A Guide to Uniswap V3

Contents

• What is Uniswap V3?
• What's new in Uniswap V3?
• Why Did Uniswap Launch Another Version?
• Improvements in Uniswap V3 vs V2
• The Road Ahead

The announcement of Uniswap V3, the top DEX's newest version, accompanied by a Uniswap V3 white paper, has compelled several decentralized finance (DeFi) traders and farmers to look forward to a faster and more liquid exchange without the crippling gas fees that Uniswap is notorious for. Uniswap V3 will be rolled out on May 5 for Ethereum and May 12 on the layer-2 solution Optimism.

What is Uniswap V3?

Uniswap v3 is the forthcoming new and improved DEX that will run on the Ethereum blockchain and be powered by the same automated market maker (AMM) model as v2, but loaded with new developments aimed at maximizing returns for traders and liquidity providers, minimizing price slippage, and managing downside risks.

What's new in Uniswap V3?

There are three main feature updates that Uniswap V3 will be rolling out:

1. concentrated liquidity,
2. new fee tiers
3. and oracle feed developments.

These features will work together in achieving better capital efficiency for the platform's traders and greater risk management for liquidity providers.

Why Did Uniswap Launch Another Version?

Uniswap has been a victim of its own success, receiving heavy criticism that its popularity is slowing down the Ethereum network and causing transaction gas fees to skyrocket. Also, Uniswap has seen the repeated exploitation and copying of its code by competitors like Sushiswap and Binance Smart Chain.

Uniswap v3 boosts the efficiency of its AMM model, which is one of the most significant features to observe when comparing DEXs.

Through the introduction of a concentrated liquidity concept, liquidity providers will have the ability to supply their assets in a definite price range for which they will deposit liquidity. Moreover, they will be given tier-based rewards based on the degree of risk they are taking on in any particular pool. This can incentivize more liquidity providers to participate as the rewards would potentially help offset some of their potential losses in supplying liquidity to a wider price range.

The combination of these features will enhance the efficiency of the AMM model that supports Uniswap v3's DEX, which would benefit traders thanks to more liquidity. Furthermore, liquidity providers can also possibly gain higher returns on their capital with as much as 4000x efficiency.

Improvements in Uniswap V3 vs V2

Gas Fee Solution

Outrageously high gas fees are traders' bane as they have been on the rise ever since the proliferation of DeFi dapps on Ethereum in 2020. However, with the deployment of Optimism, a second-layer scaling solution, users can expect lower transaction costs with their trades.

The Optimism protocol is based on Optimistic Rollups, an off-chain scaling method that outsources some of the processing work of Ethereum to a new layer in order to lower latency and increase the network's transaction throughput, enabling faster transactions and substantially lower fees. Users can expect Optimism's integration with Uniswap shortly after V3 is launched.

Better AMM

While liquidity providers can determine an arbitrary price range where they want their assets supplied, Uniswap v3 ensures that there will be no problems with liquidity fragmentation.

The protocol is designed to maintain enough reserve in a pool to facilitate trades by aggregating all the supplied liquidity with the rest of the pool.

The swap fees will also be more structured in v3, as opposed to v2, which was locked at 0.30%. The initial fee tiers for the swaps will begin at 0.05%, 0.30%, and 1%. These tiers are affected by the risk that a liquidity provider incurs, such as when they supply assets in non-correlated token pairs.

Uniswap v3 has also worked on improving the capacity of the time-weighted average prices (TWAP) oracle, enabling it to quickly respond to price inquiries without much cost. In a single on-chain request, an oracle can easily feed price averages calculated within the previous 9 days upon query.

Furthermore, Uniswap's new version saw the removal of the “checkpointing” requirement in recording inquiries, which would ease the congestion of requests on the oracle and allow them to integrate other oracles that support the display of additional indicators on any particular asset.

Anti-Vampire Protection

Uniswap V3 introduced a new license feature that protects it from “vampire mining.”

Back in 2020, SushiSwap was reported to have siphoned over $800 million from Uniswap, which led to the plunge of the latter's collateral value by around 74% and the mass migration of users to SushiSwap. However, this couldn't have happened if SushiSwap was prevented from launching a clone of the top DEX.

Uniswap seems to have learned from that experience as the new version will be secured by a business source license, which will prevent anyone from using the same code for commercial use for up to two years before it is converted into a General Public License (GPL) in perpetuity. Integrations, however, will not be affected by it.

BSC Competition

There are a ton of DEXs being built on the fast-growing Binance Smart Chain (BSC) right now, and for good reason. BSC has dramatically lower fees and faster transaction speeds compared to Ethereum-based exchanges. For instance, PancakeSwap is quickly gaining a foothold in the DEX market, making it a serious competitor of Uniswap.

With the listed improvements on Uniswap v3, the once top AMM exchange might be set to take over the DEX arena once again. Beyond the implementation of Optimism, the eventual launch of ETH 2.0 can exponentially increase the capacity of all Ethereum DEXs including Uniswap, which would facilitate instantaneous swaps with ultra-low gas fees.

Mid to long-term, Uniswap appears to have an advantage over DEXs from other chains simply because of Ethereum's vast network and community, as well as its broad developer toolsets that most new smart contract blockchains lack as of today.

The Road Ahead

Uniswap v3 is still under development but is slated to be launched on May 5. In order to ensure that proper tests are done, they will be deployed on the Ropsten, Rinkeby, Kovan, and Gorli testnets firsts. The team is also constantly working on security audits for the contracts, employing the aid of some of the top auditors in the space such as Trail of Bits and ABDK. Other ongoing developments include integrations, improvements on the interface, building of the technical infrastructure for its new features, etc.

Unfortunately, the layer 2 solution won't be available as soon as the new version of Uniswap goes live. However, the team did mention that Optimism will be integrated “shortly” after launch. If successful, Uniswap's gas costs and transaction speeds could improve by roughly a factor of 100, a feat that would give other DEXs a run for their money. A large portion of the crypto community already supports Ethereum. If or when it scales, it's hard to imagine why it won't be the top DEX in the world again.