In 2018, Uniswap completed an efficient automated market maker (AMM) trading model in just 500 lines of elegantly simple code, and everything DeFi LEGO assembled on top of it, nourishing a thriving ecosystem and making the public chain not just a tool for issuing Tokens, but an infrastructure backed by real value, indirectly starting the 2021 The bull market in cryptocurrencies in the year 2021 was dramatic.
Now, Uniswap has turned itself upside down and launched V3, a comprehensive upgrade that has sparked a lot of buzz in the DeFi community.
Let liquidity providers make more money
The biggest highlight in Uniswap V3, in official terms, is the improved funding efficiency. In fact, to put it simply and straightforwardly, it is possible for liquidity providers to make more money with the same amount of money, with higher returns.
In the previous version, when adding liquidity to a pool, the liquidity was evenly distributed in each price band. However, in most cases, users will actually only operate in price bands that fix a certain interval.
This is more common in stablecoin exchanges, where the price bands are particularly short. For example, the price of the DAI/USDC pair mostly fluctuates only between 1.01, which results in low utilization of funds to provide liquidity for the rest of the price range. The liquidity provider only earns a fee for this period of liquidity.
As we all know, this kind of liquidity mining is commonly known as one-pooling, and for cryptocurrencies with highly volatile prices, one-pooling is extremely risky due to the presence of unearned losses, and there is a high risk of losing money. In addition, users who perform currency exchange can experience a lot of slippage, placing an order at one price and getting it in hand at another.
In Uniswap V3, the liquidity provider can choose to provide liquidity for a specific price range. For example, in the ETH/DAI liquidity pool 100 USD is allocated to the 4000 price band and another 50 USD to the 2000 price band.
With this market making model, the liquidity provider is up to 4000 times more efficient. Let’s say that in order to get 5 USD, it was necessary to provide 100 USD of liquidity, but now only 50 USD is needed, so the remaining 50 USD of capital can be used for other things, such as pledging to other DeFi agreements, or providing liquidity in other price bands, etc.
At the same time, the depth of liquidity in the pool will be better, so users will have lower slippage when making exchanges, and this low slippage will even outperform centralized delivery platforms, or the AMM market making model for stable pairs.
- Multi-level commission: Uniswap V3 allows liquidity providers to choose their own commission between 0.05%, 0.30% and 1.00%. With these settings, higher fees, such as 0.30%, can be set on pairs with a higher risk of unearned losses.
For pairs with little to no price volatility, like in stablecoins, choose a lower fee, such as 0.05%. As for the Zoo series of cottage coins, which are currently on fire, you can set a fee of up to 1.00%.
- Prophecy Machine: Uniswap V2 introduced the Time Weighted Price Prophecy Machine (TWAP), and the current V3 version has also made significant improvements to the prophecy machine. A third party can call to calculate any TWAP price for about 9 days in the past.
This makes it easier and cheaper to create more advanced prognosticators, including simple moving averages (SMA), exponential moving averages (EMA), outlier filters, etc. Also, updates to the V3 Predictor can reduce Gas consumption by 50% compared to V2. It also becomes cheaper to calculate TWAP in external contracts.
- Range orders: In the old version of Uniswap, if we wanted to provide liquidity, then we had to have two Tokens. while in V3, the liquidity provider can earn by providing liquidity in one token, as long as the current price is not in the range of his choice.
If the exchange pair price enters the price range of his choice, then this asset he offers will be sold for another, and he will also receive a fee. If the liquidity provider chooses a small range of prices, this is a bit like the limit order function in the order book model – the user lists a certain price until someone is willing to deal with him at that price.
By analogy with limit orders, we can think of scenarios where range orders can be used: target price shipping, bottoming, initial public offering, etc.
- Position i.e. NFT: Since in V3, each pair of LP Token corresponds to a different price range, LP Token cannot be exchanged and transferred between each other, and this cannot be achieved through the ERC20 token protocol. the position of LP Token will become the position of NFT, which may be a minor flaw after upgrading V3.
After becoming NFT, many of the previous third-party applications with combinability will not be available. For example, pledged LP Token, and fees will no longer be automatically reinvested in the liquidity pool. Currently, the Uniswap team is also working on exploring this area so that liquidity providers can continue to earn through LP Token.
Few people may realize that Uniswap V3’s innovation is actually a big change that greatly improves the efficiency of capital, which will always look for the highest returns. However, the DeFi world as we know it today is built on the old AMM market making model.
Once V3’s Uniswap is adopted on a large scale, the accompanying infrastructure will be very different, and many forward-thinking project owners are already moving away from “classical liquidity mining” to the development of the new version. To protect the V3 code from being copied and used by other projects, the Uniswap team has applied for a 2-year patent protection period.
Will Uniswap V3 be able to build a moat and disrupt the existing ecosystem? Let’s see if users buy it.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/will-uniswap-v3-be-able-to-build-a-moat-and-disrupt-the-existing-ecosystem/
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