Cryptocurrency News

As Uniswap v3 takes charge, DeFi undercuts crypto market reforms



The decentralized exchange Uniswap successfully launched version 3 of its platform in May – resulting in higher trading volumes despite a slowdown in cryptocurrency markets.

The latest version of the hugely popular Decentralized Finance (DFI) Automated Markets Producer (AMM) has quickly attracted large amounts of trading volume, moving it to the top five decentralized exchanges with SushiWap, Pancake Swap v2 and its predecessor, Uniswap v2 Is done.

The success of v3 cannot be underestimated, as the cryptocurrency space has been under pressure due to the market correction in May, which has overshadowed the most prevalent bull run in the region.

Uniswap v3 is now the leading dex in terms of trading volume, Recording An average of $ 1.2 billion in daily transaction volume, while Uniswap v2, leading until very recently, currently processes just under $ 1 billion in 24-hour transaction value.

In addition, following last week’s turmoil correction, several partner Defy tokens led a rally in the market, which has since been dubbed the largest surrender in the cryptocurrency markets. However, the overall market saw a downward trend $ 400 billion increase in value With Maker, as many altcoins increase, shortly after MKR The token saw an increase of 91% and Yearn.finance’s YFI by 72%. Uniswap Exchange’s original tokens, UNI and AAVE, also saw significant increases in value.

As a result, some analysts believe that Uniswap v3 could see an increase in usage by liquidity providers and retail users given its improved functionality. But what changed, and is it ready to replace the previous version?

Uniswap v3 revisited

The nature of software development means that applications and platforms are in a state of continuous improvement, and Uniswap is no exception. The first edition of the rapidly growing Defy AMM was released Returned in 2018 and has garnered thousands of users and hundreds of million dollar transaction volume over three years.

Given the emerging state of the Defy ecosystem, changes come faster and faster, and developers continually seek to improve existing protocols and offer new products and services on their platforms.

Uniswap v2 was Launched in May 2020 And introduced direct token swaps and other features that improved the overall performance of AMM. Since that year, Uniswap has facilitated trading volumes of approximately $ 135 billion and has established itself as one of the largest cryptocurrency spot exchanges worldwide.

While the platform continued to contribute significantly to the popularity and use of DIFI, developers began working on Uniswap v3 from behind the scenes, introducing better controls and multiple fee levels for liquidity providers on the platform.

Is V3 a success?

The launch of Uniswap v3 in May has been announced as a success with trading volumes on the platform Racking up some eye-catching numbers Uniswap v2. Despite its lower total price lock (TVL).

Johannes Jensen, product and project manager at eToro, told Cointegraf that improvements in key issues that exist in the design of continuous work market makers (CFMMs) have been a key driver in the immediate success of Uniswap v3:

“The primary contribution is the ability for liquidity providers (LPs) to provide limited liquidity in a fixed price range. With the custom liquidity provision feature, instead of automatically reinvesting as liquidity in the pool, trading fees are collected and collected separately. Is held. An interesting consequence of limited liquidity conditions is that the systemic effects of LP shares naturally decrease. “

Jensen noted that Uniswap’s v2 model essentially gave liquidity providers proportional ownership of a liquidity pool, which created a complex payout function due to temporary losses, making the facility more similar to an option contract than a direct claim on the underlying asset. happened.

Protocol expert Ilias Simos of Bison Trails believes that the early success of Uniswap v3 and its innovation will continue to attract capital from liquidity providers because of its superior efficiency:

“With Uniswap V3, we are seeing the rise of capital-efficient DeFi. For reference, since its launch in early May, Uniswap V3 has finished printing at 120% TVL usage vs. Sushi Trading at 20% .

Aniket Jindal, co-founder of transaction infrastructure firm Beaconomy, highlighted the fact that despite the high fees, Uniswap v3 has attracted new users, suggesting that the improvements brought by the latest version of AMM have met positively: “Even more surprising, even after gas prices have gone to insane levels, Layer 2DEX has become more popular.”

Liquidity providers chase better returns

The cryptocurrency ecosystem has become accustomed to things running at breakneck speeds, and the potential for larger, better returns may well exceed liquidity providers Uniswap v3.

Simos believes that the inherent complexities of moving to v3 will be a short-term barrier to entry, but the bottom line, improved yields and new products will drive the migration to the latest version of AMM:

“Yes, concentrated liquidity offers new challenges, perhaps even more overhead for LP, but first the yield is better, and secondly, there will soon be an ecosystem of products around the Uniswap V3 LP posts that will have some complications. Will overcome. “

While Jindal agreed with Simos’ feelings that v3 could continue to attract liquidity providers, there are some factors that could cause some friction in the migration of users from v2, who would have to re-authenticate their tokens for v3 and “For liquidity providers who now need to select a ‘price range’ that can be complicated for many people to understand.”

Jensen believes that the increased capital efficiency of the Uniswap v3 model will continue to attract new liquidity providers and traders: “The ability to provide liquidity bound to a desired price-range makes it an interesting tool in volatile markets, Because LP models can be used to price. Inventory risk of holding little-known or volatile assets. “

related: Uniswap v3 hopes to recreate its DEX, others see a different route to DeFi

As a result, Jensen suggested that liquidity providers using specialized CFMMs such as Curve could move to Uniswap v3, depending on the relative depth of the stable currency pairs and trading activity in the competitive pool. He also said that he does not necessarily want to deal with the additional demand of managing his risk:

“To maintain a consistent income with Uniswap V3 during volatile markets will require active effort from LPs, as they will need to adjust their price range accordingly. Certainly passive LPs may opt for lower capital efficiency to reduce the possibility of temporary losses in highly volatile markets.

Defy gives a comeback power

2021 has proved to be another important year for the cryptocurrency space, with major steps taking place across the ecosystem. DeFi has become a major focal point, and the most recent market reform has increased credibility in the impact and role of DeFi.

Nevertheless, Simos highlighted the fact that DeFi has seen tremendous growth since the beginning of 2020 and this significant data shows that: “DeFi has been printing positive signals for more than 1.5 years right now. Fundamental (TVL, Vol, Users) growth remains on the way to the hockey stick. […] Will there be short term volatility? sure. But the basics remain. “

Jensen pointed to the role that Daffy and AMM are playing in the allocation of capital from liquidity providers and their common use by everyday cryptocurrency users, so that they “have become an intrinsic part of allocating capital to crypto today.”

He also highlighted the yin-yang relationship of Defy and Ethereum, the latter still being the smart contract blockchain of choice for space. This has inevitably led to problems around higher fees, but Jensen believes v3 can help reduce some of these pain points, while Ethereum is a proof-of-stake future. Continues its development towards:

“Uniswap V3 may attract a more sophisticated breed of LP that will create new features to algorithmically adjust price-ranges based on market volatility or even sentiment data.”