The decentralized exchange Uniswap successfully launched version 3 of its platform in May – resulting in high trading volumes despite the downturn in the cryptocurrency markets.
The latest version of the very popular automated market maker (AMO) for decentralized finance (DeFi) quickly attracted a significant amount of trading volume and saw it move between 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 was under pressure due to the May market correction, which cast shadows on what was the most prolific bull during the universe.
Uniswap v3 is now the leading dex in terms of trading volume, record an average of $ 1.2 billion in daily transaction volume, while Uniswap v2, which led until recently, currently processes nearly $ 1 billion worth of 24-hour transactions.
In addition, a number of other DeFi tokens led to the markets after last week’s stormy correction, which has since been called the largest surrender in the cryptocurrency markets. However, the overall market recorded and An increase in value of $ 400 billion shortly after several altcoins set off with Maker MKR the token is gaining 91% and YN’s Yearn.finance is up 72%. Uniswap, UNI and AAVE’s native token also saw a significant increase in value.
As a result, some analysts believe that Uniswap v3 could experience increased use of liquidity providers and retail users due to improved functionality. But what has changed and is it ready to replace the previous version?
Uniswap v3 is back
The nature of software development means that applications and platforms are constantly improving, and Uniswap is no exception. The first version of the thriving DeFi AMM was released back in 2018 and three years later it gained thousands of users and a transaction volume worth hundreds of millions of dollars.
Due to the nascent state of the DeFi ecosystem, changes are coming quickly and rapidly, and developers are constantly striving to improve existing protocols and offer new products and services on their platforms.
Uniswap v2 was launched in May 2020 and introduced direct token exchanges and other features that improved the overall performance of the AMM. Since then, Uniswap has brokered a trading volume of around $ 135 billion and established itself as one of the world’s largest cryptocurrency spot exchanges.
While the platform continued to make a significant contribution to the popularity and use of DeFi, developers began working behind the scenes at Uniswap v3 and introduced improved controls for liquidity providers on the platform and several levels of fees.
Is V3 a success?
The launch of Uniswap v3 in May was marked a success with trading volume on the platform Collect a few glaring numbers despite a lower total lock value (TVL) compared to Uniswap v2.
Johannes Jensen, Product and Project Manager at eToro, told Cointelegraph that improving the key issues in the Constant Function Market Makers (CFMM) designs is a key factor in the immediate success of Uniswap v3:
“The primary contribution is the ability of liquidity providers (LPs) to offer tied liquidity in a certain price range. Thanks to the own liquidity function, trading fees are collected and held separately, not automatically reinvested as liquidity into the fund. An interesting consequence of limited liquidity positions is that the systemic consequences of LP shares are inherently mitigated. “
Jensen noted that the Uniswap v2 model essentially provided liquidity providers with a proportionate ownership of the liquidity fund, which created a complex payout function due to volatile losses, making the function more like an option contract than a direct claim on the underlying asset.
Elias Simos, a protocol specialist at Bison Trails, believes that the early success of Uniswap v3 and its innovation will continue to attract capital from liquidity providers due to its higher efficiency:
“With Uniswap V3, we see the emergence of capital-efficient DeFi.” For information, Uniswap V3 since its launch in early May has ended up printing something like 120% of TVL vs. VHF utilization. trading sushi at 20%. “
Aniket Jindal, Biconomy’s co-founder of Transaction Infrastructure, highlighted the fact that despite high fees, Uniswap v3 attracted new users, suggesting that the improvements of the latest version of AMM have been positively met: “What’s even more surprising is gas prices have risen to insane levels, with layer 2 DEX becoming more popular. “
Liquidity providers are chasing better returns
The cryptocurrency ecosystem has become accustomed to things moving at dizzying speeds, and the prospect of greater and better returns could be a catalyst to lead more liquidity providers to Uniswap v3.
Simos believes that the inherent complexity of the v3 migration will be a short-term barrier to entry, but the result, better yields, and new products will lead to the latest AMM upgrade:
“Yes, concentrated liquidity brings new challenges, perhaps even greater overhead for LPs, but firstly there is a better return and secondly, there will soon be a product ecosystem around the Uniswap V3 LP positions, which will remove some of the complexity.”
Although Jindal agreed with Simos that v3 could continue to attract liquidity providers, there are some factors that could create some friction in the migration of v2 users who will need to re-approve their tokens for v3 as well as for “liquidity providers who they now need to choose a “price range” that can be complicated for many. “
Jensen believes that the increased capital efficiency of the Uniswap v3 model will continue to attract new providers and liquidity traders: “The ability to provide limited liquidity for the desired price range becomes an interesting tool in volatile markets as LPs can use this model to value inventory risk less known or volatile assets. “
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 funds. He added that some may not necessarily want to deal with the additional demand for managing their risks:
“Maintaining a steady income during volatile markets with Uniswap V3 will require the active efforts of LP, as it will have to adjust its price range accordingly. Passive LPs can definitely opt for lower capital efficiency to reduce the chances of suffering volatile losses in highly volatile markets. “
DeFi drives the return
The year 2021 proved to be another monumental year for the cryptocurrency space, when significant steps took place across the ecosystem. DeFi has become a major focal point, and the latest market correction has added credibility to the influence and role of DeFi.
However, Simos highlighted the fact that DeFi has seen fruitful growth since the beginning of 2020 and that important data show that: “DeFi has been printing positive signals for more than 1.5 years right now. The growth of the bases (TVL, volumes, users) is still on the trajectory of the stick. […] Will there be short-term volatility? Certainly. But the basics remain. “
Jensen pointed to the role that DeFi and AMM play in allocating capital from liquidity providers and their general use by everyday cryptocurrency users, to the point that “they are increasingly becoming an integral part of how capital is allocated in the cryptocurrency today.”
He also highlighted the yin-yang relationship between DeFi and Ethereum, the latter still being the intelligent contract blockchain of choice for the space. This inevitably led to problems with high fees, but Jensen believes that v3 could help alleviate some of these painful points, while Ethereum continues its development toward future proof of share:
“Uniswap V3 can attract a more sophisticated LP group, which will create new features for algorithmic price range adjustments based on market volatility or even sentimental data.”