- Uniswap v3, DeFi’s highly anticipated DEX upgrade, will launch on May 5th on Ethereum mainnet, and on May 12th on Optimism.
- This upgrade largely targets the liquidity problem and intends to solve it.
- V3 update also offers a more flexible fee structure at which different pools can be created with different fees.
Uniswap, a superior decentralized exchange (DEX) and an essential part of decentralized finance (DeFi), has licensed its third iteration. This upgrade is introduced at a time when competition among projects to improve liquidity has surged.
In an announcement, Uniswap Labs said they intend to make Uniswap “the most flexible and efficient AMM ever designed.”
AMMs (Automated Market Makers) allow digital assets to be traded automatically without the need for an order book. AMMs have gained more popularity along with DeFi’s explosive growth last year.
Uniswap v3 mainly introduces “Concentrated liquidity” which gives individual LPs absolute control over what price ranges their capital is allocated to, and “Multiple fee tiers” that will allow LPs to be compensated properly “for taking on varying degrees of risk.”
This upgrade promises up to “4000x capital efficiency” compared to the previous v2 version. Other features like oracles are told to be “easier and cheaper to integrate.”
In the whitepaper, Uniswap describes “concentrated liquidity” as the principal change:
In this paper, we present Uniswap v3, a novel AMM that gives liquidity providers more control over the price ranges in which their capital is used, with limited effect on liquidity fragmentation and gas inefficiency.
Hayden Adams, Uniswap’s founder, addressed v3 upgrade as a “critical infrastructure” for DeFi and said:
Uniswap v3 now paves the way for automated market makers to outcompete both stablecoin-focused and traditional exchanges on trade execution quality.
The news about this update triggered a surge in Uniswap price leading to a new all-time high of $36.41 and a Total Value Locked of $5.23 billion.
More flexible fee structure
So far, all trades in all Uniswap pools have had a constant fee of 0.03%. However, with the v3 update, different pools can be created with different fees. The whitepaper states:
While this default fee tier historically worked well enough for many tokens, it is likely too high for some pools (such as pools between two stablecoins), and too low for others (such as pools that include highly volatile or rarely traded tokens).
Another big change for Uniswap’s composability might be the removal of native liquidity tokens, which will allow others to create unique ways of showcasing positions.
Finally, there is also a change in the v3 licensing. Uniswap v3 Core will launch under the Business Source License 1.1.
The license limits use of the v3 source code in a commercial or production setting for up to two years, at which point it will convert to a GPL license into perpetuity.