Written by Kai Hao, working at HashKey Capital Research
Reviewed by Zou Chuanwei, Chief Economist of Wanxiang Blockchain
On May 5th, Uniswap V3 was officially launched on the main ethereum network. Uniswap V3 has been introduced in Wanxiang Blockchain research report “A Study on Uniswap V3” (Issue 33, No. 130, 2021), and the main improvements include: granularity control of aggregated liquidity, multi-level rates, range orders, advanced prophecy machine and software license protection. This paper focuses on the performance of Uniswap V3 since its launch.
Uniswap V3 post-launch performance
Uniswap V3 is a DeFi project in the trading category, for which lock volume and trading volume are two important evaluation metrics.
Figure 1 shows the evolution of Uniswap V3 lock volume. It can be seen from the figure that Uniswap V3 has been on an upward trend since its launch, and the lock volume is growing rapidly. Figure 2 shows the transaction fees of cryptocurrency projects, and it can be seen that Uniswap V3 is ranked 2nd, which indicates that this project has a very high participation.
Figure 1: Uniswap V3 lock volume (Source: oklink, May 28, 2021)
Figure 2: Cryptocurrency Project Transaction Fees (Source: Crypto Fees, May 28, 2021)
Table 1 shows the current lockup volume and the rate of change of lockup volume for the last 7 days for each of the major DeFi projects. The table shows that Uniswap V3 has a lock-up volume of approximately $1.55 billion, ranking 15th among DeFi projects. Considering that Uniswap V3 has been live for less than a month, this is a good result. From the perspective of the rate of change in lock volume over the last 7 days, Uniswap V3 has performed much better than other DeFi projects. Due to the recent sharp drop in the cryptocurrency market, many DeFi projects have experienced a sharp drop in lock-in volume, but Uniswap V3’s lock-in volume has increased by more than 40% during this period, which shows that many liquidity providers (LPs) are very bullish on Uniswap V3 and have actually provided a lot of liquidity.
Uniswap V3 became the most traded decentralized exchange project in the last 24 hours. Despite the higher volume, Uniswap V3 had a significantly lower number of transactions and fewer people trading than Uniswap V2, which reflects the improvement in Uniswap V3 in that the granularity control of aggregated liquidity is better suited for large transactions. It should be noted that the lock-up volume of Uniswap V3 is only about 30% of that of Uniswap V2, but the number of trades is higher than that of Uniswap V2, which can indicate to some extent that the capital utilization rate of Uniswap V3 has been significantly improved.
Actual usage of Uniswap V3
Uniswap V3 adds granularity control to the constant product curve x*y=k, which allows liquidity providers to concentrate their funds in the most frequently traded intervals in order to achieve concentrated liquidity and improved capital utilization. uniswap V3 creates ERC-721 contracts for the positions of liquidity providers. Unlike the homogeneous liquidity of Uniswap V2, the liquidity of V3 is composed of a series of liquidities on different intervals, and the liquidity provided by LPs is in the Uniswap V3 system in the form of non-homogenized tokens (NFTs).
Denotes the major pairs with the largest lockups in Uniswap V3.
LP provides the most liquidity for transactions between USDC, ETH, and stablecoins, which is a relatively significant difference from Uniswap V2.
Figure 3: Key pairs of Uniswap V3 (Source: Uniswap official website, May 28, 2021)
Figure 4: Main trading pairs of Uniswap V2 (Source: Uniswap official website, May 28, 2021)
Uniswap V3 uses multi-level rates, with the lowest fees for trading between stablecoins. At the same time, the range of price movements for trading between stablecoins is very small, and it is unlikely for LPs to suffer impermanent losses. Moreover, the granularity control feature of aggregated liquidity improves capital utilization, especially for stablecoin trading pairs. As a result, Uniswap V3 is very friendly for trading between stablecoins and has attracted a large number of LPs to provide liquidity to it.
New issues arising from Uniswap V3
The improvements to Uniswap V3 have also created some new issues.
First, the issue of fairness. From the point of view of LPs providing liquidity, they all contribute to the ecosystem, yet the distribution mechanism of Uniswap V3 prevents these LPs from being directly rewarded in proportion to the liquidity they provide. In order to provide capital utilization, Uniswap V3’s liquidity is non-homogeneous, allowing liquidity providers to provide liquidity for different price bands. When actual trades occur in this price range, the liquidity provider receives a share of the transaction fee; when actual trades occur outside this price range, the liquidity provider does not receive a share of the transaction fee. there is competition among the LPs in Uniswap V3, requiring them to make further predictions about the price range of the trades.
Second, the participation space for ordinary participants is compressed. In Uniswap V2, all liquidity providers receive their share of the transaction fee in the same way, which equates to a “market average return” for all liquidity providers. In Uniswap V3, liquidity providers can earn “Alpha gains” above the “average market return” through a more reasonable price range and capital allocation. But this is very difficult for ordinary participants, who cannot make a reasonable response strategy to price changes and have to buy strategies and services from professional service providers. Professional strategy teams, however, have a new opportunity to gain by providing strategies or capital management. In the future, professional strategy teams will be a powerful force in Uniswap V3.
In Uniswap V3, the share of transaction fees received by LPs is influenced by many factors, mainly price fluctuations, the range chosen by other LPs, additional fees paid for adjusting liquidity, etc. LPs need to use historical data on price volatility, liquidity data already provided by LPs, and methods to reset price ranges when developing their strategies. There are already teams that have introduced Uniswap V3 automated liquidity provision strategies that adjust the price range when the market price is outside the price range set by the LP, allowing the liquidity provider to make gains. Of course, the existing strategies are relatively simple and the market needs more sophisticated and complex strategies to further improve capital utilization.
Third, the additional Gas fee for adjusting liquidity. It is very difficult for liquidity providers to pick a reasonable finite price range to receive a share of the transaction fee over time. Especially for pairs with highly volatile prices, there is a higher probability that the actual price will deviate from the preset price range. Therefore, LPs also need to dynamically adjust the price range according to the actual price movement, which requires additional Gas fees for them.
Fourth, Uniswap V3 may increase the risk to LPs in extreme market conditions. Currently, the pricing power of many underlying transactions is held by centralized exchanges. In Uniswap V2, LPs provide liquidity for the full range, so they do not run out of liquidity regardless of price changes. In Uniswap V3, LPs provide liquidity for a set range, and it is entirely possible for prices to fluctuate dramatically outside of this range and run out of liquidity. At the same time, trading prices are more likely to change dramatically as liquidity outside the reasonable price range is reduced.
Subsequent development of Uniswap V3
Although Uniswap V3 improves the utilization of LP funds, it runs on the Ethernet mainnet and suffers from performance and Gas cost issues. Therefore, Uniswap V3 previously planned to deploy the Layer 2 solution Optimism network to reduce transaction gas fees while improving user experience. Recently, the vote for deploying Uniswap V3 to Arbitrum, a Layer 2 Ethernet network, has been overwhelmingly supported, and Arbitrum will be launched on the mainnet tomorrow, May 28. The deployment of Uniswap V3 to Arbitrum will speed up transactions, reduce transaction costs and contribute to the long-term development of the Uniswap ecosystem.
Vitalik suggested that Uniswap should be able to provide prophecy price data, which is also a direction to watch. Many DeFi projects require the prophecy machine to constantly input the desired price, and Uniswap V3’s trading price can be a price anchor. uniswap V3 enables more liquidity to be aggregated into a more reasonable price range, greatly increasing the depth of trading. A mischief-maker who wants to interfere with and manipulate prices needs to use larger amounts of capital. All else being equal, Uniswap V3 is safer and better suited than V2 to provide price data to other DeFi projects, and can improve the stability of prophecy machine prices in the DeFi ecosystem.
Strategies for providing liquidity are a key area of future competition for Uniswap V3. LPs need to use historical data on price fluctuations, liquidity data already provided by LPs, and methods for resetting price ranges when developing their strategies. Compared to Uniswap V2, Uniswap V3 can be more profitable with more elaborate and complex strategies. Of course, this also means that if the strategy is not chosen properly, LPs will get lower returns than the market average and their capital utilization will be even lower than Uniswap V2.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/data-analysis-of-uniswap-v3-market-performance-after-launch/
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