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What's The Fuss About The Uniswap V3?

BitForex Editor
Apr 13, 2021

There has been a continuous growth in the demand for more decentralized exchange platforms, and currently, Uniswap is at the top of its game.  With major hype in the past year as a result of the pandemic, Uniswap has recorded a higher trading volume compared to Coinbase, which has been the norm for a while. Thanks to this major success, the developers at Uniswap have been working on a third version known as Uniswap V3.

Although this version is yet to be released, the Uniswap V3 is set to be the best market maker designed to increase the capital efficiency of liquidity providers by 4000X. Now, you might be wondering why there's so much buzz about this version. Before we delve into exactly what the new version promises to deliver, here are a few things to consider about the current version;

1.Uniswap has already caused a stir when it was released.

2.With relatively low development costs, this trading exchange has taken over 60% of the decentralized trading market.

3.With ETH not required as an intermediary token for swap processes, more users can benefit from the platform

4.Uniswap v2 uses wrapped Ether to facilitate core contracts. This enables direct exchange of ERC20 tokens.

Essentially, Uniswap v2 has been extremely successful, so you can already tell that the upgrades of the V3 will be excellent.

Let's Take A Deep Dive Into The Features Of Uniswap V3

The Uniswap V3 is the newest variation of the Uniswap protocol that is yet to be released. Although the white paper has been made public, the release date is scheduled for May 5th. This new Uniswap protocol offers you a DEX powered by an AMM filled with incredible features such as;

1.Capital control for liquidity providers

2.Capital efficiency

3.New tiers for its fee structure

All of these features are designed purposely to help you earn higher returns from your capital while lowering the probability of price slippage and risks. These, amongst other issues, are the major setbacks of Uniswap v1 and v2.

Let's have a look at the major changes in this iteration of the Uniswap protocol;

Concentrated Liquidity

The very first change of the Uniswap V3 is the ability of liquidity providers to determine the price range of their supplied liquidity. Basically, as a liquidity supplier, you can now bind your supplied assets on a specific price range determined by you. Whereas in v2, the only way you could set a specific price range for your liquidity assets is to create a new pool. Although this process has been equally effective, it's less profitable, because it means more gas fees and an inevitable profit loss.

Fortunately, this feature gives you total control of the price you choose for your liquidity assets. Hence, you get better liquidity, a more efficient process, and higher gain for your capital.

Upgrade On Oracle Feeds

The next feature that takes the Uniswap V3 to the next level is the upgrade to the performance of the TWAP oracles. Usually inquiring about price averages requires a process known as checkpointing- a process that entails storing the cumulative sums of pair prices on a per-second basis. To ascertain the TWAP of a specific period, these sums are then checked once at the beginning and end of a specific period.

The V3 version offers a significant upgrade to this process by making it possible via a single on-chain request. The recent TWAPs can now be calculated with the past nine days. This new upgrade saves time and can provide information from other trading indicators such as simple-moving averages (SMA).

Newly Revamped Fee Tiers

The swap fees of the Uniswap v2 were permanently set at 0.30%. However, the V3 version now features three different fee tiers you can choose from; 0.05%, 0.30%, and 1%. These fee tiers will be profitable to you if you are a liquidity provider, because you can set an acceptable risk level for your margins. You can either decide to go with risky correlated pairs or non-correlated pairs, which you will be compensated appropriately for.

Although this may sound very risky, the V3 version of LP fees are far more flexible, as they can be altered by governance. For instance, it could be turned on based on a per-pool and set between 10%-25% LP fees.

Non-fungible Liquidity

Non-fungible tokens are slowly becoming the new way to sell and exchange digital assets, and the Uniswap V3 version is up to speed. Unlike the v2 that usually issues a fungible ERC-20 token, Uniswap V3 will provide NFTs to represent liquidity positions instead. Although there's the rumor about these LP tokens not being interchangeable, it is possible to transform them into fungible tokens via bridged protocols or peripheral contracts.

All of these features mentioned above are easily the reasons why there is so much hype about the V3 iteration of the Uniswap protocol.

The Benefits Of The Uniswap V3

The Uniswap V3 has so many benefits for liquidity providers compared to the v2 version. Below is a breakdown of how this about to be released version will offer a better experience to you;

1.Unlike the v2 version of the Uniswap protocol, as a liquidity provider, you can provide liquidity with up to 4000x capital efficiency. Hence, you get higher returns on your capital.

2.You can reduce your downside risk and increase the exposure to your preferred asset.

3.You have total control of your price set, which means you can sell at a price range that is either above or below the market value.

4.You can enjoy low-slippage exchange processes that exceed both stablecoin-focused AMMs and the traditional forms of exchange.

In conclusion, the upcoming Uniswap V3 has a lot of features that gives liquid providers the ability to modify the level of exposure of an asset, while enabling better returns and minimizing the risks involved. If all of the features promised are effective, then the Uniswap exchange platform might just retain it's spot in the DeFi space. Since v2 has been nothing short of excellent, the prospects are very high.

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