Another view of Uniswap V3
The underlying logic of UniV3’s dominant DEX trading volume, and the fatal shortcomings that will lead to its disruption
Uniswap V3 was deployed to the Ethernet mainnet on May 5, 2021, and as of today (September 25, 2021) its total locked value (TVL) reached $2.4 billion, with a 24-hour transaction volume of $1.10 billion and around 70,000 active users. Although it is not as good as V2’s $4.15 billion in TVL, considering that V2’s 24-hour transaction volume is only $310 million, and based on a comparison of the transaction volume/total lockup ratio, it can be said that Uniswap V3 brings a tremendous capital efficiency improvement.
One of the main reasons behind its rapidly growing trading volume is Uniswap V3’s innovation of concentrated liquidity, where users define price ranges to provide liquidity. Liquidity providers tend to set price ranges within the expected range of price fluctuations of the underlying asset in order to obtain more transaction fees, and can adjust the LP price range at any time in accordance with market changes, which has achieved the effect of concentrated liquidity compared to Uni V2.
Another innovation is that V3 is designed with a multi-fee level trading pool function. Users can choose three trading pools with 0.05%, 0.3% and 1% trading fees to trade or provide liquidity. Compared with the fixed 0.3% fee of Uni V2, it adds another dimension of flexibility. This in turn creates a game of fluctuation between the two players — traders and liquidity providers in this dimension, which theoretically further increases the overall capital efficiency.
Furthermore, on September 17, Uniswap Labs released an optimized new feature, Auto Router, utilizing algorithmic code that can be executed automatically when users use Uniswap V3, by splitting trades across asset pools, taking into account the cost of operating Gas and automatically comparing Uni V2 transaction costs to match traders with better trading prices.
Uniswap V3’s innovative product design and continuous feature optimization provides traders with a low slippage trading process and liquidity providers with greater capital efficiency, allowing them to adjust the LP price range at any time to reduce impermanent losses while receiving a higher fee return. This is why Uniswap V3 is now firmly at the top of the DEX (Decentralized Exchange). Even the trading volume of V3 stablecoin pairs has surpassed Curve due to the ability to set LP price ranges to centralize liquidity, which is enough to reflect the impact of the multi-dimensional flexibility brought by the Uniswap V3’s innovation on other DEXs.
But with all the advantages of Uniswap V3, there are still many shortcomings that limit the amount of water that can be stored in this “barrel”. The most important point for the entire DeFi ecosystem is that Uniswap V3 currently supports only Ethereum and two Layer 2 networks, Optimism and Arbitrum. Compared to the multi-chain supporting strategy of other DeFi projects, especially its most direct competitor — Sushiswap, which supports Polygon, Avalanche, Fantom and several other EVM compatible blockchains , Uniswap V3 is still greatly lacking in this direction, which leads to the fact that DeFi users of other public chains have no way to directly enjoy the high capital efficiency brought by Uniswap V3, which largely hinders the growth rate of Uniswap V3 users.
More importantly, Uniswap V3’s unique non-fungible LP token design interrupts the liquidity mining model that was based on the Uniswap V2 LP token and flourished. In the original Uniswap V2 ecosystem, liquidity providers could stake LP tokens in the project’s pool for additional liquidity incentive rewards after providing liquidity to token trading pairs, which was the best means for the project team to secure initial liquidity for project tokens when many new projects were launched and for pegged crypto assets, including wrapped tokens, synthetic tokens and token-backed notes.
For the pegged crypto assets, this is the sector where Curve is currently dominant with TVL of over $13 Billion. This aspect of the market also accounts for a large share of the DeFi industry, and many project’s stability is relying on it. For Example, When users deposit ETH in some staking platforms, like Lido, to seek staking rewards, they will get corresponding token-backed notes, like Lido’s ETH staking note is stETH. Although stETH is backed by the locked ETH asset, if sufficient liquidity is not provided between stETH and ETH, resulting in a serious price disconnect between stETH and ETH or difficulty in exchange, this will ultimately discourage users from choosing Lido as their staking platform. Therefore, the liquidity is crucial for DeFi projects, which is why those projects need to maintain the stable pool on Curve and are willing to provide high APY incentive to liquidity providers who stake their LP tokens.
Even for many V2 liquidity providers, the main income they receive is the additional LP staking incentive provided by the project team, rather than the fee income provided by Uniswap. So the disruption of this model greatly reduces the incentive for ordinary DeFi users to proactively provide liquidity for some emerging assets, and adds a significant impediment for project teams to ensure proper circulation of tokens.
Based on years of blockchain cultivation, izumi team keenly saw the huge development prospection of Uniswap V3 ecology, closely followed the development of the project from the beginning of V3 launch and conducted related in-depth research. [On Liquidity Mining for Uniswap v3], and firstly come up with the best set of solutions for optimizing Uniswap V3 products.
In order to make up for the several fatal shortcomings of Uniswap V3, Izumi team first proposed and implemented a liquidity mining scheme based on Uniswap V3 NFT LP token. Unlike the traditional V2 fungible LP tokens that are directly staked for mining, when designing the V3 liquidity mining incentive plan, the project owner can clearly set the value range of the incentivized LP token, and after the user stake the V3 LP token to the izumi platform, izumi’s smart contract will automatically determine the value range of the LP token whether within the liquidity incentive value range set by the project owner. If it is within this range, the smart contract will issue the mining token reward for the liquidity provider based on the incentive program, and if it is not within this range, there will be no token reward for LP staking. In this situation, the three dimensions — the trader’s influence on the token price, the value range set by the liquidity provider, and the target value range for the project’s additional incentive — create a more complex game of fluctuation, bringing additional convenience and revenue to all three parties. This will further enhance the capital efficiency of Uniswap V3, resulting in a win-win situation for all four parties.
In addition to innovative product design, the izumi team has also devoted in the development of cross-chain functionality for Uniswap V3, and will integrate the C-AMM cross-chain bridge function on the izumi platform. The C-AMM bridge will provide cross-chain transaction services of concentrated AMMs for DeFi users outside the Ethereum ecosystem, including Polygon and BSC which are currently under development. The team also plans to Integrate more Ethernet VM compatible public chains, in order to provide a channel for multi-chain users to enjoy the high capital efficiency of Uniswap V3.