Uniswap v3 hopes to reinvent its DEX, others see a different path for DeFi

Uniswap’s decentralized exchange and its governance token, UNI, have defied expectations in recent months, with the world’s largest DEX recently registering cumulative transaction totals that crossed the $ 10 billion threshold. In addition, it is estimated that Uniswap’s 24-hour trading volume is currently somewhere around $ 2.3 billion.

Hayden Adams, CEO of Uniswap tweeting about the milestone recently and even released an accompanying chart showing a 25.7% weekly increase in Uniswap’s weekly trading volumes. It’s worth noting that if the platform can maintain its current inflow / outflow pace, it could handle a whopping $ 500 billion in transactions over the next 12 months.

Uniswap’s increasing popularity seems to stem from the fact that it is investors who want to float quite easily in various decentralized financing projects and other obscure cryptocurrencies, which may not be available through popular centralized exchanges such as Binance or Coinbase.

As a result, Uniswap’s native token offering is also on the receiving end of some serious monetary traction. For example, since the beginning of the year, the value of the token has risen from $ 5 to around $ 40, showing an 8x increase in just four months.

Even the DeFi market appears to be performing well right now, with data showing that about $ 67 billion is currently locked in various DeFi platforms. This number was even higher a week ago. Due to the recent market-wide correction – with about $ 300 billion in cumulative crypto value being wiped off the market almost overnight – the figure has been scaled back again.

Will Uniswap v3 become a game changer?

According to an April 21 release, Uniswap has taken another step towards launching the latest version of its platform called v3 in all of Ethereum’s test networks, with the mainnet launch on May 5. implemented on Ethereum test networks Ropsten, Rinkeby, Kovan and Goerli.

In terms of what this latest revision entails, Uniswap will now use the concept of “capital efficiency”, potentially complicating the passive income aspect of its liquidity provision for many casual DeFi investors. Brandon Iles, co-founder of the rebasing cryptocurrency protocol Ampleforth, gave his thoughts on the upgrade, telling Cointelegraph:

“Philosophically, I think the design of v3 is a natural progression from where they are. It will be interesting to see how (and if) other platforms respond in turn. I expect this to be the point where Uniswap and other AMMs are going to diverge. This means more diversity in the space, and that’s a good thing. “

Other upgrades include a multi-fee system, which allows liquidity providers to be compensated for taking varying degrees of risk. In addition, there are now three separate fee levels per pair based on their expected pair volatility – 0.05%, 0.30% and 1.00% – which provide better protection against temporary loss for liquidity providers on paper.

Finally, v3 also makes tangible upgrades to Uniswap’s existing automated market maker bonding curves, which merge individual positions into a single pool to form a combined curve that users can trade against.

Not everyone is sold on v3

While many seem to be praise Uniswap v3, Sergej Kunz, co-founder of DEX aggregator 1inch, told Cointelegraph that compared to v2 and most other automated market makers, the new version has become a specialized tool more suited to advanced market makers than amateur liquidity providers. :

“The other side of higher capital efficiency is the complexity of liquidity provision and management. Since the launch of the Flashbots service AMMs became the target of sandwich attacks, Uniswap v3 design is still vulnerable to this issue. “

When asked about the rapid growth of UNI – something that put the token in the top 10 of rankings based on market capitalization – Kunz opined that while the rise of UNI looks really good, such governance tokens don’t really have any intrinsic value. except that they provide owners with the option to participate in certain governance issues.

He also stressed that Uniswap’s main contributing teams are releasing new features and updates through the use of “corporate licenses.” Kunz said, “To be fair, such an approach does not fit the spirit of decentralized finance.”

Will the current DeFi wave grow?

Despite high Ethereum network gas fees – with Uniswap exchanges currently costing users around $ 21 per trade – most DEXs have continued to attract high trading volumes. In this regard, Fernando Martinelli, CEO of Balancer – a programmable liquidity protocol – said to Cointelegraph:

“A growing number of users are added to DeFi, and this is especially driving growth in the SMP space. SMPs act as the critical underlying liquidity layer for DeFi products and services, and the market seems to be understanding this more recently. This growth benefits the ecosystem as a whole, including Uniswap. “

He also pointed out that as Balancer wants to launch v2 of its own protocol with a whole new set of features, these options will be significantly different from those offered by Uniswap v3. “Both will benefit DeFi users with improved capital efficiency. Uniswap v3 has gone in a very different direction from Balancer v2, which is good for the space as a whole, ”he added.

While many had been looking forward to Uniswap v3, it seems that the upgrade may not have been successful. For example, although founder Adams had promised to silence the critics by rolling out an update that would make the platform’s AMM impermanent from loss and super efficient, v3 actually appears to exacerbate the transient loss.

This is because the mechanism relies largely on the concept of “concentrated liquidity”, which essentially allows liquidity providers to choose the price ranges in which they feel comfortable committing liquidity – rather than the whole range from zero to infinity. to cover.

Another powerful drawback of v3 is that it no longer has pool tokens. Instead, the protocol now uses intangible tokens to represent a user’s specific position, taking a blow to “composability” that would immediately render concepts like Aave’s Uniswap markets or Maker’s pool token vaults unusable.

While v3 makes it difficult for users to avoid slipping issues and use pool tokens, it seems quite likely that the developers of the platform will take these pain points into account when trying to tweak the system in the future, making it easier for newer ones participants to explore the DeFi landscape much easier.