What is Uniswap V3? Uniswap V3 introduces a completely new concept to the Crypto market in general and AMM in particular: Centralized Liquidity. So, if there’s anything interesting about Uniswap V3, let’s all find out in the article below.
To better understand Uniswap V3, people can refer to some of the articles below:
- What is Uniswap (UNI)? Uniswap Cryptocurrency Overview
- Series 3: Real Builder in Winter | Uniswap – The True Unicorn Cryptocurrency Ever Produced
What is Uniswap V3?
Market context
In November 2018, Uniswap was born and brought the first concepts to the crypto market, Automated Market Makers, abbreviated as AMM, initially opening up DeFi trends. It was not until May 2020 that Uniswap V2 was born and this was the turning point for Uniswap to become the largest AMM platform in the crypto market and one of the important DeFi pieces on Ethereum.
However, Uniswap still has some major problems:
- For Stablecoin pairs, providing liquidity at prices below $0.9 and from many dollars becomes a waste of liquidity.
- For major altcoins in the crypto market such as ETH or BTC, the price of BTC and ETH fluctuates tens of percent in a day, so providing liquidity for BTC prices at a few thousand dollars is unnecessary. .
- Fees for LPs are fixed but should vary because each type of asset LP bears different risks.
Based on the remaining problems, the biggest is “Ability to use capital” then Uniswap V3 was born.
Overview of Uniswap V3
Uniswap V3 was introduced with the following main features:
- Centralized Liquidity: This allows LPs to have choice and control. LPs can offer at many different price ranges.
- Various fee tiers allow LPs to enjoy different fees for assets with different risk levels when providing liquidity.
From the above products, Uniswap V3 has become one of the AMMs designed to be flexible with the highest capital utilization on the market:
- LPs can provide liquidity with capital utilization up to 4000 times higher than Uniswap V2, the profit from providing liquidity will definitely be higher.
- With abundant liquidity, this makes transactions have much lower slippage than Uniswap V2. With Uniswap V3, Uniswap can completely compete fairly with StableSwaps like Curve Finance.
- LPs can set whether their assets can be converted to the opposite asset in the trading pair under given conditions. For example: If you provide liquidity for the ETH – USDC pair at a price of $1,500 – $2,000, you can set that when the ETH price reaches $1,400, all ETH in the pool will be transferred back to USDC.
In addition to strongly upgrading the protocol, Uniswap’s Oracles will be integrated much easier and cheaper, which reduces gas fees on Uniswap V3 compared to Uniswap V2.
Concentrated Liquidity – Concentrated Liquidity
For the Uniswap V2 model, the liquidity of LPs is distributed evenly along the price line x * y =k, equivalent to all tokens being provided with liquidity at prices from 0 to positive infinity. This causes a number of major disadvantages for LPs (Liquidity Providers) including:
- Many Stablecoin token pairs or synthetic asset pairs (stETH – ETH, wBTC – BTC,…) often trade in the range of 0.99 – 1.01. This is the price range where LPs earn large trading fees but providing liquidity in amounts much larger or smaller is not necessary.
- Besides Stablecoins, providing liquidity for Bitcoin (or some of the large altcoin piles) at price differences of tens of % in a short period of time is also unnecessary.
- The transaction fees earned by LPs may not compensate for the risks of Impermanent Loss.
For Uniswap V3, LPs can choose and customize the price range at which they want to provide liquidity based on their own strategy. Besides, LPs can combine many separate strategies in the same liquidity provision. For example, an LP could offer $1,000 for the ETH – USDC pair at the $1,500 – $2,000 price range and add about $500 for the $1,700 – $1,900 range.
Users will trade based on liquidity when combining all LP strategies without increasing gas fees for LPs. Trading fees collected at a certain price range are prorated to LPs depending on the liquidity they contribute within that price range.
Capital Efficiency – The ability to use capital
With Uniswap V3, LPs can earn an equivalent amount of fees but with much less capital than Uniswap V2, this means that Uniswap V3 has solved the problem of capital usability. on V3 will be much higher than V2.
For example:
Buu Pro and DeFi Huyz both want to provide liquidity for the ETH – USDC pair. Each has a starting point of $1M and the price of ETH is $1,500.
Because he was so familiar with Uniswap V2, Buu Pro was very lazy to learn, so Buu thought V3 was too complicated and risky to participate, so Buu decided to deposit his $500K USDC and 333.33 ETH into Uniswap V2 (total value). put in is $1M).
Passionate about DeFi, from the beginning Huyz was proficient in Uniswap V3 and Huyz decided to provide liquidity for the price of ETH from $1,000 – $2,500. Huyz decided to spend $91,751 USDC and 61.17 ETH for a total investment value of $183,500. The remaining amount Huyz divides into baskets and sends them to different places to make a profit.
Although Buu Pro has staked 5.44 times more capital than Huyz, the amount of fees the two earn is the same as long as the price of ETH – USDC still runs between $1,000 – $2,500.
This leads to:
- Buu Pro spent $1M but the APR earned was only about 50%.
- DeFi Huyz only spent about $183,500 but earned an APRR of up to 314%.
Not only that, Huyz also has the right to convert all ETH to USDC in case ETH drops or increases to the point where Huyz wants to lock in losses or cut profits. From the above example we can see that Uniswap V3 has greatly amplified the user’s ability to use capital and the lower the price range, the higher the user’s ability to use capital will be.
The capital efficiency on Uniswap V3 can be 4000 times higher than that of the Uniswap V2 platform offered by LPs within a price range of only about 0.1%. In the near future, developers can continue to reduce 0.1% to only 0.02%, making the capital usage capacity on V3 up to 20,000 times higher than on V2.
Active Liquidity – Active Liquidity
If the price of an asset runs outside the range within which LPs provide liquidity, LPs will not collect transaction fees from users. Therefore, LPs need to continuously update the market to be able to come up with appropriate strategies to gain the highest profits. Some common strategies include:
- Wide-ranging offering: Allows LPs to not need to monitor the project too much, but in return they will receive fewer transaction fees.
- Providing on a narrow scope: LPs will maximize profits but they will have to spend a lot of time to develop strategies suitable to the market.
Range Orders
Uniswap V3 allows users to deposit a single asset to provide liquidity: if in case the price of the asset falls within the specified range, their assets will be transferred to the other asset. It can be seen that Uniswap V3’s Range Order is similar to Market Order on centralized exchanges such as Binance, OKX,…
For example, DeFi Huyz provides liquidity for the ETH – USDC pair at an ETH price of $1,500. Huyz decides to deposit 200 ETH into Uniswap V3 and when ETH – USDC increases to $1,600, Huyz’s 200 ETH will automatically be converted into $32,000 USDC.
With Rage Order, users will not need to watch the price to enter but can set up at a given price and wait for the market to match the order. This not only helps improve user experience but also saves users time.
Non-Fungible Liquidity
With Uniswap V3, when LPs provide liquidity, they will receive an NFT representing their liquidity in the Pool instead of an ERC – 20 token as in the V2 version. In addition, collected transaction fees will not be compounded into assets to continue providing liquidity in the Pool.
Flexible Fees
Uniswap V3 offers 3 invitation fees from 0.05%, 0.3% and 1%. Different fees represent liquidity pairs with different risk levels, such as providing ETH – USDC will be much more risky in terms of Impermanent Loss than USDC – USDT. Normally, 0.05% is for Stablecoin asset pairs, 0.3% is for Bluechip assets such as BTC, ETH,… and 1% is for riskier assets.
Normally in Uniswap V2 there will be a Fee Switch feature that allows the protocol to collect fees from LPs at a rate of 16.66%, but with Uniswap V3, it can be turned on and off by the administrator instead of the project’s DAO, this fee has can fluctuate from 10 – 25%.
Advanced Oracles
Uniswap V3 introduces a new, more optimized Oracle, which has resulted in the cost of using Oracle on v3 being reduced by up to 50% compared to Uniswap V2.
License
This is a license that prevents Uniswap V3 from being used commercially by third-party projects. However, other protocols can still integrate Uniswap V3 normally.
Some disadvantages of Uniswap V3
Besides the advantages and benefits it brings to the crypto market, Uniswap still has some limitations as follows:
- Uniswap focuses on the Stablecoin market and Bluechip assets such as BTC, ETH,… but most altcoins are difficult to deploy Uniswap V3 because their fluctuations are too large, so it is necessary to continue improving Uniswpa v3 to for all.
- The truth is that centralized liquidity is not enough for Uniswap V3 to win with StableSwap protocols in the liquidity war for Stablecoins.
The future of Uniswap V3
Similar to Uniswap V3 or Centralized Liquidity, it will definitely become a big trend when Uniswap V3’s license expires. There will be many protocols to upgrade their products based on the Uniswap V3 source set.
However, Uniswap V3 has not completely solved the problem of capital utilization for all LPs with all liquidity pairs available on the market.
Summary
Uniswap V3 is a big step forward for the crypto market in general and the entire DeFi industry in particular. Hopefully through this article, everyone can understand more about what Uniswap V3 is?
