Uniswap’s dominance as the automated market maker (AMM) is unchallenged so far. The famed orderbook-less decentralized exchange launched way back in Nov ’18 and has since then taken the DeFi world by storm. A new and improved version of the protocol Uniswap v2 was deployed in May ’20 offering direct ERC20/ERC20 pairs, hardened price oracles, flash swaps, modular smart contracts, other improvements etc. It has facilitated billions in trading volume since it’s inception. But the quest for perfection is far from over. Enter Uniswap v3.
Uniswap team announced on Mar 23 that it will introduce a highly thought, designed from the ground’s up, complex and revolutionary third iteration of the popular protocol – the Uniswap v3 on Apr 05. It is expected to substantially increase the already wide lead of Uniswap over other competing AMMs. A Layer2 deployment on Optimism is also set to follow right after.
It offers concentrated liquidity, multiple fee tiers, high capital efficiency, concepts of active and passive liquidity, range orders, introduction of non-fungible liquidity, time weighted average price (TWAP) oracles etc.
However, there are concerns that this customization and complexity, despite offering high profits and efficiency, might turn the protocol into a place largely suitable for professional market makers and bots.
Uniswap v3 Offers 4000X Capital Efficiency And Automated Asset Adjustments
The most significant feature of Uniswap v3 is that it allows users to make their capital 4000X efficient. This allows higher return on the capital for liquidity providers and also gives decentralized exchanges closer ability to compete with their centralized counterparts/stablecoin AMMs like Curve, by offering tight slippages.
It’s also possible for the liquidity providers to decide which assets to gain exposure to and what ranges to provide liquidity to. This allows LPs to take calculated risk and make a more informed decision. LPs can also sell their positions or convert them, if prices crosses a certain threshold.
Uniswap v3: Lower Fees And Upgraded Oracles
Uniswap v3 is optimized to offer lower fees than Uniswap v2, it will further improve once the protocol moves to Optimism L2 solution in the coming month. The price oracles from Uniswap are now easier to integrate, they provide time-weighted average prices (TWAPs) from the last ~9 days on demand.
Uniswap v3: Active Liquidity And Range Orders
It’s now possible to remove liquidity automatically by specifying ranges to effectively utilize them. If the prices moves from there, the liquidity is removed from the pool automatically and no longer earns fees. This allows for automated management, according to one’s risk appetite and/or requirements.
Uniswap v3 system also allows for liquidating positions, once price has gone past a certain limit and buying back in automatically, once it comes within range. This new function allows for executing complex logic actions, like on centralized exchanges like buying low or taking profit.
Uniswap v3: Non Fungible Liquidity And Tiered Fees
Because of the customization and specific settings, LP tokens aren’t fungible (or exchangeable 1:1) like Uniswap v2 before and might be represented as an NFT. Only common shared positions can be made fungible and automatic earned trading fees reinvestment isn’t possible. This allows for more sophisticated LP strategies.
Uniswap v3 also offers flexible and three tiered fees system per pair – 0.05%, 0.30% and 1.00%. This allows LPs to customize and adjust fees according to their profit margin amidst market volatility.
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