Uniswap has been surprising people from its V1 iteration to its current V3. The update of Uniswap V3 includes granular control of aggregated liquidity, range orders, multi-level rates, advanced oracles, etc., giving users more autonomy. Among them, the functions of liquidity aggregation, range order and limit order can be realized only by allowing users to customize the liquidity range.
In Uniswap V2, all liquidity is allocated in the interval from 0 to positive infinity according to the constant product curve k=x*y, but the prices on both sides of the interval are difficult to reach, so a large amount of funds are idle. For some specific trading pairs, price fluctuations may be limited to a very small range. If funds are still allocated within the entire range, it will cause great waste. Many projects have been optimized on this basis and have achieved success. For example, Curve chose to optimize the bonding curve to concentrate liquidity in a specific range for trading of similar assets such as stablecoins.
In this Uniswap V3 upgrade, the concept of "Tick" was introduced, which also makes Uniswap and traditional order book transactions more and more similar.
Tick is not unique to Uniswap. In traditional futures trading, Tick is used to refer to the smallest fluctuation of contract price. Uniswap V3 allows liquidity providers (LPs) to customize the liquidity range. The minimum and maximum prices set by LPs represent the minimum and maximum values of Tick, and the liquidity of LPs is distributed on every Tick within the range , these data are reflected in the NFT generated after the liquidity is provided. The transaction fee is calculated separately in each Tick and allocated to users according to the liquidity ratio of each user on the Tick.
When the market price fluctuates due to a transaction, it may pass through several Ticks, and after the original liquidity is exhausted, it will become the liquidity in the opposite direction. Such as USDT/W with 0.3% handling feeETHFor trading pairs, the Tick corresponding to the price of ETH in the range of 1204.8 to 3904.9 is -205380 to -193620. When the price falls below the price corresponding to Tick -205380, the liquidity of the buy order above the Tick will become the liquidity of the sell order.
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Higher Fund Utilization
Comparing the data of Uniswap V3 and Uniswap V2, Uniswap V3 currently captures more trading volume due to its lower liquidity than V2. Taking the data on May 28 as an example, as shown in the figure below, the locked volume of Uniswap V3 is only 1.58 billion US dollars, but the transaction volume in the past 24 hours is 923 million US dollars. On the other hand, Uniswap V2 has a lock-up volume of US$5.72 billion, and the trading volume in the past 24 hours was only US$741 million.
Similarly, compared with other exchanges horizontally, the data of Uniswap V3 is also very impressive.
EthereumSushiSwapThe lock-up volume is 3.32 billion US dollars, and the 24-hour trading volume is 142 million US dollars.
BSCOn PancakeSwap, the lockup volume was US$8.2 billion, and the 24-hour trading volume was US$920 million.
The QuickSwap lock-up volume on Polygon was 940 million US dollars, and the 24-hour trading volume was 229 million US dollars.
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Similar asset transactions
In the trading of similar assets, among the decentralized exchanges, Curve has firmly occupied the main market due to its low slippage and low handling fee (0.04%). Other decentralized exchanges usually require a 0.3% handling fee, which is completely uncompetitive for transactions such as stablecoins that are usually large in amount. In terms of centralized exchanges, Binance maximizes the application range of BUSD by exempting its own BUSD from trading fees with other stablecoin trading pairs.
After the launch of Uniswap V3 this time, users can set the liquidity between stablecoin trading pairs with small fluctuations within a very small range. within range. Through the extremely high utilization rate of funds in a small area, LPs can obtain income, and have a stable currency trading experience comparable to Curve.
Compared with trading 100,000 USDT for USDC, you can get 100,006 USDC in Uniswap and 100,018 USDC in Curve. Considering the gas fee gap between the two transactions, Uniswap V3 may bring a better experience.
Stablecoin yields on decentralized platforms also decrease as capital inflows and platforms mature. Also taking the data on May 28 as an example, the rate of return of Pool Y in Curve is the base APY of the transaction of 2.18% plus CRV rewards of 0.88% to 2.21%. If CRV tokens are not pledged, then the comprehensive annual rate of return of Pool Y Only 3.07%.
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Cross-asset transactions with low fees
After the success of Uniswap's AMM mechanism, various DEXs that imitated Uniswap will set the transaction fee to 0.3% the same as Uniswap, which makes the friction of on-chain transactions far greater than that of centralized exchanges. Taking Binance as an example, in the absence of invitation rebates or other fee reductions, the handling fee for currency transactions is only 0.1%. If BNB is used for deduction, the handling fee can be reduced to 0.075%.
Uniswap V3 can customize the handling fee ratio, currently there are three options: 0.05%, 0.3%, and 1%. If the transaction volume is larger through lower handling fees, and the final APY of LPs is not lower than that of other gears, then it is likely to attract LPs to choose a handling fee ratio of 0.05%.
From the figure below, the liquidity of the ETH/stable currency trading pair is still concentrated in the trading pair with a handling fee of 0.3%. Among the trading pairs with a handling fee ratio of 0.05%, the yields of ETH/USDC and ETH/USDT are lower than most other trading pairs, while the yields of ETH/DAI are much higher than other trading pairs. In the case of insufficient liquidity, the daily fee income will fluctuate greatly. Generally speaking, the return rate of ETH/stable currency trading pair with 0.05% service fee may be slightly lower than 0.3%.
According to Uniswap founder Hayden Adams at the Consensus 2021 conference, Uniswap is providing funds through grants to allow the community to build liquidity mining smart contracts. Any project that wants to stimulate liquidity can use this contract. If the community governance passes, UNI A liquidity mining plan may be launched.
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future trend
In less than a month since Uniswap V3 went live, the daily trading volume of Uniswap V3 has surpassed almost all decentralized exchanges. From this, we can also see some future trends.
The liquidity of Uniswap V3 will continue to grow. After the sharp drop on 5.19, the TVL of decentralized platforms such as Uniswap V2 was greatly affected, and now the liquidity of Uniswap V2 is only about half of the highest point. The liquidity of Uniswap V3 continued to grow after a brief decrease.
The growth rate of trading volume may not keep up with the growth of liquidity. In recent days, while the liquidity has increased, the trading volume of Uniswap V3 has continued to decrease due to the overall inactive trading in the market.
The attractiveness of transaction fees to ordinary users will continue to decrease, and the risk/benefit ratio will increase. If there is no good enough strategy, the current risk of providing liquidity in the Uniswap community is extremely high. Although Uniswap can double the efficiency of capital use, impermanent losses are also multiplying. according tohtdefi-lab.xyz/The simulator calculates that if the liquidity is gathered at half to double the market price, the capital utilization rate will be 3.41 times the original, then when the market fluctuates, the impermanent loss will also increase proportionally. According to actual experience, the current average liquidity of the ETH/USDT trading pair with a 0.3% handling fee is far more concentrated than this. Under the circumstances that the current market price fluctuates greatly, after the liquidity is aggregated, the impermanent loss may not be enough to make up for the fee income.
Liquidity will continue to gather around the market price and change as the market price changes. Take the currently most liquid ETH/USDC trading pair as an example. The price of ETH is 2505 USDC, and most of the liquidity is in the range of 2000 to 3400 USD. It can also be seen from the figure below that in the range of 2,560 to 2,600 US dollars, there are large orders here to provide liquidity. When the price rises above this range, the user’s ETH will be sold, providing liquidity and order trading. Time is no longer indivisible.
Uniswap V3 will benefit from Layer 2 development. The market-making strategy of Uniswap V3 will be more flexible on Layer 2, reducing the impact of Gas fees. Uniswap originally maintained a good cooperative relationship with Optimism, but due to the delay of the Optimism mainnet, Uniswap V3 failed to launch Layer 2. And another Layer 2 star project, Arbitrum, is about to go online, which may usher in a first-mover advantage. Uniswap has voted on Snapshot to prepare to deploy Uniswap V3 on Arbitrum, which was approved with 100% support.
New professional market-making institutions and active market-making strategies based on Uniswap V3 will continue to emerge, and an excellent market-making pool may emerge. At present, a number of excellent projects such as Lixir, Charm Alpha Vault, Visor, and Method Finance have emerged, and the following will briefly introduce them.
Lixir: A market-making strategy provider for Uniswap V3, which can keep the market-making funds concentrated and move with the market price, ensuring more liquidity around the market price and helping to reduce impermanent losses.
Charm Alpha Vault: Helps liquidity rebalance funds. For example, the initial value of ETH and USDC is 1:1. When the market price falls and the ratio of ETH increases, Alpha Vault will first withdraw the liquidity and re-provide liquidity according to the available funds of ETH and USDC at 1:1. In the high price range, only ETH is used to provide liquidity.
Visor: A proactive liquidity management tool. Provides self-hosted mining, reward fee accumulation and time locking functions, including three components: Visor Vault, Hypervisor, and Supervisor. The Visor smart pool can lock LP NFT to prevent the project party from withdrawing funds and running away. Hypervisor can obtain liquidity rewards according to the predetermined trading range. Supervisor can update Hypervisor preset parameters, manage assets, and execute policies.
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epilogue
Uniswap V3 has significantly improved the utilization rate of funds, enabling Uniswap V3 to obtain greater transaction volume when the TVL is only 27.6% of Uniswap V2. With the maturity of professional market-making teams and active market-making protocols, Uniswap V3 may bring huge profits to professional institutions, but it will become increasingly difficult for ordinary retail investors to participate, and the risk of impermanent losses is difficult for retail investors to control.
In general, Uniswap V3 is an update that is beneficial to most people. Traders have better liquidity, and professional market makers can use their own technology and capital advantages to obtain a higher proportion of handling fees than centralized exchanges. The project In the early stage, you can also reduce the impact of previous price fluctuations by customizing the rate and liquidity range.
If Uniswap V3 can push the 0.05% handling fee to the mainstream, it is likely to truly subvert the existing cryptocurrency trading system. Judging from the current data, the difference between the LPs income of the ETH/stable currency trading pair with a handling fee of 0.05% and the 0.3% is not obvious. If compensation can be obtained from the liquidity mining of Uniswap V3, the market share of 0.05% transaction fee transactions may be increased.
