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What is Uniswap V3?

BitForex Editor
Apr 13, 2021

UNISWAP is a DeFi protocol for cryptocurrency exchange. This hub is built primarily on the Ethereum blockchain. Given its purpose, Uniswap has consistently introduced different initiatives into the cryptocurrency market to serve the teeming population of digital money investors. Uniswap v3 is the upcoming version of the series.

In November 2018, UNISWAP v1 was made available to the public. A simple DEX at the time, Uniswap allowed users to trade ERC20 tokens on Ethereum without the hassles of a centralized exchange.

By May 2020, UNISWAP v2 followed. As anyone will expect, it was an upgrade on v1. Uniswap v2 came along with fresh features and optimizations. This resulted in an astonishing growth in the adoption of AMMs for exchange. In less than a year, Uniswap v2 had controlled around $135 billion in trading volume, sitting among the top cryptocurrency spot exchanges worldwide.

Now, the DeFi platform is gearing up for a third: Uniswap v3. The Uniswap team has stated that an initial L1 launch on Ethereum will take place by May 5, and a subsequent L2 release will follow on Optimism.

What's New?

This latest version of Uniswap(v3) offers concentrated liquidity and multiple fee tiers which will revolutionize the mode of automated market makers and define the future of decentralized exchanges. These features address the shortcomings of v2.

Concentrated Liquidity

Concentrated liquidity helps users stand at lower chances of risk. Certain currency pairs allow a small liquidity range(e.g 0.998 to 1.000) although the AMM algorithm entertains all prices between 0 to infinity. Liquidity outside this range does not augur well and the risk of loss heightens either by slippage or impermanent loss. With v3, liquidity pools can set up their custom price range and concentrate liquidity per price curves.

In this vein, a usual 50/50 USDC/ETH pool on v2 can be split into custom ranges. For instance, a sum of $3,000 is divisible into $1,000 and $2,000, and they can be put into separate liquid ranges. This simply means that LPs need to satisfy the liquidity requirements of their constant product pool, and then, they can work with an "imaginary reserve" that is without boundaries (i.e 0 to infinity).

At the same time, those looking to exchange tokens will trade against the summed up liquidity of all individual custom price curves thereby keeping gas fees at bay. So, payments to liquidity pools are in proportionality to the price range they produce liquidity in.

Concentrated liquidity goes a long way in aiding capital efficiency. A cited situation in the Uniswap v3 blog post gives a clear example. Two people have $1M each. Alice has her bulk money locked(fixed) within one price range in v2. Meanwhile, Bob—who is using v3—can place $183.5k in a concentration range from $1000-$2500 DAI/ETH. Bob's finances are still in the green if the worst happens, like ETH falling to $0. Also, he could try out other protocols.

What Happens If Price Defies The Custom Range?

It seems like the icing on the cake, but it is vital to know what lies ahead when things go south. For one, the LP concerned will cease to receive fees and their assets are converted to the less valuable asset of the two. Furthermore, the LP's liquidity is withdrawn from the pool. However, Uniswap employs a concept known as RANGE ORDERS. This allows LPs to deposit single assets in price ranges outside the current price. The origin asset can be swapped for another when the price enters that range and LPs make money from swapping fees.

Multiple Fee Tiers

There is free flexibility in Uniswap v3 with offers including three different fee tiers:- 0.05%, 0.30%, and 2.00%. They reflect the ratio of LPs' risk-taking to probable volatility.

LPs focusing on correlated assets like USDC/DAI are expected to follow the 0.05% fee tiers, those going for the non-correlated pairs e.g ETH/DAI will use 0.30%, and those interested in

Advanced Oracles

In Uniswap v2, there are time-weighted average price oracles (TWAP). They have been significant in structuring the DeFi model and have served as building blocks in many projects like Reflexer and Compound.

These v2 oracles store pair prices cumulatively on Uniswap every second. The price sums at the beginning and end of a period are recorded, giving an accurate TWAP over that time.

Uniswap v3 brings major changes to the TWAP oracles. An on-chain call can elicit the calculation of any TWAP over the last 9 days—an amazing recall system. The trick is made possible by storing an array of cumulative figures instead of just one.

Licensing

As the software of many other DeFi platforms, that of Uniswap is free and open-source, but v3 has an ecosystem present around its codebase. The Uniswap v3 core is guarded by a Business Source License 1.1. With this license, a commercial set-up can only use it for two years maximum after which it converts to a GPL( General Public License).

Launch Details

Different testers will get to scrutinize the Uniswap v3 smart contracts prior to release. These developers are chosen from four notable companies to see that every loose end is tied. Uniswap v3 is in two parts;

1.The Uniswap v3 Core Repository: As the name implies, the core powers the protocol and it is highly essential to the operation of smart contracts.

2.The Uniswap v3 Periphery Repository: This comprises the smart contracts that aid user interaction with the core.

Everything is in full speed to ensure that Uniswap is smoothly running by launch, and it is amendable on the occasion of any hitches.

This new initiative by Uniswap is aimed at making LPs maximize profit and lower their risks. Concentrated liquidity and multiple fee tiers have put Uniswap in a position to brush shoulders with other AMMs already advanced to this level and stand towering over others. These options will also bring complexity to play in new LPs. It can only get better as Uniswap adds more features. Definitely, the launch of Uniswap v3 on Optimism will boost traffic to the former.

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