The third iteration of the market-leading decentralized exchange Uniswap is coming in May, according to new details of the so-called Uniswap v3 launch published on 23rd March.
Last week,Hayden Adams, Uniswap’s founder, already gave a hint about publishing details of Uniswap v3 in a tweet.
This upgrade gives the ability to liquidity providers (LPs) to make customized price ranges. LPs are responsible for placing their assets into liquidity pools, against which Uniswap users trade. But now LPs can earn fees at more specific prices. The only fee-generating capital for LPs would be that which is designated for the prices at which a given asset is trading.For example, LP could decide to provide liquidity only for ether when it trades at, let’s say, $2000 to $2500.
The new approach effectively makes the job of a liquidity provider more capital efficient. LPs can direct their liquidity towards the price range at which trades are occurring, and in turn, earn a higher rate of return on their capital. By doing so, an LP can approximate the shape of any automated market maker or active order book. Liquidity providers can supply liquidity with up to 4000x capital efficiency relative to Uniswap v2, earning higher returns on capital. One can put up the same amount of capital to earn more fees or use marginal capital saved to invest in any other strategy of choice. This change will decrease slippage on Uniswap, which would improve the overall trading experience.
Uniswap already accounts for 20% to 25% of transactions on Ethereum on any given day. Last month, the project saw more than $30 billion in trade volume. The platform makes up 60% of the DEX market and has about 15x more users than any other Ethereum DEX. The LP capital efficiency problem is one that Uniswap has been tackling since its inception. Most of the DEXs have the same issue: how to make providing liquidity on DEX more efficient. Most other issues tied to DEXs — slippage and trade execution, for instance — stem from this problem, in addition to the scaling limitations inherent to the Ethereum network.
As for scaling, the project is targeting an Ethereum Layer 1 Mainnet launch on May 5 with a layer-two deployment of Optimistic Rollup in mid-May. This particular Layer 2 application Optimism, aims to increase throughput and lowers gas fees to effectively zero. Aside from addressing scaling and the addition of customizable liquidity ranges, v3 includes many other features aimed at strengthening the platform against would-be competitors. An updated fee structure is another new feature for v3. V3 will offer LPs three distinct fee tiers per pair: 0.05%, 0.30%, and 1.00%. LPs will generate more fees from making markets in more volatile assets. Those same LPs have the flexibility to engage in whichever assets they want and will be compensated in line with the volatility or risk of those assets.
There are some small drawbacks of v3. It’s harder to make liquidity fungible meaning LP tokens will not be interchangeable with one another. Furthermore, fees are not continuously re-invested into the pool. They said third parties can write contracts tied to the protocol that does this on their behalf and make tokens fungible.
It’s also not lost on the Uniswap team that its open-source nature comes with its drawbacks. Anyone can take the publicly available code and build their versions. That’s already happened in the case of Uniswap clone SushiSwap. By copying Uniswap and introducing its own governance token, SushiSwap quickly became one of the largest DEXs on the market. The Uniswap v3 Core protocol is licensed under Business Source License 1.1. It will protect them against commercial ventures from copying it outright. This license does not affect integrations with wallets or other mobile apps looking to plug into the platform.
Uniswap’s governance token holders will be able to adjust these licenses as they see fit in the future. In two years, this license will lapse unless accelerated by UNI governance participants. Furthermore, v3 represents the last major update to occur outside of public view. From here, the development team will hand the reins over to the community.