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Uniswap V3 Arrival Signals Bright Future For the DEX

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Just slightly ahead of Curve Finance, Uniswap holds the number one position as the most popular decentralized exchangeThe reader bears full responsibility for any actions taken by him or her in response to information found on our website.Uniswap V3 upgrade should boost this precarious lead even further.

By pioneering automated market makers (AMMs) in November 2018, Uniswap cleared the way for the decentralized future of financeThe reader bears full responsibility for any actions taken by him or her in response to information found on our website.One without the influence of hedge funds as market makers, exchanges, and clearing houses, all in one corruptive package.

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Uniswap V3 teaser: Official Twitter handle

When JP Morgan talks of ethereum eventually outperforming bitcoin, DeFi protocols like Uniswap will drive its value.We were teased by the Uniswap team just a month ago, hinting at the long-awaited implementation of layer 2 scaling.Such an upgrade couldn’t come sooner, given the breakneck pace at which DeFi traffic flows into BINANCE Smart Chain (BSC).

BSC’s equivalent to Uniswap — PancakeSwap — reached over 2 million transactions this month, outpacing the entire Ethereum space.Decentralization is not possible without huge transaction fees, unbefitting of the concept of decentralized finance.As of press time, the average Uniswap Swap fee is at $50.81, according to the Etherscan gas tracker.

Let’s take a look at key Uniswap V3 features that will alleviate Ethereum’s gas crisis.

Uniswap V3 gives liquidity providers greater control

Since the May 2020 launch of V2, the pioneering DEX accounted for $135 billion in trading volume.Most of the features focus on improving the user experience, fixing exploits, and optimizing the protocol.However, Uniswap V3 represents a true milestone thanks to the following upgrades:

Concentrated liquidity

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Concentrated liquidity: Official website

During V2, liquidity providers (LPs) had to adjust the price of their assets across an x*y=k price curve.Despite most pools not using such liquidity, the assets were now reserved for the entire price range — 0 to infinity.When you take into account that LPs tend to earn fees on a small percentage of their assets, in addition to high slippage, such a system discourages staking.

Uniswap V3 overhauls this by giving LPs the tools to customize the price ranges of their assets instead of distributing them evenly.Consequently, each LP can carve out its own pricing curve.This has the effect of generating concentrated liquidity, rendering LP positions non-fungible.

In one liquidity pool, LPs can have ETH/USDT pairs, with only a usage of $2,000–$2,700.By the same token pair, a different price range could be set for the same poolThe reader bears full responsibility for any actions taken by him or her in response to information found on our website.If the ETH price happens to be outside the designated range, the LP receives no fee.

Uniswap V3 will use ticks to keep the liquidity within a certain price range to facilitate concentrated liquidity.They have their own LPs.

Multi-tiered fees

Under the current V2 system, Uniswap gives LPs 0.3% for each transaction, dependent on their pool shareThe reader bears full responsibility for any actions taken by him or her in response to information found on our website.This is in addition to the fee protocol of 0.05% on transactions, lowering LP yields from 0.3% to 0.25%, subject to governance change by vote.

Uniswap V3 makes the LPs’ fees more flexible by introducing multi-tiered fee brackets:

  • 0.05%
  • 0.30%
  • 1%

Through governance voting, between 10% to 25% of LP fees can then be allocated to token stakers per pool.This should result in LPs having lower fees for stable pools, in line with their risk profile.

Likewise, a greater emphasis is placed on governance voting to determine feesThe reader bears full responsibility for any actions taken by him or her in response to information found on our website.Only time will tell if this will be a superior model to Kyber’s approach of providing dynamic fees.

Capital efficiency

Departing from V2, Uniswap V3 will make it possible that 100% of your asset deposit will be employed for yield farmingThe reader bears full responsibility for any actions taken by him or her in response to information found on our website.

Whether in stablecoin pools, or for more volatile token pairs, even if trades occur outside your set price range, when they do occur, you would be earning more from the 100% utilization of your assets.

As you can see, capital efficiency directly results from concentrated liquidity, making more fees from less.As for liquidity, if a trade goes over your price range, the liquidity is gone inactive.Meaning it will no longer generate fees from active liquidity.

Therefore, when we combine concentrated liquidity with capital efficiency, Uniswap parties will have to choose wisely between these approaches:

  • Very high capital efficiency but very high risk.
  • Wide price range but low capital efficiency.
  • Several price ranges within a single pool.

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

With the provided example, if DAI goes under $1.001 USDC, you could start your position by providing $1M DAI into the pool at the 1.001–1.002 price rangeThe reader bears full responsibility for any actions taken by him or her in response to information found on our website.When DAI goes above $1.001 USDC, your fees start to generateThe reader bears full responsibility for any actions taken by him or her in response to information found on our website.If DAI goes even further up, above $1.002, your pool converts into USDC, which you can withdraw with the accumulated fees.

BSL 1.1 license

As the king of Ethereum’s ecosystem, Uniswap’s code is often copied to repeat its success under a different team.Uniswap’s code is often copied for its success by other Ethereum partners if DAI goes even higher, above $1.002.As a compromise between staying open-source and reducing Sushiswap-like scenarios, V3 introduces Business Source License (BSL) 1.1 for its code.

Such a license should prevent unauthorized use, making other protocols unable to use Uniswap’s code for commercial use.A compromise between staying open-source and eliminating Sushiswap-like scenarios, V3 introduces the Business Source License 1.1 for its codeThe reader bears full responsibility for any actions taken by him or her in response to information found on our website.Such a license should prevent unauthorized use, making other protocols unable to use Uniswap’s code commercially.One could see that the very deployment of the BSL 1.1 license would be sufficient to scare off investors from tapping into competitive protocols accused of unauthorized use.

The future is bright for Uniswap

As Uniswap’s weekly trading volume surpassed $10 billion this month, there is little doubt that the protocol will become a major DeFi player in the near futureThe reader bears full responsibility for any actions taken by him or her in response to information found on our website.Its V3 upgrade overhauls much of the fee structure and incentives, giving LPs new tools to fine-tune their gains.

However, they will also require greater engagementThe reader bears full responsibility for any actions taken by him or her in response to information found on our website.Uniswap V3 is scheduled to launch on May 5, followed suit by Optimism’s roll-out.

Disclaimer

All the information contained on our website is published in good faith and for general information purposes only.All the information on this website is provided in good faith and only for general information purposes.
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 5/4/2021

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