(Uniswap V3 will be released on May 5, 2021)
The past year has seen a number of major breakthroughs in the DeFi (decentralized finance) space. Today we’re introducing one of the major, game-changing developments, the highly anticipated Uniswap V3 release.
Uniswap V3, based on the Ether Layer network, was officially released on May 5, 2021 and is designed to change the basic infrastructure that makes up an Automated Market Maker (AMM). The updated iteration of V3 is almost all-encompassing, from the way liquidity is provided, the Layer 2 (Ethernet Layer 2 network) extension, to the new NFT (Non-Homogenized Token) space.
Further pioneering by trailblazers
The launch of V2 in May 2020 reinforced Uniswap’s leading position in DEX and drove DeFi’s tremendous growth over the summer. v2 introduced the now popular user-driven liquidity model – which allows platform users to deposit ERC-20 tokens into a liquidity pool in exchange for transaction fees as well as LP tokens with more utility. On the other hand, these pools provide liquidity for trading, allowing the entire platform to operate without market makers or orders.
Customized and ultra-efficient liquidity
Uniswap has achieved a very high position in the “decentralization game”, currently holding around 20% of the DEX market share and with a recent daily trading volume of over $2 billion. Importantly, Uniswap is not stagnant, as V3 has made much more changes than previous iterations, thus taking AMM in a whole new direction while addressing a number of outstanding issues.
The first innovation is V3’s emphasis on “centralized liquidity (also known as “aggregated liquidity”). This allows LPs (liquidity providers) to choose exactly the desired price range of liquidity, rather than having the system spread the assets in the pool across all possible price ranges. In other words, this creates an order book similar to a centralized exchange (CEX), while controlling the constant losses that traders have always feared.
(Pooled liquidity ensures that most of the pool’s liquidity is where it needs to be)
This change may seem small, but it means that LPs depositing $1,200 into the pool in V3 can get the same level of fees as depositing $10,000 in V1 – making the invested capital 8.34 times more efficient. This is because assets are typically traded within a given time frame, rather than from $0 to infinity, as is currently the case with V2’s liquidity pool. Such high efficiency in the future will make liquidity provision more attractive to both users and professional market makers.
(The following image is taken from Finetmatics’ video on Uniswap V3, showing how V3 users can earn the same fees with 12% of their money)
Fewer losses, more opportunities
Uniswap developers believe that this small change will make capital 4000 times more efficient compared to V2, resulting in higher returns for LPs providers while helping them to reduce losses during major market events that could lose liquidity (e.g. above when ETH is $0, only $1200 is lost instead of $10,000).
Another user-friendly feature of V3 is the ability for LPs to choose to deploy capital across multiple fee ranges in a pool, allowing them to profit from multiple pricing opportunities with less capital. They can also set their own fee rates when providing liquidity, such as a 0.05% rate for less volatile pairs (e.g. stablecoins, etc.) and a higher rate of 1% for pairs in “niche” (high-risk) currencies.
Reduce the complexity of market making
Moving into the realm of CEX (Centralized Exchange), V3 users can set limit orders to change funding categories (e.g. DAI to USDC) when the price of the funds reaches a certain point; this way, if the price drops beyond a set range, the funds will change to another type of funding. As shown in the chart below, this can potentially generate significant revenue for LPs, while opening the door to more sophisticated market-making strategies across the platform.
Importantly, all of this customization will be possible using one of DeFi’s key innovations: NFT. LP positions will be irreplaceable ERC-721 tokens and will no longer be allocated by fungible ERC-20 tokens. This will also help expand the potential of advanced market making strategies in V3 and trading opportunities in the secondary market.
(How limit range orders generate revenue for V3 users)
Bringing DeFi to the masses
The last major innovation of V3 is the Layer 2 version deployed to launch on Optimism, expected to be released in July 2021. (There are other smaller innovations that we won’t go into detail about here). While the development team says that lowering the gas fee will be a natural sign of the natural innovation that V3 brings, the move to a nearly free Layer 2 protocol does change the DEX pricing rules.
While Layer 2 protocols such as Polygon/Matic, xDai and Loopring have caught the eye of investors recently, moving one of the largest and most recognizable exchanges in DeFi to Ethernet Layer 2 could be a huge driver of change. This innovation could extend Ether, and thus the entire DeFi ecosystem, triggering a new wave of scaling and innovation that could have some real impact on traditional finance.
Within the crypto space, the incredible capital efficiency that V3 brings should significantly reduce transaction slippage, which will shorten the time needed to compete with some of the larger centralized exchanges in the future and pave the way. Combined with the ability to set range limit orders, this may prompt some movement between the two largest market segments in cryptocurrencies.
All of these innovations could make V3 an overwhelming “disruptive force” that will not only change the way things work in DeFi, but potentially change the shape and direction of the entire cryptocurrency industry.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/why-uniswap-v3-will-change-defi-and-by-extension-the-entire-crypto-space/
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.