How will the Uniswap V3 update affect DEX development

Uniswap is the most popular decentralized exchange. Updating the protocol to the third version will help it further strengthen its leadership position

The Uniswap project, launched in 2018, has become a pioneer of the automated market makers (AMM) market and the founder of the decentralized finance industry. A world free from the influence of hedge funds that functioned as market makers, exchanges, and clearing houses.

Uniswap V3: Official announcement

DeFi protocols, such as Uniswap, push up the ethereum exchange rate, with even JP Morgan talking about its superiority over bitcoin. The Uniswap team hinted at the V3 update a month ago, promising to provide it with a long-awaited second-tier scaling solution. This update is most welcome, given the rapid outflow of DeFi-capital on the Binance Smart Chain (BSC).

Read also: What is the Uniswap exchange and how to use it

The equivalent of Uniswap on BSC-PancakeSwap-this month processed 2 million transactions, ahead of the entire Ethereum blockchain. This mass relocation is understandable: people do not like the huge commissions that destroy the idea of decentralized financing. At the time of writing, the average fee for exchanging tokens in Uniswap is $50.81.

Let’s take a closer look at the main functions of Uniswap V3, which will help to eliminate the “gas crisis” in the Ethereum network.

Uniswap V3 Gives Liquidity Providers more control

Since the second version of the protocol was released in May 2020, trading volumes on the most popular decentralized exchange (DEX) have amounted to about $135 billion. Most of the features revolved around improving the user experience, fixing vulnerabilities, and optimizing the protocol. However, Uniswap V3 will be a milestone in the development of the project thanks to the following updates:

In V2, liquidity providers (LPs) had to adjust the value of their assets according to the price curve x*y=k. Thus, assets were reserved across the entire width of the price range — from 0 to infinity-although most pools did not require such liquidity. If you consider the high risks of slippage, as well as the fact that LPs, as a rule, receive a commission on only a small share of assets, staking becomes an unattractive event.

Uniswap V3 will change this system by allowing liquidity providers to set up price ranges for assets, rather than distributing them evenly. Thus, each LP will be able to create its own price curve. Thus, we will get the effect of concentrated liquidity and non-interchangeable positions of suppliers.

For example, an LP may indicate that in a given liquidity pool, its assets can only be used in the ETH/USDT pair in the price range of $2,000-$2,700. For the same pair, you can set a different price range for the same pool. If the ETH price is outside the specified range, the LP does not receive any fee.

Uniswap V3 will use ticks to keep liquidity within a certain price range to create concentrated liquidity.

Multi-level commissions

Under the current V2 system, Uniswap pays LP 0.3% for each transaction, depending on their share in the pool. Taking into account the protocol fee of 0.05% on transactions, the LP yield is reduced from 0.3% to 0.25%.

In Uniswap V3, the fees paid to vendors will be more flexible and layered:

Through a management vote, 10% to 25% of the LP fees can be distributed among the token stake holders in the pool. In this way, you can get the effect of stable pools that are less risky and bring in less commission than volatile pools.

In addition, more emphasis is placed on voting on governance issues to determine the size of commissions. Only time will tell how successful this approach of dynamic commission formation is.

Capital efficiency

The transition from V2 to Uniswap V3 will allow you to use 100% of the deposit in profitable farming. This means that users will be able to earn more and use their available capital more efficiently.

Capital Efficiency v3: Official website

Capital efficiency is directly related to concentrated liquidity, which allows you to earn more with less investment. If the transaction occurs outside the established price range, the liquidity is transferred to the inactive status. This means that it will no longer generate commission as active liquidity.

Thus, protocol participants will have to choose between these two strategies: concentrated liquidity and capital efficiency.

  • The higher the efficiency, the higher the risks.
  • Wide range, but low efficiency.
  • Multiple price ranges within a single pool.

Of course, to earn on active liquidity, you can use the third option and set the range of orders.

For example: if the DAI falls below the $1,001 USDC mark, you can open a position by providing $1 million DAI with a price range of 1,001–1,002 to the pool. When the DAI rises above $1,001, you will start earning commission. If the DAI rises even higher and exceeds $1,002, your pool, along with the commission, will be converted into US dollars, and it can be withdrawn from the account.

BSL license 1.1

Uniswap is considered the king of the Ethereum ecosystem. Its code is often borrowed and used in other projects. The most striking example is Sushiswap. As a compromise between keeping open source and reducing the number of copycats like Sushiswap, V3 introduces the Business Source License (BSL) 1.1 for its code.

Such a license should prevent unauthorized use of the Uniswap code for commercial purposes. In two years, the project will return the open source GPL license. It is believed that the introduction of the BSL 1.1 license will scare investors away from clones who are accused of misappropriating and using the code.

Uniswap has a bright future

Uniswap’s weekly trading volume has exceeded $10 billion this month, and there is no doubt that the protocol will become a major player in the DeFi segment in the near future. The update to V3 completely changes the structure of commissions and incentives, providing LP with new tools for greater flexibility and optimization of strategies.

But they will need to be more involved in the process. The launch of Uniswap V3 is scheduled for May 5, then the deployment of Optimism will begin.


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