Abandoning the “inner volume” Uniswap is dead set on mobility

Achieving higher trading volume with less locked-in capital, Uniswap v3 does increase the efficiency of capital, which is one of its milestones.

Every new decentralized exchange (DEX) that appears in the DeFi world is benchmarked against Uniswap, which is the largest DEX on the ethereum chain.

There are also more and more dimensions of competition between DEXs, from comparing total locked positions (TVL) and trading volume, to comparing user volumes, and now they are starting to compare functionality. In addition to decentralized trading of various crypto assets, some DEX platforms have stepped into functions such as saving coins for interest, financing innovative projects, introducing financial derivatives and even buying lottery tickets. Like a replication of the centralized exchange (CEX) operating model, DEXs are on a big inward roll.

Uniswap, on the other hand, seems to have given up on inrolling with its peers in terms of scenario functionality. From v1 and v2 to v3, which has been live for less than a month now, Uniswap has been upgrading on AMM (Automated Market Maker), the lifeline of DEX. After solving peer-to-peer trading with passive liquidity, it moved to a new level of granular trading depth.

After Uniswap v3 achieved aggregated liquidity, the $1.6 billion TVL was not even half of v2, but the 142 million trade volume was twice that of v2. Achieving higher volumes with less locked-in capital, Uniswap v3 did improve the efficiency of the capital, which was one of its milestones.

However, data from a tracking study suggests that v3 has not yet delivered significant improvements in terms of impermanent losses for liquidity providers (LPs), and will need to wait for LPs to advance their strategies, as well as to be supported by a low Gas fee environment like Layer 2.

Getting LPs to upgrade from passive liquidity provision to active liquidity management will take both time and the refinement of related tools; and the migration to the Layer 2 network was already in Uniswap’s plans, except that the main Optimism chain network targeted earlier would not be available until July, and the anxious community voted quickly and almost 100% in favor of Uniswap v3 being on the Arbitrum network first.

When both rates and speeds improve, the AMM model that Uniswap brought to fire will have a chance to take on the CEXs of the traditional order book model.

Low TVL creates high transaction volumes
Uniswap v3 has been running on Ether for 26 days, and as of 3 a.m. BST on May 31, the total locked-in volume (TVL) of crypto assets on v3 was $1.65 billion. TVL has been on the rise if you look at May 5, when it officially went live, but if you compare it to the $4.81 billion TVL metric of v2, v3’s ability to ‘suck up’ to liquidity providers looks much weaker.

On the contrary, in terms of volume metrics, v3 has surpassed the level of v2. At around 3:00 am on May 31, Uniswap v3’s 24-hour trading volume was $1.42 billion, compared to v2’s $686 million in the same time frame. In other words, v3’s trading volume has already exceeded v2’s by twice.

OKLink data shows that since the launch of the new version of Uniswap, the trading volume of v2 has shown a gradual downward trend, with the highest daily trading volume of $5.04 billion in 30 days, and has now been below $1 billion for four consecutive days. On the contrary, the volume of v3 has been climbing from $170 million at the beginning of the launch to a peak of $2.62 billion, and has remained above $1 billion for half a month.

Taking the monthly trading peak of $5.04 billion set by v2 on May 16, the TVL on that day was $7.53 billion; while on v3, when the market plunged on May 19, the trading volume hit a new monthly high of $2.62 billion, but the TVL on that day was only $880 million.

The data suggest that Uniswap v3 created high trading volumes with low levels of locked-in capital, achieving to some extent what the new version was trying to achieve – increased efficiency of capital.

At the very least, the data shows that as a decentralized trading application, the new version of Uniswap is much less dependent on LP liquidity lockup funds, and the new design of centralized liquidity or ‘aggregated liquidity’ as it is called, is working by allowing liquidity providers (LPs) a customized price range that supports them to concentrate their funds within the majority of their trading activity. For simple Swap (coin exchange) users, this design strengthens the depth of trading.

Abandoning the "inner volume" Uniswap is dead set on mobility

Comparison of daily TVL turnover rates of 3 DEX (data from IOSG)

“High capital efficiency is indeed a feature of v3. An analysis by blockchain investment firm IOSG also came to this conclusion. The agency’s researchers tracked Uniswap v3’s daily TVL turnover and compared it to v2 and Sushiswap and found that v3’s TVL turnover was faster, “For example, during the peak May 19 market crash, giving v3 $1 in TVL translated into over $1.7 in trading volume… …The same scenario would have generated only about $0.2 in volume for v2.

In addition, IOSG used DEX aggregator data to verify that v3 does indeed offer better prices for trading users. The agency tracks both aggregators, Matcha and 1inch – in order to offer the best price to end users, they send most of their volume to the most competitive trading markets, “and we observed a trend where aggregators allocate most of their volume to the latest Uniswap version, which implies better pricing.

Can’t wait for Optimism Get Arbitrum first
Not wasting locked-in funds and offering the best price, Uniswap v3 does improve the efficiency of the funds from the current data. But in IOSG’s view, v3 vs v2 does not solve the problem of impermanent loss, only that the size of the loss can be determined by the LP’s behavior.

IOSG points out that in Uniswap v2, LPs who passively manage funds are static relative to arbitrageurs; in v3, both LPs and arbitrageurs have pricing power. When LPs and arbitrageurs play in market volatility, it is the LPs that are active in the market and actively manage positions that can constrain the influence of arbitrageurs and protect themselves from high volatility markets.

The agency gives an example based on the v3 rule – assuming liquidity is provided for ETH-DAI.

Abandoning the "inner volume" Uniswap is dead set on mobility

IOSG explains LP’s exposure with an ETH-DAI pool

“Funding does not become active until the ETH price exceeds $2,817.5. Assuming the ETH price eventually rises above $3,138.8, the LP’s position will consist entirely of DAIs (v3 rule) and the LP’s exposure to further ETH rises will be zero. After that, DAI liquidity will be inactive until the ETH price falls back into range. Assuming the ETH falls back into range at some point and continues to fall below $2,817.50, the LP position will be composed entirely of ETH. Thus, in the case of a rising ETH, LP loses exposure to rising prices; in the case of a falling ETH, LP gets 100% exposure to the downside. Once the price lags between the centralized exchange and Uniswap, arbitrageurs will squeeze LPs.

This means that LPs that do not actively adjust their market-making price ranges to market prices will likely experience greater impermanent losses. iOSG also found that arbitrage bots contributed massive volumes in Uniswap v3. This also means that LPs who operate manually are likely to ‘outperform’ scientists who use robotic arbitrage.

A realistic problem is that adjusting the lock-up funds in different price ranges under volatile markets is costly for LPs in terms of Gas fees, and Uniswap v3 deployed on Ether is certainly not friendly enough. Without adjusting the pool of funds, LPs will face potential impermanent losses on the one hand, and it also means a decrease in yield on the other. Such a reality is probably the reason why TVL within v3 has not yet been able to outperform the v2 version.

IOSG believes that the maturity of LP management of positions and the abundance of active management tools will gradually solve the existing problems of v3, and that the Layer 2 deployment and low Gas fee environment support a more aggressive LP strategy.

Of course, the Uniswap community has long noted the constraints of the high cost of Gas on ecological development. Before the v3 release, the team said they would deploy the new version on the Layer 2 network, and the solution chosen at the time was the Optimism network, which supports Ethernet EVM, but nay, that network will not open its main network until at least July.

The Uniswap community sat up and on May 27th, Robert Leshner, a community KOL and founder of Compound, launched a poll – whether Uniswap V3 should be deployed to the Arbitrum network. The network is also a Layer2 solution and will open its main network on the 28th.

Leshner explained that no one knows which network is more attractive, “If Uniswap only decides to deploy on Optimism and it turns out that Arbitrum is the most popular Rollup solution, that would favor the competitor …… to deploy v3 on Arbitrum. Uniswap would have solved the high Gas fee problem in the short term without changing any contracts.

The two-day vote ended up in an overwhelming victory, with the community passing the proposal to deploy Uniswap v3 in Arbitrum with nearly 100% support.

Others Innovate Features Uni Sculpts Mobility
From the birth of Uniswap in November 2018, which has now iterated to v3, the DEX that practices the AMM model and carries it forward has been in development for 2.5 years.

Compared to the DEXs that have been frantically flooding the market along with exchange public chains since last October, the veteran Uniswap is more dedicated to AMM, and the decision to issue governance tokens all seem to be made under the stimulus of post-competition like SushiSwap.

And then came PancakeSwap on the BSC chain, MDEX on the Heco chain, the latter simply expanding its sphere of influence to the BSC chain as well, gaining incremental TVL and transaction volume, and planning to expand its presence to more blockchain networks.

The various DEXs are not only aggressively deploying multiple chains, but are also developing additional functions modeled after centralized exchanges, with PancakeSwap going beyond trading and absorbing asset liquidity to offer IDO, coin deposit and even lottery sales, and MDEX going live with similar functions for IDO.

Not only do people feel that DEX is homogenizing with each other, but also with CEX in terms of its operating model. On the contrary, Uniswap seems to have abandoned the “in-roll” with players in the track in terms of scenarios, and is bent on digging deeper vertically towards the AMM model.

Compared to v1, Uniswap v2 allows users to create exchange pools between any two ERC20 assets, gathering liquidity from more assets in the pool, allowing users with trading needs to use the liquidity in the pool to complete peer-to-peer ‘exchange’ and find a more suitable exchange path for them; while v3 is a refined exchange pool, allowing LPs to provide liquidity according to market needs. By actively making the market to improve the utilization of capital and gain from it.

The evolution of Uniswap is to leverage the LP liquidity in the pool to allow automated market maker clients to serve Swap users and earn revenue from it, as opposed to pursuing the TVL growth space.

Making liquidity and trading work in a way that doesn’t require intermediaries is a sign of Uniswap’s creativity and the root of why it will be evaluated as a DEX model. When other DEXs competed against it, it kept its eyes on centralized exchanges.

If you remember, you probably won’t forget Hayden Adams’ excitement last year that “for the first time ever, Uniswap’s 24-hour trading volume was higher than Coinbase’s.” Compared to competing with other DEXs now for multiple features, perhaps the bigger expectation of Uniswap’s die-hard AMM is that one day, DEXs under the automated market maker model will overtake centralized exchanges and become a true blockchain infrastructure in the crypto asset market.

When Layer2 is full, or in the longer term, when the era of Ether 2.0 comes, Uniswap, which runs on a low cost and high efficiency blockchain network, will officially enter the long race with CEX. Uniswap’s ambitions are not excluded. Do you remember the sock token UNISOCK that once sold for $160,000? What it’s really trying to do is physical tokenization.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/abandoning-the-inner-volume-uniswap-is-dead-set-on-mobility/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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