In November 2018, Uniswap was introduced as a proof-of-concept for automated market makers. The Decentralised Exchange (DEX) enables direct peer-to-peer transactions without the use of a middleman or an intermediary. Developers were able to create a decentralized exchange with automated market-making capabilities using Ethereum.
Uniswap V2 was released two years later, in May 2020, with new features and optimizations that set the stage for massive development. Fast forward to today, and Uniswap has directly mediated $135 billion in trading volume, making it one of the world's biggest cryptocurrency exchanges and responsible for 20% to 25% of all daily Ethereum transactions.
Uniswap was able to challenge the world's largest centralised exchanges in a limited period of time.
The decentralised platform, which is ranked in the top 100 exchanges, provides mission-critical financial infrastructure for everyone who wants to participate in a robust marketplace without borders and with complete financial independence.
What is the aim of Uniswap V3?
The exchange's next update, Uniswap V3, is needed for scalability. The stress tests and traded volumes become more difficult as the network grows in size. Uniswap V3 is designed to improve automated market making and resource efficiency in order to meet rising demand.
Although the DEX has progressed significantly over time, there is still much room for improvement, especially in terms of versatility. Lower fees, less order slippage, and an increase in the impermanent loss structure are among them.
In summary:
Individual liquidity providers (LPs) now have low resolution control over which price ranges their capital is allocated to thanks to Uniswap V3. Individual positions are merged into a single pool, creating a single combined curve on which users can trade.
Multiple fee rates are introduced as part of the update, allowing LPs to be fairly compensated for taking on varying degrees of risk.
Thanks to the keeping of a cumulative record of previous inquiries, improved oracle feeds allow for quicker and less expensive price checks.
To avoid replication of the update on other platforms, Uniswap V3 is not open-source.
Concentrated Liquidity
Uniswap V3 incorporates the idea of concentrated liquidity, which allows limited partners to choose which price levels their resources would be allocated to. With a single pool, liquidity providers may combine numerous concentrated positions.
In an ETH/DAI liquidity pool, for example, an LP will assign $100 to the $1,000-$2,000 price range and another $50 to the $1,500-$1,750 price range. The form of any order book or automated market maker can be approximated using this method by LPs. Trading takes place against all of the individual curves' liquidity, with no additional gas costs per LP.
This function is often marketed as a temporary fix for "permanent loss." If you're into DeFi, you've probably heard the word impermanent loss tossed around in online forums. When the price of your tokens varies between when they're deposited in a tank and when they're not, it's called impermanent loss. The greater the disparity, the greater the loss.
Uniswap V3 is the "only viable alternative" to impermanent loss using concentrated liquidity, according to Uniswap Founder Hayden Adams on Twitter.
Fee tiers for Uniswap V3
The third version of Uniswap contains a new feature that allows users to build custom pools with different fee dynamics. A regular 0.03 percent trading fee was applied to all transactions in V2.
In order to address an inefficiency, the redesign eliminates the one-size-fits-all solution. As a result, Uniswap V3 has several fee levels, allowing liquidity providers to be appropriately compensated for varying degrees of risk under certain parameters.
Uniswap V3 has three dynamic fee tiers per trading pair, having selected the history of capital efficiency: 0.05 percent, 0.30 percent, and 1.00 percent. As a result, liquidity providers will change their margins based on anticipated pair volatility. Non-correlated trading pairs, on the other hand, will have a high risk, while correlated trading pairs will have a low risk. Unfortunately, the average consumer would find these notifications uninteresting.
In response to the question of LP capital performance, Uniswap stated that V3 will have the same liquidity depth as V2 within defined price ranges, but will threaten much less capital.
Oracle feeds have been improved.
The oracles of Uniswap have also increased the performance of time-weighted average prices (TWAP) by lowering the cost of integration. Thanks to the Optimism L2 upgrade, which is an Ethereum-based second-layer solution that will be introduced shortly after V3 releases, Gas fees will be significantly reduced in comparison to V2.
Apart from the reduced rates, the three main improvements in the protocol are essentially uninteresting to the regular user. That isn't it, however.
Departure from the open-source community
Finally, due to misuse of its intellectual property, Uniswap developers have abandoned their open-source origins. Since several exchange clones appeared after Uniswap's launch, the version 3 update includes approved code with a two-year time limit on authorized commercial use. The code will be repurposed as open-source ‘in perpetuity' for the crypto community to use or expand on after this time is over.
Putting all together
On paper, Uniswap V3 is a better model that aims to increase capital flows, liquidity, and overall performance. The implementation of Optimism's layer-2 solution is also expected to significantly reduce Ethereum network fees, which is a top priority for most users. Overall, the cards are on the table, and the stakes for Uniswap V3 are high.