Increased Demand Following Uniswap v3 Migration
The Migration to Uniswap v3
Uniswap rolled out its v3 upgrade on May 5th, 2021, drawing significant attention from blockchain enthusiasts, liquidity providers (LPs), liquidity miners (LMs), financial investors, and anyone else interested in decentralized finance (DeFi), new or old. Uniswap v2 had already been dominating trading volume among DEXs (decentralized exchanges), peaking at a one-day total of over US$1.5 billion the week before v3 launched.
Less than two weeks after v3 launched, it surpassed v2’s trading volume, with just about an even split between the two versions at over US$2.3 billion each on May 18th, 2021. Yes, you read that right; just earlier that month, v2 peaked at US$1.5 billion from its launch a year prior, so we are talking 3x growth in less than three weeks. While this certainly was an extraordinarily high one-day spike, it still demonstrates the colossal demand within DeFi.
The migration to v3 marched on, coupled with brand new LPs and LMs entering the market as word spread. On July 7th, Uniswap v3 on Optimism launched, trading almost US$500 million in volume on its first day. Today that number is about US$2 billion. Let’s look at the most current split between the three versions; in early August, v2 traded at US$344 million, v3 (Ethereum) traded at US$1.8 billion, and v3 (Optimism) traded at $14.5 million. Trading on Uniswap v3 is now 5x that of v2.
While the idea behind DeFi applications such as automated market makers (AMMs), for example, presents innovative revenue opportunities for LPs, we are still in a stage of infancy within this space, especially compared to traditional financial tools. One of the most apparent opportunities presented in Uniswap v2 was that liquidity provided outside the typical price range of a stablecoin, for example, was rarely touched. Uniform distribution allowed trading across the entire price interval, from 0 to infinity, without any loss of liquidity. However, in many pools, the majority of the liquidity was never used.
While the example of a stablecoin may be on one end of the extremes, it helps illustrate this inefficiency. In the（USDC/USDT）pair, more than half of the total available capital for trading falls within a two-cent price range; this is the area on the curve LPs earn the most fees.
Concentrated liquidity became the defining idea of the new version, where Uniswap set out to improve this inefficiency. Using the previous (USDC/USDT） example, LPs could choose to allocate capital only within that two-cent price range (US$0.99–1.01), resulting in deeper liquidity at this middle price range and increasing their overall trading fees. Their position for that pair is chosen based on their preferred level of risk. In the case of highly volatile tokens, the range would need to be massive to match the same level of risk, which in some instances, theoretically, would be nearly impossible.
Opportunities within v3
Uniswap v3 is groundbreaking and opens a world of possibilities for DeFi investors and LPs. However, it does not come without limitations. One of the most significant barriers is related to accessibility. Uniswap took a small but vital step in this direction when they launched v3 on Optimism in early July. However, numerous other blockchains are still unable to readily access these benefits without utilizing external exchanges before entering, which would be slow and costly.
This is where Izumi Finance steps in, drastically improving accessibility for multi-chain users with their cross-chain bridge. Users can use Izumi’s cross-chain automated market maker (C-AMM bridge) to transfer from the target chain of their choice. The first chains Izumi will launch on are Ethereum, Binance Smart Chain, Polygon, and other chains compatible with Ethereum Virtual Machine. Later, other chains such as Solana and Cardano, for example, will be added.
Expanding concentrated liquidity to multi-chain users is just one of the modules the project involves. Check out any of the below links to read more about this exciting project.
Izumi Finance is the first protocol to support Uniswap v3 liquidity mining and concentrated liquidity for multi-chain users with NFT incentive distribution.
Litepaper & Research: https://docs.izumi.finance/