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Introduction to UniSwap V3

12 May 2021 | ZebPay Trade-Desk

Uniswap operates as a decentralized automated liquidity pool and is an on-chain system of smart contracts built on the Ethereum blockchain. It is a governance protocol, accessible to all, and built with the purpose to allow anyone with an Ethereum wallet to exchange tokens with reduced costs and ease, without any interference of any central authority. A few months back, the Uniswap protocol had undergone an upgrade, referred to as Uniswap v2. This upgrade has made room for some key attributes and improvements in the protocol. Namely, Uniswap v2 allows the liquidity providers to create pair contracts for any two ERC-20s, whereas earlier the protocol required ETH to be a fixed asset among other ERC20 tokens. You can read more about the V2 upgrade in our previous report.

Earlier this month, UniSwap saw the launch of its largest upgrade, now called UniSwap V3. Uniswap V3 features the following attributes, which make it a rather significant upgrade. Namely, it will provide concentrated liquidity, better capital efficiency, active liquidity, range orders capabilities, non-fungible liquidity, flexible fees, and a license to operate its open-source code. UNI will remain the native token of the Uniswap protocol, and holders will continue to have governance rights and can vote on the development of the protocol. 

Uniswap (UNI) Summary (at the time of writing):

Market Capitalization$21,332,985,755.44
Current Price$40.97
24 HR Volume $927,405,845.40
All Time High/Low$44.97 / $0.4190
Script in Circulation 523,384,244 UNI
Total Supply 1,000,000,000 UNI
Total Locked Value $9,105,709,558

Let’s now have a look at what the upgrade to V3 brings to the table for UniSwap and its users. 

  • Concentrated Liquidity: LPs will now be able to concentrate their capital within custom price ranges, hence providing better liquidity at desired prices. This in turn would enable LPs to construct individualized price curves that reflect their own preferences. 
  • Capital Efficiency: This is likely to increase rewards for LPs by close to 4000x on Uniswap V3. This is a function of the ability to provide concentrated liquidity. Rather than providing equal amounts of liquidity depth as v2 LPs with less capital, v3 LPs may provide greater depth with the same amount of capital as their v2 counterparts. 
  • Active Liquidity: If market prices fall out of an LP’s predefined price range, their liquidity is automatically removed from the pool and they no longer earn fees. This means the LP’s liquidity will consist entirely of the less valuable of the two assets until the market price moves back into the LP’s price range or the LP’s decides to update their range as per current prices.
  • Range Orders: V3’s LP customizability introduces a new order feature along with market orders, called ’range orders’. LPs may deposit one single token in a custom price range above or below the CMP. In case the market price falls into their specified range, they may sell one asset for another along a smooth curve and earn swap fees in the process.
  • Flexible Fees: Uniswap v3 offers LPs three separate fee tiers per pair — 0.05%, 0.30%, and 1.00%. This array of options ensures that LPs tailor their margins according to expected pair volatility, providing better flexibility and security.

These features coupled together can significantly reduce impermanent loss, which is one of the main aims of this upgrade. Along with these features, UniSwap V3 will also see the advent of advanced oracles and the license to operate its open-source code. Uniswap V3’s code, while still open source for anyone to view,  will require a license to use it in a commercial or production setting. The introduction of advanced oracles, which further strengthens the technical architecture of the protocol, is likely to reduce the gas cost to Uniswap traders for keeping oracles updated by ~50% compared to v2.

Investment Analysis:

Since its launch in late 2020 UNI has traded in a wide range, after opening at $ 3.44, the price it trades at now is $ 40.97 appreciating more than 12x over just a year from its launch.  The lowest price it has witnessed is $ 0.42, which was below its ICO price. Since its launch, the token has seen two upgrades.

Uniswap remains one of the largest players in the DeFi space, and the efforts the community is taking with upgrading the protocol to make it more usable and widespread have resulted in significant traction and interest among crypto enthusiasts and investors. As the DeFi space is booming, and DApps are gaining momentum, Uniswapn is likely to be a key beneficiary. With the V3 upgrade, much will positively contribute to its growth, thanks to its prudent governance mechanisms, coupled with its ability to engage effectively with liquidity providers. 

UniSwap (UNI)2021-Jan2021-Feb2021-Mar2021-Apr2021-May
Month End Close ($)$17.67$22.19$27.99$40.70$40.97
MoM Returns-%25.58%26.14%45.41%0.66%
Locked USD Value ($,bn)$1.77$3.08$3.94$4.55$6.22
MoM Growth-%74.01%27.92%15.48%36.70%

Since we have covered UniSwap in our previous reports, the table above shows how the asset has performed this year, on an MoM basis, as much of the anticipated traction seen in the asset has come in 2021, thanks to the upgrade and as well as the growth seen in the DeFi space. The table clearly reflects that sentiment. MoM prices have shown positive growth, especially through the months of March-May. This is due to the news of the launch of the V3 mainnet upgrade which took place a few weeks back. The confidence in the asset seems to be skyrocketing as well, as more liquidity is being pumped into the pull, as market participants seem to be rising. This is reflected in the phenomenal increase in the locked USD value, which has more than doubled in the past 3 months. 

On a concluding note, Uniswap is still a fairly nascent asset and is still very much in its early stages of growth, but has been showing a lot of promise with its recent upgrades, as well as the interest it has garnered for itself in the crypto and DeFi community. Hence, UNI makes for an interesting offering in the DeFi space and remains an asset to look out for in the future.

References:

https://Uniswap.org/

https://coinmarketcap.com/

Disclaimer: This report is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation, or needs of any investor. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. The Company has prepared this report based on information available to it, including information derived from public sources that have not been independently verified. No representation or warranty, express or implied, is provided in relation to the fairness, accuracy, correctness, completeness, or reliability of the information, opinions, or conclusions expressed herein. This report is preliminary and subject to change; the Company undertakes no obligation to update or revise the reports to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. Trading & Investments in cryptocurrencies viz. Bitcoin, Bitcoin Cash, Ethereum, etc. are very speculative and are subject to market risks. The analysis by Author is for informational purposes only and should not be treated as investment advice.

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