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Taking a Closer Look at Uniswap V3

Uniswap Labs launched its first version of Uniswap in November 2018 as a proof of concept for automated market makers (AMM), which is an exchange where users can pool assets into shared market making strategies.

Currently, Uniswap helps empower token issuers, traders, and liquidity providers (LPs) to take part in a secure and robust financial marketplace. 

Decentralized crypto exchanges have been battling their centralized exchange counterparts for trading volume dominance. One of the achilles’ heels of DEX is the uniform spread of liquidity from LPs. This has resulted in an inefficient allocation of capital which brings down the APR. Uniswap aims to address this through its v3 release slated for next month.

On March 23, 2021, Uniswap Labs revealed the details regarding Uniswap V3, bringing in a couple of new features.

According to Uniswap V3’s overview, the new features are:

  • Concentrated liquidity: Liquidity providers (LP) are given more control over the price range of their capital. This enables LPs to create individualized price curves for users to trade against, which leads to higher capital efficiency. They can earn the same amount of fee with only a fraction of the underlying capital.
  • Multiple fee tiers: LPs can be compensated based on the level of risk taken on. LPs will be offered three separate fee tiers  per pair: 0.05%, 0.30%, and 1%. The more volatile the assets are, the more fees that they get to earn. Previously, only a 0.03% fee was available; it works for most tokens, but not so for other tokens.

The reactions that V3 has garnered have been mixed. Most are feeling uncertain about how V3 would bring changes to the dynamics between active and passive LPs.

V3 is designed in an attempt to mitigate the tradeoffs of AMM and to get both pro market makers and lazy LPs to play under the same set of rules. The issue of distribution inequality among the LPs, both active and passive, could be resolved by mixing the order between the parties equally.

While Uniswap in its 3rd version still has plenty of room for improvement, its design is nevertheless ambitious and is taking the DEX meta to another level in innovation.

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