Uniswap V3 — New Era Of AMMs?

Intro

So what is the long-awaited Uniswap V3 all about? How is it different from V2? Will this be a game-changer when it comes to the Automated Market Makers space? And will it launch directly on Layer 2? You’ll find answers to these questions in this article.

Uniswap

Although Uniswap, as one of the core DeFi projects, doesn’t need much of an introduction, let’s quickly go through a few major points before we jump into V3.

V3

Just before releasing V2, the team behind Uniswap had already started working on a new version of the protocol, details of which were announced just now — at the end of March 2021. The team decided to launch Uniswap V3 on both the Ethereum mainnet and Optimism — an Ethereum Layer 2 scaling solution — targeting early May for the release.

Concentrated Liquidity

Concentrated liquidity is the main concept behind V3.

Capital Efficiency

Concentrating liquidity offers much better capital efficiency for liquidity providers.

Active Liquidity

V3 also introduces the concept of active liquidity. If the price of assets trading in a specific liquidity pool moves outside of the LP’s price range, the LP’s liquidity is effectively removed from the pool and stops earning fees. When this happens, the LP’s liquidity shifts completely towards one of the assets and they end up holding only one of them. At this point, the LP can either wait until the market price moves back into their specified price range or they may decide to update their range to account for current prices.

Range Limit Orders

Range Limit Orders is the next feature enabled by concentrated liquidity.

Multiple Positions

LPs can also decide to provide liquidity in multiple price ranges that may or may not overlap.

Non-Fungible Liquidity

As each LP can basically create their own price curve, the liquidity positions are no longer fungible and cannot be represented by well-known ERC20 LP tokens.

Flexible Fees

The next new feature is the flexibility when it comes to trading fees. Instead of offering the standard 0.3% trading fee known from Uniswap V2, V3 initially offers 3 separate fee tiers — 0.05%, 0.3% and 1%. This allows LPs to choose the pools according to the risk they are willing to take. The team behind Uniswap expects the 0.05% fee to be predominantly used for pools with similar assets such as different stable coins, 0.3% for other standard pairs like ETH/DAI and 1% for more exotic pairs.

Advanced Oracles

Last but not least is a significant improvement to the TWAP oracles introduced by Uniswap V2. V3 makes it possible to calculate any recent TWAP within the past ~9 days in a single on-chain call.

Summary

It looks like Uniswap V3 can be a game-changer when it comes to AMMs. It basically combines the benefits of a standard AMM with the benefits of a stable-asset AMM — all of this while making capital way more efficient. This makes V3 a super flexible protocol able to accommodate a whole range of different assets.

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