For a DeFi protocol, Uniswap v2 has gained a huge amount of popularity in the year 2020. This decentralized exchange has proved to be the eye of the current financial revolution. In terms of volume, Uniswap has matched and then outperformed a lot of major trading platforms. Uniswap has made countless tries to reach the heights of success as it is today. Its third iteration, Uniswap v3 was launched on May 5th. This new model of Uniswap combines limit order books that are used by all the traditional exchange platforms with AMM (automated market maker) formula. This new proposed design for the new model has brought both capital efficiency and more flexibility when it provides liquidity.
But, in the exchange of this, all the LPs (Liquidity providers) should have an active role in the protocol. Uniswap v2 model allows the users to provide liquidity for the whole range of a trading pair. However, the newest iteration, Uniswap v3, has a feature known as concentrated liquidity. This limits the liquidity to a specific section of the price spectrum.
This is why there is a constant need for users to compete in the market if they want profits. After its implementation, this new decentralized exchange saw a change in its number of users where around 9500 liquidity providers migrated to the new iteration. But this metric dropped as soon as the hype was all over. With the new model unveiled, now only a few LPs can participate in the race to provide useful liquidity. They all can use the new protocol’s capital efficiency. In Uniswap v2, the liquidity provided some trading pairs which were completely unused such as the stablecoin trading pairs. Furthermore, the third iteration allows a user to customize the price range to which they wish to provide liquidity. They are most likely going to put it in a pretty useful range. This means that 100% of their capital will be earning fees in that range.
Uniswap’s Dominance In The DeFi Sector
Uniswap v3, the latest iteration is asking for more from LPs. This is why it is providing them with tools such as future integration with L2 scaling solution, optimistic rollup, more interoperability with other protocols, several passive and active strategies, and more. The latest data from researches suggest that this new iteration has been successful in attracting liquidity for the trading pairs who have a large interest. In terms of trade volume, Uniswap v3 took over the market share for UNI/ETH, USDC/ETH, wBTC/ETH, etc in just two weeks of its launch. However, trading pairs who have less interest and liquidity such as the FEI/ETH have better trade volume in the second iteration.
Uniswap v3 has greater efficiency. So, it can provide better trades for trading pairs between a token and a stable coin. There is a prediction that all these pairs will dominate the current financial system and will play a bigger role in future exchanges. Now, some more data indicates the fact that in just a couple of weeks Uniswap v3 accounted for around 80% of the 2nd iteration trade and it is 10% above in liquidity terms. Even after such a difficult launch, Uniswap is progressing at a rapid rate. The liquidity providers, market makers, and even users are experimenting continuously and getting familiar with all its features and capabilities. Migration is occurring at a slow speed.
This new protocol is developing and still maturing and soon it will integrate more features. Furthermore, it is planning to operate with even more pieces of Ethereum. This is just so that more users can participate in it.
Regarding the future of this new iteration, Cermak says, “Eventually, it will happen (…) What’s also important to remember is that Uniswap is pushing relatively hard for people to migrate. If you go to Uniswap right now, it automatically routes you through v3 unless you want to switch to v2.”
Critical research such as the one conducted on Uniswap v3 is going on to grasp the actual reach of the ecosystem that is built on Ethereum, its capabilities, limitations, opportunities, and potential to support a whole new global financial system.