Everything you need to know about Uniswap V3

Updated on 31 August, 2022 2:44 PM
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    Recently there has been a race to overthrow centralised institutions and Uniswap, one of the most popular DEXs globally has emerged as a a front-runner in this race. A new version of this well-known DEX, Uniswap v3, was released by the Uniswap team after it reached one of the greatest TVLs among all DeFi projects.

    Uniswap, the Biggest Decentralised Exchange

    On Ethereum, the Uniswap protocol is used to swap ERC20 tokens. Uniswap was created as a tool for the community to trade tokens without platform fees or middlemen, in contrast to most exchanges which are structured to take fees.

    Another distinction between Uniswap and most exchanges is that it performs the same functions using pools of tokens and ETH instead of matching buyers and sellers to set prices and complete trades.

    What is Uniswap V3?

    Uniswap V3 is the new and improved DEX that runs on the Ethereum blockchain and be powered by the same automated market maker (AMM) model as V2 but loaded with new developments aimed at maximising returns for traders and liquidity providers, minimising price slippage, and managing downside risks.

    Why was Uniswap V3 launched?

    Because of the harsh criticism, it has received for allegedly decelerating the Ethereum network and driving up transaction gas costs, Uniswap has become a victim of its own popularity. Constant copying of their tactics by competitors prompted them to launch something new.

    The effectiveness of the Uniswap V3 AMM model is improved, making it one of the most important characteristics to consider when contrasting DEXs. Liquidity providers now have the flexibility to supply their assets in a specific price range for which they deposit liquidity thanks to the advent of the concentrated liquidity concept(implemented by Uniswap V3.

    Additionally, they have distributed tier-based payments according to the level of risk they are taking in each pool. By combining these elements, the AMM model that underpins the Uniswap v3 DEX was made more effective, which will also benefit traders by supplying more liquidity.

    New features brought in by Uniswap V3

    Some of the new features seen in the Uniswap V3 are –

    Capital Efficiency

    This is one of the key new features where its maximum capital efficiency will be 4000 times greater than that of V2. For liquidity providers, the concentration of liquidity(brought in by Uniswap V3 ) delivers significantly superior capital efficiency. It is also brought by better Security and more capital decentralisation provided by Uniswap V3.

    Concentrated Liquidity

    This is the principal idea behind Uniswap V3. Prior to V3, the only method for allowing LPs to have unique price curves was to designate a unique pool for each curve. If trade had to be conducted across many pools, these pools, if not aggregated together, resulted in excessive gas prices. V3 develops unique price curves for every one of the liquidity sources in order to solve this problem.

    Active Liquidity

    Additionally, the idea of active liquidity is introduced in V3. The LP's liquidity is completely eliminated from the pool and ceases to be eligible for fees if the price of an asset trading in a particular liquidity pool falls outside of the LP's price range. The LP ends up holding just one asset as a result of the total shift in liquidity towards that asset.

    Flexible Fees

    LPs can choose between three different price tiers per pair, at 0.05%, 0.30%, and 1.00%, with Uniswap v3. This variety of choices guarantees that LPs can adjust their margins in accordance with anticipated pair volatility: In contrast, LPs take on little risk in correlated combinations like USDC/DAI while taking on higher risk in non-correlated ones like ETH/DAI.

    Range Limit Orders

    This enables LPs to offer a single token as liquidity at a specified price range above or below the prevailing market rate. One asset is exchanged for the other across a smooth curve as the market price moves into the predetermined range, all the while generating swap fees. This is also the result of concentrated liquidity.

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