Uniswap V3: DeFi’s most anticipated DEX upgrade
On March 23, 2021, leading decentralized exchange (DEX) Uniswap published a blog post highlighting the core functionalities of its upcoming third iteration.
As per the announcement, Uniswap v3 is expected to go live on May 5, with the deployment of the Ethereum throughput booster, Optimism, shortly after.
Uniswap is a big name in the DEX market and is at the center stage of the $42 billion DeFi sector. This makes the anticipated launch a big deal in the industry.
Uniswap v3 introduces two core features – concentrated liquidity and multiple fee tiers. While concentrated liquidity allows individual liquidity providers (LPs) to set a minimum and maximum price on their portion of any given pool, a tiered fee structure balances the compensation LPs get for various degrees of risk.
In Uniswap v3, LP’s can concentrate their capital within custom price ranges, providing greater amounts of liquidity at desired prices. In doing so, LPs construct individualized price curves that reflect their own preferences.
Uniswap v3 will have three fee tiers per pair – 0.05%, 0.03%, and 1.00%. All trades in Uniswap pools are currently being charged a 0.03% fee for trading. The new structure will allow LPs to set their margins based on the expected pair volatility. For instance, an ETH/DAI pair is riskier than a USDC/DAI pair.
While this fee historically seems to have worked well enough for many tokens, it is likely too high for some pools (such as pools between two stablecoins), and likely too low for others (such as pools that include highly volatile or rarely traded tokens).
In general, it appears Uniswap v3 is worth looking forward to. The team has boasted that the new features make “the most flexible and efficient [automated market maker] ever designed.” For one, LPs will be able to provide liquidity with up to “4000x capital efficiency relative to v2.” There will also be low-slippage trade execution enough to rival centralized exchanges. And best of all, the gas cost of v3 swaps on Ethereum mainnet is slightly cheaper than v2.