Uniswap v3 - A Game Changer?


Hey DEFI TIMES community,

You all know that Uniswap v3 was announced last week. There was a massive hype around it - with good reasons.

The features were finally revealed, and we now have a good overview of the new features and their possible implications. In short, the new features are impressive, and they have the potential to completely change our understanding of a DEX.

After v3 was announced, some people are starting to believe that most other DEXs on Ethereum will cease to exist. Why? Because the new Uniswap has 4000 times better liquidity efficiency, customizable price curves, Optimism integration, and so many more features.

While I don't agree with such an extreme opinion, I do understand that v3 is probably the best technology any DEX has shipped.

It will make people question the existence of SushiSwap, Balancer, Curve, and all other DEXs claiming to be a better version of Uniswap.

So what will happen to all of these DEXs on May 5, when Uniswap v3 goes live? Especially if you consider the fact that no single project can simply copy their code. It's protected under the Business Source License 1.1. For two long years, the code is protected.

Now, in order to understand v3s impact on other DEXs, it's necessary to wrap your head around all the new features that their new version includes.

Let's dive into it!


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What is Uniswap v3 all about?

Concentrated liquidity

Probably the biggest innovation of Uniswap v3 is the possibility for LPs to provide liquidity in a predetermined price range, allowing LPs to effectively set stop-losses for their liquidity. Impermanent loss is probably the biggest problem in the AMM space. While v3 doesn't solve the underlying problem, it helps LPs prevent impermanent loss after a certain threshold.

Capital efficiency

Liquidity inside v3 is up to 4000 times more capital efficient than inside v2, which was introduced around a year ago. This is made possible by the ability to provide liquidity in a concentrated way. In essence, when you provide liquidity in v3, you can earn way more fees with less capital - higher returns on less liquidity.

Flexible fees

Uniswap v3 offers LPs three fee options per pool: 0.05%, 0.30%, and 1.00%. Depending on the volatility of the pair, LPs choose the optimal fee structure. For example, LPs may choose the 0.05% option for stablecoin pairs to avoid too much price slippage, while it may be optimal to choose 1% fees for high volume trading pairs like ETH/DAI.

Optimism integration

v3 will be deployed on Optimism shortly after their mainnet launch on May 5. Optimism is the most anticipated L2 solution on Ethereum right now, essentially allowing users to trade with nearly zero gas fees.

Non-fungible LP tokens

LP tokens will be NFTs with the introduction of concentrated liquidity. 

Gas efficiency

Even though the source code is way more complicated than v2, transactions on v3 will be more gas efficient - cheaper tokens swaps even on L1 =)

Advanced oracles

Uniswap v3 will improve the underlying oracle system, making it possible to calculate any recent TWAP within the past ~9 days.

License

v3 will come under a Business Source License 1.1, meaning that forks are forbidden by law. The UNI governance council can decide about potential exceptions, though.

Uniswap governance fees

v3 will introduce governance fees - effectively between 10% and 25% of LP fees. At first, those fees will be turned off but can be activated at any time by the governance council.

What will happen to other DEXs?

V3: The liquidity black hole

V3 is way more capital efficient, which means that it needs less liquidity for the same trading volume and price slippage. In fact, you need only a fraction of the liquidity to earn the same trading fees. This results in a significant amount of liquidity being "freed."

Despite the capital efficiency, v3 might be a liquidity black hole sucking in large amounts of value locked from similar DEXs on Ethereum (SushiSwap, Balancer, Curve, …).

Why would you provide liquidity to SushiSwap when you can earn way more money on less TVL on Uniswap v3?

Well, the answer is not entirely simple because we have to distinguish between active and passive liquidity. Liquidity on SushiSwap (or Uniswap v2!) is passive, meaning LPs don't need to actively manage it. They earn a decent amount of trading fees accordingly. 

V3 liquidity, on the other hand, is active because LPs set certain price ranges. When the price moves above or below their set threshold, they have to readjust their position. Why? Because their liquidity only works within the set price range. If the price is outside the price range, their liquidity is idle. This is why v3 LPs are active liquidity managers.

Even though LPs earn more trading fees on less capital in v3, though have to work for it - regularly setting new price ranges in highly volatile markets.

Retail LPs might decide to stick with traditional AMMs because they don't have the time for active liquidity management. It's a full-time job!

So even though you earn higher rewards on v3, there are good reasons to stick with other AMMs. This is why I don't expect most liquidity to move to Uniswap v3 in the near future. 

Quite the opposite will happen: TVL in v3 will… stay quite low!

TVL will not be a good metric to measure the success of v3 because it just needs fewer assets to achieve the same results!

Trading volume eater?

Will v3 eat all the trading volume from other DEXs? Well, it certainly could! Custom price ranges allow v3 to have almost no price slippage!

Users could decide that it just doesn't make sense to use competitors like Curve or Balancer anymore. Sure Curve has low price slippage for stablecoins, but what happens when v3 achieves better results?

I don't claim that this will inevitably happen, but it's certainly worth thinking about!

Optimism integration

Unisawp's Optimism integration is a statement! They won't use Binance Smart Chain; they won't move to Polkadot! They will simply stay on ETH!

Optimism will - in my opinion - have the most significant impact on the success of v3 in the short and long term. Optimism will make Uniswap scalable - Bye-bye, high gas fees!

The Optimism integration could be the single reason why users choose Uniswap over competitors. It will make Uniswap:

  • cheap

  • fast

  • scalable for the masses

Conclusion

While you should take all of the above implications with a grain of salt, it's safe to say that v3 will change the AMM market forever.

In short, here are the main advantages of the new update:

  • concentrated liquidity: stop loss to prevent impermanent loss after a certain point

  • Optimism integration: cheap, fast, and scalable token swap on the second layer

  • flexible fees: LPs can choose between 0.05%, 0.30%, and 1.00%

  • license: the source code cannot be forked for two years

What all of this means for competing DEXs is yet to see; however, I'm super keen to see what happens on May 5 when v3 finally goes live!


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All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.

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