Less than a year since its V2 launch, Uniswap announced the launch of V3 on Twitter, saying,
- “Today we are thrilled to present a detailed overview of Uniswap v3, the most flexible and capital efficient AMM ever designed! Mainnet launch is scheduled for May 5, with a scalable Optimism L2 deployment set to follow soon after.“
Uniswap serves as a critical infrastructure provider for decentralized finance, empowering developers, traders, and liquidity providers (LPs). The announcement was received with enthusiasm and humor, as seen in a tweet by Simon Dedic, Managing Partner of Moonrock Capital, saying,
- “Good Morning to all except the people who are bearish despite the upcoming Uniswap V3 launch.”
What’s New In Uniswap V3?
Uniswap Labs is targeting an L1 Ethereum mainnet launch on May 5th, with an L2 deployment on Optimism set to follow shortly. V3 brings in concentrated liquidity, providing individual LPs greater control over their capital’s allocated price ranges. The team tweeted about this, saying,
- “Uniswap v3’s groundbreaking new feature is Concentrated Liquidity positions. Rather than being required to allocate capital across the entire price spectrum from 0 to infinity, each LP is given full control over what price ranges they wish to provide liquidity to.”
Individual positions will be aggregated under a single pool forming a combined curve for users to trade against. Along with this, Uniswap V3 provides multiple fee tiers, i.e., 5bps, 30bps, or 100bps. This enables liquidity to be compensated based on the varying degrees of risks they take. Integration of Uniswap’s oracles will be easier and cheaper in V3.
V3 is licensed under Business Source License 1.1, giving the project more power to protect commercial ventures from copying it. This license will not affect integrations with wallets or mobile apps that plug into the platform.
How Do The New Features Help?
The two new features help make Uniswap V3 a flexible and efficient automated market maker (AMM). LPs can earn higher returns on their capital as they can provide up to 4000x capital efficiency relative to Uniswap V2.
V3’s capital efficiency makes way for low-slippage trade execution that can surpass both centralized exchanges and stablecoin-focused AMMs. LPs can also increase their exposure to preferred assets significantly and reduce their downside risk.
They can also add liquidity to a price range entirely above or below the market price by selling one asset for another. This will approximate a fee-earning limit order that will execute along a smooth curve.
V3 makes the job of an LP more capital efficient. The gas cost of V3 swaps on Ethereum mainnet is slightly cheaper than V2, and transactions made on the Optimism deployment will likely be more affordable.
Certain Drawbacks Of V3
LP tokens will not be interchangeable with one another as liquidity positions are no longer fungible and represented as ERC20 tokens in the core protocol. NFTs will represent them, but commonly shared positions can be turned into a fungible ERC20 token using peripheral contracts or other partner protocols.
Trading fees will not be automatically reinvested back into the pool on the LP’s behalf, neither will they be continuously reinvested into the pool. The open-source nature also offers a drawback as anyone can take the code and build their versions, as seen with Sushiswap.