The Uniswap team has officially announced the launch of the Uniswap V3. “We’re thrilled to announce that Uniswap V3 is now live on Ethereum Mainnet!” the team said.
Uniswap holds the number one position as the most popular decentralized exchange. The Decentralized Exchange, which appeared on Ethereum in late 2018, is currently the fourth-largest decentralized finance application by DeFi Pulse.
The Company behind the Uniswap protocol announced version 3 in late March. Uniswap v3 promise to give users more control over the liquidity they provide. The Liquidity pool interface now supports the creation of the Uniswap V3 position with multiple fee tiers and concerned liquidity ranges. Each position represented as an NFT comes with a unique piece of chain generative art. Have also released a migration portal for Uniswap v2 and Sushiswap LPs to migrate their assets over to V3 seamlessly.
The chief innovation in the new version is what the company is calling “Concentrated Liquidity”. Concentrated Liquidity makes the basic functionality of AMM more efficient for all users. A Basic AMM allows market participants to deposit two tokens into any given liquidity pool. Each pool then offers a price for both tokens. That price is determined simply by the ratio of two tokens.
Since the May 2020 launch of V2, the pioneering DEX accounted for $135 billion in trading volume. Most of the features revolved around improving user experience, fixing exploits, and optimizing protocol. During V2 liquidity, LPs had to adjust their assets across an X*Y=k Price curve. This made assets reserved for the entire price range from 0 to infinity –despite most pools not using such liquidity.
Uniswap V3 LPs can concentrate their capital within a custom price range, providing greater liquidity at desired prices. Therefore each LP can create its own price curve. This has the effect of generating concentrated liquidity, rendering the LP position non-fungible. LPs can combine any number of distinct, concentrated positions within a single pool.
For example, if there 100 DAI in a pool with 100 USDC, then 1 DAI is worth 1 USDC and vice versa. These markets depend on arbitrageurs to trade them back in line with the market when this simple system goes out.
This approach leaves a lot of liquidity effectively unusable, though, because if someone tried to buy 70 USDC from our pool above, it would knock the average price for trade way above the market price. So one would ever make that large of trade there.
Concentrated liquidity allows a person lending funds to a pool, a liquidity provider or LP, to define the band which their deposits will trade. LP might deposit 100 USDC and 100 DAI but with the limit that their USDC will never trade for less than 0.99 DAI and never more than 1.01 DAI.
Uniswap V3 will use ticks to keep the liquidity within a specific price range to facilitate concentrated liquidity.
Uniswap V3 protocol fees are far more flexible. Fees will be off by default but can turn on by governance on a per-pool basis and set between 10% to 25 % of LP fees. This should produce the effect of a stable pool generating smaller fees than volatile pools, aligning with LPs risk. The Uniswap protocol is governed by the UNI governance token.