The decentralized exchange Uniswap successfully launched version 3 of its platform in May, resulting in high trading volumes despite a downturn in the cryptocurrency markets.
The latest version of the hugely popular Automated Market Maker (AMM) of Decentralized Finance (DeFi) quickly attracted a significant volume of transactions, seeing it entering the top five decentralized exchanges alongside Sushiswap, PancakeSwap v2 and its predecessor, Uniswap v2.
The success of v3 cannot be underestimated, as the cryptocurrency space has come under pressure due to a market correction in May that cast shadows on what has been the most prolific bull run. that space has known.
Uniswap v3 is now the # 1 dex in terms of transaction volume, averaging $ 1.2 billion in daily transaction volume, while Uniswap v2, which until very recently led the way, is currently trading slightly less $ 1 billion in 24-hour transaction value.
Additionally, a number of DeFi tokens led a rally in the markets after last week’s tumultuous correction, which has since been dubbed the biggest sellout in the cryptocurrency markets. However, the overall market saw its value surge by $ 400 billion shortly after the surge of several altcoins, with Maker’s MKR token gaining 91% and Yearn.finance’s YFI registering a 72% increase. The native token of the Uniswap, UNI and AAVE exchange has also seen its value increase significantly.
As a result, some analysts believe that Uniswap v3 could be used more by liquidity providers and retail users given its enhanced functionality. But what has changed and is it ready to replace the previous version?
Uniswap v3 revisited
The nature of software development means that applications and platforms are constantly improving, and Uniswap is no exception. The first version of the booming DeFi AMM was released in 2018 and has attracted thousands of users and hundreds of millions of dollars in transaction volume over the next three years.
Given the nascent state of the DeFi ecosystem, changes are rapid and rapid, and developers are constantly looking to improve current protocols and bring new products and services to their platforms.
Uniswap v2 was released in May 2020 and introduced direct token exchanges and other features that improved the overall performance of AMM. Over the next year, Uniswap facilitated approximately $ 135 billion in trading volume and established itself as one of the largest cryptocurrency spot exchanges in the world.
As the platform continued to contribute significantly to the popularity and use of DeFi, developers began working on Uniswap v3 behind the scenes, introducing improved control for liquidity providers on the platform. form and several levels of fees.
Is V3 a success?
The launch of Uniswap v3 in May was hailed as a success, with trading volume on the platform racking up impressive numbers despite having a lower Total Locked Value (TVL) than Uniswap v2.
Johannes Jensen, product and project manager at eToro, told Cointelegraph that improvements to critical issues existing in Constant Function Market Manufacturers (CFMM) designs have been a key factor in the immediate success of Uniswap v3:
“The main contribution is the ability of liquidity providers (LPs) to offer limited liquidity within a certain price range. With the custom liquidity provision feature, trading fees are collected and held separately, rather than automatically reinvested as liquidity in the pool. An interesting consequence of limited liquidity positions is that the systemic implications of LP stocks are inherently mitigated. “
Jensen noted that Uniswap’s v2 model essentially gave liquidity providers proportional ownership of a liquidity pool, which created a complex payment function due to non-permanent losses, making the feature more similar to a contract of liquidity. ‘options than a direct claim on the underlying asset.
Elias Simos, Protocol Specialist at Bison Trails, believes that the initial success of Uniswap v3 and its innovations will continue to attract capital from liquidity providers given its improved efficiency:
“With Uniswap V3, we are witnessing the emergence of capital-efficient DeFi. For reference, since launching in early May, Uniswap V3 has ended up printing something like 120% TVL usage vs. Sushi trading at 20%.
Aniket Jindal, co-founder of transaction infrastructure company Biconomy, pointed out that despite high fees, Uniswap v3 has attracted new users, suggesting that improvements in the latest version of AMM have Even more surprisingly, even after gas prices hit insane levels, Layer 2 DEXs became more popular.
Liquidity providers seek better returns
The cryptocurrency ecosystem has gotten used to things moving at breakneck speed, and the prospect of bigger and better returns may just be the catalyst to drive more liquidity providers to Uniswap v3.
Simos believes the inherent complexities of moving to v3 will be a barrier to entry in the short term, but the end result, better yields and new products will lead to the migration to the latest version of AMM:
“Yes, concentrated liquidity offers new challenges, maybe even more overhead for LPs, but first, the return is better, and second, there will soon be a product ecosystem around Uniswap V3 LP positions that will eliminate part of the complexity. “
While Jindal agreed with Simos’ sentiment that v3 may continue to attract liquidity providers, there are factors that could create friction in the migration of v2 users who will need to re-approve their tokens for v3 as well as for the ‘liquidity providers who now need to select a’ price range ‘which can be complicated for many to understand. “
Jensen believes that the increased capital efficiency of the Uniswap v3 model will continue to attract new liquidity providers and new traders: “The ability to provide limited liquidity for a desirable price range becomes an attractive tool in volatile markets, because LPs can use the model to price the inventory risk associated with holding lesser-known or volatile assets. “
Related: Uniswap v3 Hopes To Reinvent Its DEX, Others See Different Path For DeFi
As a result, Jensen suggested that liquidity providers using specialized CFMMs such as Curve could migrate to Uniswap v3, depending on the relative depth of stablecoin pairs and trading activity in competing pools. He also added that some may not necessarily want to deal with the additional demand to manage their risk:
“Maintaining constant income during volatile markets with Uniswap V3 will require an active effort on the part of LPs as they will have to adjust their price ranges accordingly. Strongly passive LPs may opt for lower capital efficiency to reduce the risk of short-lived losses in highly volatile markets. “
DeFi propels the return
2021 has turned out to be another monumental year for the cryptocurrency space, with some major moves taking place in the ecosystem. DeFi has become a major focal point, and the most recent market correction has added credence to DeFi’s influence and role.
Nonetheless, Simos pointed out that DeFi has experienced prolific growth since the start of 2020 and that important data shows that: “DeFi has been showing positive signs for over a year and a half at this time. Growth in fundamentals (TVL, volumes, users) continues to be on a hockey stick trajectory. […] Will there be volatility in the short term? For sure. But the fundamentals persist.
Jensen highlighted the role DeFi and AMMs play in the capital allocation of liquidity providers and their general use by everyday cryptocurrency users, so much so that they have “increasingly become an intrinsic part of how capital is allocated in crypto today “.
He also highlighted the yin-and-yang relationship of DeFi and Ethereum, the latter still being the smart contract blockchain of choice for the space. This inevitably led to high fee issues, but Jensen believes v3 could help alleviate some of these issues as Ethereum continues to move towards a proof-of-stake future:
“Uniswap V3 may attract a more sophisticated breed of LPs who will build new functionality to algorithmically adjust price ranges based on market volatility or even sentiment data.”