The most anticipated upgrade of Topstream AMM is finally here! On May 4, the Uniswap V3 contract was officially launched on the Ethernet mainnet. After full arguments, we finally have some views on the advantages of Uniswap V3.
The biggest advantage of Uniswap V3 is higher capital efficiency. With the same volume of funds, V3 has lower slippage than V2. Therefore, V3 can mobilize more funds in stock compared to V2. To verify the capital efficiency of Uniswap V3, we compare the total locking turnover with Uniswap V2 and Sushiswap.
Overall, it seems that Uniswap V3 does have higher capital efficiency in a short period of time. As the chart shows, V3 has a higher TVL turnover than V2 and Sushiswap. At its highest point, V3 had a much greater TVL turnover than V2. Every $1 of TVL in V3 generated $0.7 of daily trading volume, while the same amount of money in V2 only generated $0.2 of daily trading volume. In addition, data from the introduction of V3 shows that Uniswap generates $5 in volume for every $1 added to the pledge pool, while Sushiswap only generates $1.3 in volume for the same scenario.
What is the cost of the obvious capital efficiency advantage of V3 that comes with it?
It is well known that one of the problems of V2 is the impermanent losses faced by liquidity providers, and V3 has this same problem. But the size of the losses in V3 depends on the behavior of the liquidity provider. That is, in V2, LPs are quite static relative to arbitrage, while in V3 both parties are able to actively manage their positions.
Thus two possible scenarios emerge. The first scenario is that the liquidity provider is better priced and will squeeze the arbitrageurs out of the market. This requires the sophisticated LP to constantly adjust its price range to correctly map out market price changes before the arbitrageur makes a move. However, while this ensures that LPs do not lose money, it also reduces the potential trading volume of the protocol, as automated trading accounts for a large share of Uniswap v2 and Sushiswap.
The second scenario targets less sophisticated LPs. assuming price discovery still exists on centralized exchanges like Binance, liquidity providers with too narrow a price adjustment range and too slow a move will be defeated by arbitrageurs. A too-narrow price range means greater liquidity depth, because the more volatile the price, the higher the risk of suffering losses.
As an example, if the price of ETH is $3,500, LPs can set a price range of $3,490 – $3,510. If the external price of ETH rises to $3600. A rational LP will immediately adjust her price range to near $3,600. Otherwise, she would expose her selling exposure to arbitrageurs due to the price difference. Conversely, if the price drops to $3,300, the LP provides no liquidity and gains no transaction fees unless she adjusts her price downward.
So what is the current situation?
Although it is too early to tell, as a rule of thumb we can look at the trading volume of the top 10 arbitrageurs in Uniswap V3 vs. V2. The more professional the LP’s market making, the less arbitrage activity and the less liquidity providers lose. The opposite is true if there is a large amount of arbitrage.
As the table below shows, the total volume of the largest arbitrageurs on Uniswap V3 represents 12% of the total volume since V3 went live! This means that this address alone has generated over $670 million (identified by Nansen.ai as Wintermute). In addition, the top 5 arbitrage bots account for about 22% of the total volume, which is much larger than the V2 level. In V2, the top 5 arbitrageurs accounted for almost less than 5% of the total trading volume. This also indicates that LPs suffered significant losses in the early days of V3.
With the huge volume of arbitrage transactions in the pre-launch period of V3, Uniswap introduced an active liquidity management tool, Visor Finance, to manage multiple positions, automatically balance liquidity based on market prices, reinvest fees, rewards, etc. So, there are currently two paths. For the first scenario above, mature LPs go completely professional; in the second scenario, less professional LPs rely on tools like Visor to actively manage liquidity.
How will the future evolve?
We expect arbitrage participation to diminish over time in the V3 version for the following reasons.
Risk control: LPs will be able to better grasp risk after having learned from previous experience
Innovative design: active liquidity management tool Visor
Deployment of Layer 2: frequent adjustments can be made at low cost
In addition, the Uniswap ecosystem should not be underestimated. The Grants program, for example, devotes significant resources to creating key developer tools, adding high-quality data and launching key services in the Uniswap ecosystem.
For full project details, please click on the link: https://www.notion.so/3430a00270ea4d79be5c70d4ca99680a?v=cb2ce86b52194b759428b458f9717749
Uniswap V3 is off to a good start. While there are areas for continuous improvement, we remain optimistic about the future of V3. Eventually we will see more professional market makers becoming liquidity providers and squeezing out arbitrageurs with better pricing, V3’s wild growth is just beginning, will it be the end of the race for DEX competition? Let’s wait and see.
P.S. This article is a throwaway, we look forward to more discussion, feel free to leave us a comment to interact. Your message or opinion will have the opportunity to be officially quoted as the next IOSG weekly insight to be shared in various channels, discussion topics include but not limited to
Q1: Did V3 allow uniswap to take a city in the competition? Or did it not have the desired effect?
Q2: When V3 moves closer to the professional market maker and order book models, will it lead AMM more overall in that direction, or will it form two camps, what do you think about that?
Q3: What kind of changes will be brought about by spreads and arbitrage between V3 and centralized exchanges?
Q4: Where will the passive liquidity mining providers move the mining funds to?
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/the-wild-growth-of-uniswap-v3/
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