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Funding efficiency amplified by a thousand times! Introducing custom liquidity and limit order features, Uniswap v3 to launch in May.

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Funding efficiency amplified by a thousand times! Introducing custom liquidity and limit order features, Uniswap v3 to launch in May.

Uniswap has released details of its V3 version more than a month in advance. New features include concentrated liquidity, optional fee rates, range order functionality, optimized oracle costs, and more. It is expected to go live on the mainnet on 5/5, with plans to later deploy the Optimism Layer 2 scaling solution.

Uniswap V1 was launched in November 2018, followed by V2 in May 2020. Subsequent major changes include the introduction of the governance token UNI and this latest update. Additionally, to prevent potential malicious forks, V3 will be issued under the "Business Source License" (BSL) to establish a two-year moat for the protocol.

Concentrated Liquidity

A recent update indicates that V3 has optimized the AMM pricing model, moving away from the fixed product model of the past, and introducing Concentrated Liquidity, also known as Aggregated Liquidity, in its place. In simple terms:

It no longer requires assets to be priced between 0 and infinity; liquidity providers (LPs) can decide on the price range within which they are willing to provide liquidity.

For example, in the ETH/DAI pair, LPs can provide liquidity within the price ranges of $250 - $12,000 and $1,500 - $1,750 simultaneously.

Improved Capital Efficiency

Even if LPs only provide partial asset liquidity, they can earn the same fees. This allows LPs to invest more in assets they prefer, thus improving capital efficiency. The official announcement uses Alice and Bob as examples.

Both Alice and Bob provide liquidity to the V3 ETH/DAI pool. With ETH at $15,000, both hold $1 million. Their operations are as follows:

  • Alice: Deposits $500,000 DAI and 333.33 ETH (total $1 million)
  • Bob: Deposits 91,751 DAI and 61.17 ETH, totaling only $183,000, and sets a price range of 1,011 - 2,251

In this scenario, although Alice invests five times more than Bob, as long as the price of Ether fluctuates within the set price range of 1,011 - 2,251, both can earn the same fees, and Bob still has $816,500 in idle funds to utilize.

Source: Uniswap.org

Comparing liquidity provision between V3 and V2 in the above image, the official claim is that V3 can achieve up to 4,000 times the capital efficiency. This represents a potential 20,000 times increase in capital efficiency gains compared to V2.

The official statement also mentions the hope that LPs will continue to update their price ranges to match the current market prices.

Range Orders Concept

The concept of Range Orders introduced in V3 is similar to the Limit Order feature on exchanges, allowing users to trade within a custom price range.

If the market price enters their range, the trading pair will gradually exchange assets through a smooth curve. When the price exceeds the range, it means a full exchange into the other asset in the pair, allowing for profit from the spread. Using the example of DAI/USDC:

  1. Initial position: 1 million DAI
  2. DAI to USDC falls below 1.001
  3. User sets a range order of 1.001 - 1.002
  4. Position at a price of 1.001499: 50% DAI, 50% USDC
  5. Position above 1.002: fully exchanged for 1 million USDC

The execution price in this example is approximately 1.001499, and larger range orders are said to excel in arbitrage, buying on dips, and initial token offerings.

LP Tokens Changed to NFTs

Since V3 allows users to customize pricing ranges for providing liquidity, each Liquidity Provider (LP) token must have a different definition. Therefore, LP tokens in the V3 version have been changed to NFTs.

However, this raises the issue of DeFi composability, as other DeFi protocols do not support Uniswap's LP token NFTs. In comparison, SushiSwap's xSushi allows for additional operations such as lending and borrowing, but Uniswap has a solution.

The official statement claims that LP tokens' diverse operational strategies can be achieved through external contracts and third parties.

Three-Tier Fee Structure

V3 offers LPs a three-tier flexible fee structure, including:

  • 0.05%
  • 0.30%
  • 1.00%

The official statement indicates that for higher-risk and more volatile trading pairs, LPs can set higher fees to compensate for the increased risk, whereas stablecoin pairs like USDC/DAI can have lower fees set.

Oracle Upgrade

Previously, V2 introduced the Time Weighted Average Price (TWAP) oracle, which stores the cumulative total of Uniswap trading pair prices per second to calculate a time-weighted average price over a period.

V3 optimizes the oracle to allow third parties to extract any time-weighted average price within the past 9 days through a single on-chain call, reducing gas costs by 50% compared to V2.

Business Source License (BSL)

The Uniswap team emphasizes that code openness is the future of decentralization, but V3 will be issued under a "Business Source License" (BSL) for a two-year period before transitioning to a General Public License (GPL) for public use.

The Uniswap Discord official channel will host a V3 AMA at 2:00 AM Taiwan time, where users can also submit questions through this form.