What changes can Uniswap v3 bring to DeFi?

In 2020, the popularity of Uniswap v2 is unprecedented for the DeFi protocol, and decentralized exchanges seem to be the center of the new financial revolution. In terms of trading volume, Uniswap first leveled with the main trading platform, and then surpassed the main trading platform. It has tried numerous times and imitated its own success.

The third version, launched on May 5th, introduced a new model that combines the limit order book used by traditional trading platforms with the automatic market maker (AMM) formula . This design brings liquidity Greater capital efficiency and better flexibility.

In exchange, the liquidity provider must play an active role in the agreement. Uniswap v2 allows users to provide liquidity for the entire trading portfolio. The latest iteration adds a feature called concentrated liquidity and restricts prices to specific parts of the price spectrum.

Therefore, users must compete to remain profitable. After its launch, users of decentralized exchanges have seen a sharp increase in the number of users, and approximately 9,500 LPs have migrated to the new iteration. However, according to the data provided by The Block, this indicator has declined after the hype subsided.

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Using the Uniswap v3 model, fewer LPs have the ability to participate in the competition to provide useful liquidity, however, they can take advantage of the capital efficiency of the agreement. In the second iteration, the liquidity provided for some trading pairs (such as stablecoins trading pairs) is not used.

Uniswap v3 allows users to customize the price range they wish to provide liquidity . Most likely, they will put it in the most useful range. Therefore, 100% of their capital earns fees within this useful price range.

Uniswap v3 has gained more advantages in the DeFi sector. Uniswap v3 puts forward higher requirements for LPs. It provides them with new tools, a combination of passive/active strategies, future integration with L2 expansion solutions, and optimistic Rollups, and more interoperability with other protocols .

Data from Block Research shows that Uniswap v3 is more successful in attracting liquidity in trading pairs that prefer asset liquidity. In less than two weeks, the third iteration replaced the market shares of WBTC/ETH, USDC/ETH, and UNI/ETH in terms of transaction volume. Trading pairs with lower interest rates and liquidity, such as FEI/ETH, have a better trading volume in Uniswap v2.

In addition, due to its efficiency, Uniswap v3 can provide better transactions for trading pairs between stablecoins and tokens . This research predicts that these trading pairs will dominate over time and will play a greater role in the future of the exchange.

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Further data shows that within a few weeks, Uniswap v3 accounted for 80% of the second iteration’s transaction volume, exceeding 10% in terms of liquidity. The latter is concentrated on the market price of trading pairs. Uniswap v3 has a lower rate of decline (0.49%) than v2 (0.81%). These indicators seem to be on the rise, indicating that the third iteration is achieving its goals.

Despite the difficulty of launching, Uniswap v3 is still in progress. LP, users, and market makers are still experimenting and familiarizing themselves with its capabilities and features. Data from The Block shows that the migration is slow and happening. As the protocol develops and matures, it will integrate various functions and operate with more ecosystems in Ethereum to promote the participation of more users .

The authors of The Block study Mika Honkasalo and Larry Cermak were invited to participate in Amber Group’s Crypto Unstacked podcast episode 65 power. Researchers have thoroughly studied the characteristics of decentralized transactions, new models, benefits, new LP token functions, and so on.

Regarding the future of the new iteration, Cermak predicts that Uniswapv3 will exceed v2 in terms of capacity .

Cermak said: “Ultimately, it will happen. It is also important to remember that Uniswap is working relatively hard to push people to migrate. If you now automatically switch to Uniswap v3, unless you want to switch to v2.”

The Block’s research was proposed by Amber Group, a leading international crypto financial service provider. The company’s goal is to create long-term value for its customers and build on research and academic tools such as Amber Academy and the popular podcast Crypto Unstacked.

Its in-depth research on the latest protocols, major crypto companies, trends and innovations has proven to be a useful tool for investors. Research conducted on Uniswap v3 is essential to grasp the true scope, limitations, capabilities, opportunities, and potential of the Ethereum ecosystem to support a new global financial system.

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