Uniswap v3: A brief overview
Uniswap began with the launch of v1 in late 2018 as an experiment in a new kind of digital asset market. Unlike traditional markets composed of buyers and sellers trading assets between each other, Uniswap is what’s known as an automated market maker (AMM). In an AMM, market participants called liquidity providers deposit assets into liquidity pools, for which they receive a portion of the pool’s collected trading fees. Traders then trade against this pool, rather than directly between each other.
Less than a year after the launch of v2 in May 2020, which introduced a number of new features and optimizations, Uniswap was handling more than $135B in volume and had cemented its place as a key component of the DeFi ecosystem.
With the launch of v3 expected on May 5, 2021, we wanted to provide a quick overview of what to expect.
v3 will introduce three major new features and improvements:
- Concentrated liquidity, which aims to maximize capital efficiency and returns for liquidity providers
- Multiple fee tiers, which will ensure that liquidity providers are fairly compensated for exposing themselves to different risk profiles
- Deployment on Optimism, a Layer 2 solution that will enable very low-cost trades
In v2, when a user provides liquidity, their assets are distributed across the entire potential price range. This means that only a small percentage of their deployed capital is actually earning them fees. v3 introduces a new feature called concentrated liquidity, that enables users to select the price ranges to which they allocate their assets, ensuring that a much higher proportion of their capital is producing returns through fees. Uniswap estimates that concentrated liquidity will result in 4,000 times better capital efficiency than v2.
Multiple fee tiers
New fee structures for liquidity providers will help ensure that they are compensated in accordance with the amount of risk they are taking on. For example, stablecoin trading pairs see very little price fluctuation and so will provide lower rewards than more volatile trading pairs such as ETH/DAI, for example.
Deployment to Optimism
For many, the most exciting development of v3 is the fact that it will be deployed to Optimism in addition to its deployment on the Ethereum mainnet. Decentralized protocols like Uniswap can become very expensive to use in times of high network congestion. While developments on Ethereum 2.0 and improvement proposals like EIP-1559 aim to ease some of that pressure, Optimism is a solution available today that should make trading fees extremely affordable, even in times of high usage of the Ethereum mainnet.
You can learn more about Optimism in our blog post on the subject.
Uniswap v2 was a key building block for the rise of DeFi on Ethereum. We’re excited to see what v3 has in store for us!
For a more detailed overview of Uniswap v3 and its new features, check out the team’s official blog post.
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