aims to increase throughput and reduce gas charges to effectively zero.
In addition to scaling and adding customizable liquidity areas, v3 includes a number of other features designed to strengthen the platform against potential competitors.
An updated fee structure is another new feature for version 3. Instead of a uniform price structure, v3 LPs offers three different fee levels: 0.05%, 0.30% and 1.00%.
As such, LPs will generate more fees in creating markets for assets that are more volatile. This approach makes it easier to trade thinly traded and long-tailed assets. These same LPs have the flexibility to immerse themselves in the assets they desire and are compensated based on the volatility or risk of those assets.
“In order for the protocol to serve all types of markets and be the best platform for any trader, different pairs must have different fee levels,” Leibowitz told The Block.
Even Uniswap admits that there are some minor drawbacks to version 3, including the fact that liquidity is more difficult to make fungible (meaning LP tokens are not interchangeable). In addition, fees are not continuously reinvested in the pool. According to Leibowitz, third parties can enter into contracts tied to the protocol doing this on their behalf and make tokens fungible.
Nor does the Uniswap team lose that its open source nature comes with its drawbacks, namely that anyone can take the publicly available code and create their own versions.
This has already happened with the Uniswap clone SushiSwap. By copying Uniswap and introducing its own governance token, SushiSwap quickly became one of the largest DEXs on the market. According to The Block, SushiSwap made up just over 20% of DEX volume in February.
The Uniswap v3 Core protocol is licensed under BSL 1.1, which gives the project more options to protect commercial companies from being completely copied. This license does not affect the integration with wallets or other mobile apps that are intended to be connected to the platform.
In the future, Uniswap governance token holders will be able to adjust these licenses at their own discretion. This license expires in two years unless it is accelerated by participants in UNI governance.
Even so, it doesn’t completely ward off anonymous actors.
In this regard, however, Leibowitz believes the team has enough technology edge to fend off such competitors.
In addition to specializing in the complex math behind Version 3, the project also has a $ 2 billion war chest that is available in its state treasury for development grants. Over the next 3.5 years – if prices stay constant – the project would have nearly $ 20 billion.
Additionally, v3 will be the last major update to be made outside of the public domain. From here, the development team will hand over the reins to the community.
“The first wave of grants, worth $ 750,000, were distributed to more than 20 projects,” Leibowitz said. “A second wave is about to start.”
The Uniswap v3 whitepaper can be found below:
Whitepaper-v3 by MichaelPatrickMcSweeney on Scribd
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