How Uniswap V3 is leading the next wave of DeFi bulls

The Uniswap V3 upgrade may seem usual, but it provides the basis for a lot of innovation in DeFi applications.

Source: DeepGo Chinese

Original title: “Uniswap V3 Review: How to Lead the Next Wave of DeFi Bulls?

Written by Byte and Benedict Zhou, both co-founders of crypto asset market maker DeepQuant and DeepGo DeFi developers.

Uniswap V3 introduces new features: both a new AMM mechanism with “price scaling” and a customized “flex fee” that gives liquidity providers more strategic flexibility. As a quantitative researcher who has been immersed in crypto asset market maker strategies for many years, I found a new era of DeFi in the uneventfulness of Uniswap V3.


From a micro perspective only, especially for traditional traders, the granular concept of V3 is mediocre and its trading approach is closer to that of a centralized exchange. But in the long run, V3 brings more customizability and composability to investors and greatly expands the boundaries of DeFi investment strategies.

The significance of V3 is to supply more customizable strategies, thus compatible with more investment needs, and the NFT-ized LP Token, which becomes a value unit matching the demand side of small investments with professional team providers to realize the Internet of value delivery, is the greatest innovation of DeFi at the moment.

Investment has an impossible triangle conundrum in return, risk, and scale, and V3 improves the efficiency of capital usage thereby increasing returns, yet also magnifies risk, so it is especially critical to provide external feeding data for Uniswap V3 and use it to achieve risk pricing.

Global regulation is tightening and CEX is under pressure, which is the key point for DEX platforms to grab the market. deFi is the trend to achieve value delivery on a decentralized blockchain, but it also needs the right timing and the right people to really explode. v3 ecology is currently in the gestation period, and more innovative projects will emerge soon to be compatible with it, such as new liquidity machine gun pools, custom strategy solutions, etc.

The Imagination of NFTized LP Token

In Uniswap V2, after a user adds liquidity, Uniswap will return an ERC20 token to the user, this is the LP Token. such LP Token represents the liquidity provider’s ownership of the liquidity it provides. When users want to redeem their liquidity, they simply destroy their LP Token and receive a share of the corresponding token in the pool.

Since Uniswap V2 uses an overall pool model, LP Token is a standard ERC20 token. However, in V3, each LP creates liquidity based on a different price range, so the liquidity provided is in ERC721 tokens as warrants, and Uniswap issues customized NFT cards for each liquidity provider.

How Uniswap V3 is leading the next wave of DeFi bulls

This simple NFT card represents a value unit that carries the time cost, risk cost, and strategic value of the liquidity provider. In the course of the Internet’s development, the standardization of value units laid the cornerstone of various Internet platforms, such as Amazon’s commodity links and Instagram’s images. Now the blockchain world is just like the Internet in 2003-2004, in the eve of the explosion, the perfection of value unit will allow the standardization of users to grow rapidly and eventually form the network scale effect.

NFTized LP Token is essentially asset securitization. As a financial tool, asset securitization is designed to improve the allocation of resources and increase the efficiency of capital operation. In traditional finance, the opaqueness of asset securitization has led to the potential risk of loss of control and has been criticized. But in a decentralized world, the trusted value of blockchain dramatically eliminates such concerns.

Decentralized Liquidity Machine Gun Pool

Uniswap V3’s granularity has led to more customized strategies, creating a liquidity pool market.

In the short term, the decentralized liquidity machine gun pool project is of great value to the demand side of investment, while in the long term it has positive feedback incentive benefits to the supply side of assets, the core of which lies in the data algorithm between supply and demand. The data feedback helps to form a benign curation market, where high-quality and robust strategies are sorted and screened, and high-risk and low-return strategies are quickly filtered and eliminated, so that efficient allocation of resources can be achieved.

With the synergistic effect of the innovative machine gun pool project, Uniswap V3 will be constructed into a more stable derivative system, buffering the risk of malicious smashing by the project side and further protecting the interests of investors. the underlying assets corresponding to LP Token are a combination of base tokens and project tokens. This means that the rate of change in the value of the pledged assets will be cut in the event of violent fluctuations in market conditions, thus achieving a liquidation buffer.

The Impossible Triangle Conundrum

Uniswap V3 introduces “centralized liquidity”, “rate customization”, “range orders”, “non-homogenized positions ” mechanisms, all aimed at improving funding efficiency. While helping liquidity providers to avoid unpredictable losses and generate higher returns as much as possible, they also inevitably increase risk. In the classic laws of investment trading, increasing returns, reducing risk, and increasing scale are impossible triangular puzzles, and all three are difficult to achieve simultaneously.

In Uniswap V3, the liquidity provider yield is significantly higher, however the capital risk is significantly higher. Especially in extreme market conditions, when the price of a certain asset class in a trading pair surges and falls, and the price exceeds the price range set by the liquidity provider, the liquidity within the range will be drained by market arbitrageurs, and risk control becomes a problem for the liquidity provider.

When the risk of Uniswap V3 cannot be effectively controlled based on its own mechanism, the liquidity provider can only turn to external risk data feeding, at this time, the NFTized LP Token will play an important role as a value unit bridging the world outside DEX.

LP Token, as an innovative derivative, also needs to be efficiently utilized; there is no shortage of liquidity providers in the DeFi space who, after pledging trading pairs in the liquidity pool, only get the one-sided benefits of liquidity mining and the funds are not fully utilized; LP Token, as a certificate of capital interest, can not only be circulated in the market, but also pledged to achieve higher The funds can be pledged for higher utilization.

Uniswap V3+CDO Model

CDO is called Collateralized DEX Offering, which is developed by DeepGo team. Users can achieve continuous financing by pledging the underlying risk classification. Market makers in Uniswap V3 after providing initial liquidity, lock LP Token as pledge in the CDO agreement, thus getting continuous liquidity buying.

When Uniswap users provide liquidity in V3 with a large interval, the local currency denominated value of the liquidity underlying is less volatile. The graph below simulates the curve of the overall value of the underlying with the token price after the user pledges the same value of the underlying in V2 and V3 versions. It is clear that the value curve is smoother in the V3 version.

If the CDO provider pledges the LP Token in Uniswap V3 version, the pledge will be significantly more risk resistant in extreme market conditions, which will also make the booster pool system more robust: a reasonable risk warning when the project token is rising sharply, and a good risk buffer when the token is falling sharply. This combination of Uniswap V3 and CDO will ultimately enable high-quality assets to rise in the long run, and bad assets to gradually decay and be retired.

More accurate risk pricing

In the CDO model, in order to achieve more accurate risk pricing, the risk needs to be graded, resulting in a fixed income graded fund. In addition to the originator of the project (IP), two main types of players need to be involved, divided into significant participants (GP) and fixed income earners (LP). Both types of players will provide continuous capital input to the project. The GP, as the direct investor in the project, will convert the entire principal into project tokens, while the LP’s capital will be used as leverage for the GP to help the project achieve greater value growth.

The CDO model allows IP pledges of high quality assets (Uniswap V3 LP Token), which adds a layer of security for GPs and encourages a large inflow of GP capital. Each inflow of GP capital is injected into the Vault to house the LP’s risk reserves and profits. As the volume of Vault funds increases, the willingness of LPs to invest is gradually amplified.

As follows.

LPw∝ Vault ∝ IPcol * GPturnover *IPltv

GPturnover ∝ GPw


IPcol is the pledge of IP

IPltv is the current pledge rate of IP

GPturnover is the turnover rate of GP

GPw is the GP’s willingness to invest

LPw is the LP’s willingness to invest

Vault is the reserve

It can be seen that through effective signaling, underlying assets with less volatile IP pledges effectively drive LP funding capacity, and LP funding, as the most important link in the market feedback loop, will have a positive multiplier effect.

If the project is a distressed asset, GP participants will have much higher volatility in the GP’s leveraged underlying than in the IP pledge due to the fact that they have exchanged all of their local currency for project tokens, at which point the GP may be the first to be liquidated due to the dip in project asset prices. The remaining GPs would prefer to enjoy the pledges after the IP is liquidated, thus reducing the turnover rate. This back directly leads to a shrinkage of incremental Vault, thus significantly reducing LPs’ willingness to invest, which in turn allows poor quality projects to be gradually retired.

LPw∝ IPcol * GPturnover

GPturnover ↓ ⇒ LPw ↓

Such transmission mechanism not only enables the CDO model to function benignly as a scavenger of distressed assets, but also transmits a large amount of effective market information as external feeding data for Uniswap V3 risk pricing, providing decision feedback to investors and liquidity providers.


The Uniswap V3 upgrade appears to be business as usual, but provides the basis for much innovation in DeFi applications. Now that CEX is in trouble internally and externally, it is a critical time for the rise of DEX, how can DeFi lead the next bull market? The core lies in absorbing the advantages of combinability of traditional finance and creating more easy-to-use and efficient strategic products to achieve financial inclusion on the ground, thus attracting more entrants.

In my previous opinion, Uniswap originally did not have a moat, but once V3 came out, it offered more combinable solutions. In the world of open finance, the alpha gain brought by V3 will generate many innovative products, thus forming a real head effect, which is its important strategic layout. However, DeFi is an inclusive finance rather than an oligarchic game, how to let small investors enjoy the alpha gain that only scientists or giant whales can get through some kind of agreement? It is exactly the direction we are currently focusing on exploring.

Posted by:CoinYuppie,Reprinted with attribution to:
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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