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After Uniswap V3 goes live, what is the lock-up volume, transaction volume, and actual adoption? What new problems have you encountered?
Recommended reading: ” Selected Links | Understanding Uniswap V3: AMM Liquidity A New Era “
Written by: Hao Kai, working at HashKey Capital Research
Audit: Zou Chuanwei, Chief Economist of Wanxiang Blockchain
On May 5th, Uniswap V3 was officially launched on the Ethereum mainnet. The Wanxiang blockchain research report “Research on Uniswap V3 ” (No. 33 in 2021, No. 130 in total) has introduced Uniswap V3. The main improvements include: granularity control of aggregate liquidity, multi-level tariffs, Scope order, advanced oracle and software license protection, etc. This article mainly focuses on the performance of Uniswap V3 after it goes online.
The performance of Uniswap V3 after its launch
Uniswap V3 is a trading DeFi project. For this type of project, lock-up volume and trading volume are two important evaluation indicators.
Figure 1 shows the change of Uniswap V3 locked position. As can be seen from the figure, Uniswap V3 has been in an upward trend since its launch, and the amount of locked positions has increased rapidly. Figure 2 is the transaction fee of the cryptocurrency project. It can be seen that Uniswap V3 ranks 2nd, indicating that the participation of this project is very hot.
Figure 1: Uniswap V3 lock-up amount (data source: oklink, May 28, 2021)
Figure 2: Transaction fees for cryptocurrency projects (data source: Crypto Fees, May 28, 2021)
Table 1 lists the current lock-up volume of major DeFi projects and the lock-up volume change rate in the past 7 days. As can be seen from the table, Uniswap V3 has a lock-up volume of approximately US$1.55 billion, ranking 15th in DeFi projects. Considering that Uniswap V3 has been online for less than a month, this is already a good result. From the perspective of the change rate of locked positions in the past 7 days, Uniswap V3 performs much better than other DeFi projects. Due to the recent sharp drop in the cryptocurrency market, the lock-up volume of many DeFi projects has dropped sharply, but the lock-up volume of Uniswap V3 has increased by more than 40% during this period, which shows that many liquidity providers (LP) are very optimistic. Uniswap V3, and actually provides a lot of liquidity.
Table 1: Lock-up volume of major DeFi projects (data source: oklink, May 28, 2021)
Table 2 lists the transaction volume of transactional DeFi projects. As can be seen from the table, Uniswap V3 has become the decentralized exchange project with the largest transaction volume in the past 24 hours. Although the transaction volume is larger, the number of transactions and the number of transactions of Uniswap V3 is significantly lower than that of Uniswap V2, which reflects the improvement of Uniswap V3, that is, the granular control of aggregate liquidity is more suitable for large-value transactions. It should be pointed out that Uniswap V3’s lock-up volume is only about 30% of Uniswap V2’s, but the transaction volume exceeds Uniswap V2, which can explain to a certain extent that Uniswap V3’s capital utilization rate has increased significantly.
Table 2: Transaction volume of transactional DeFi projects (data source: oklink, May 28, 2021)
The actual use of Uniswap V3
Uniswap V3 adds a granular control function on the basis of the constant product curve x*y=k. Liquidity providers can choose to concentrate their funds in the most frequently traded interval to achieve centralized liquidity and improve capital utilization. Uniswap V3 creates an ERC-721 contract for the positions of liquidity providers. Different from the homogeneous liquidity of Uniswap V2, the liquidity of V3 is composed of a series of different ranges of liquidity. The liquidity provided by LP is stored in the Uniswap V3 system in the form of non-homogeneous tokens (NFT).
Figure 2 shows the major trading pairs with the largest amount of Uniswap V3 locked positions. As can be seen from the figure, LP provides the most liquidity for transactions between USDC, ETH and stablecoins, which is quite different from Uniswap V2 (shown in Figure 3).
Figure 3: The main trading pairs of Uniswap V3 (Data source: Uniswap official website, May 28, 2021)
Figure 4: The main trading pairs of Uniswap V2 (Data source: Uniswap official website, May 28, 2021)
Uniswap V3 uses a multi-level fee rate, with the lowest transaction fees between stablecoins. At the same time, the range of price changes in transactions between stablecoins is very small, and it is unlikely for LPs to suffer impermanence losses. In addition, the granular control function of aggregated liquidity can improve the utilization rate of funds, which is especially obvious for stablecoin trading pairs. Therefore, Uniswap V3 is very friendly to transactions between stablecoins and attracts a large number of LPs to provide them with liquidity.
New problems with Uniswap V3
The improvement of Uniswap V3 also brings some new problems.
First, the issue of fairness. From the perspective of LPs providing liquidity, they have all contributed to this ecology. However, the distribution mechanism of Uniswap V3 prevents these LPs from directly receiving rewards in proportion to the liquidity provided. In order to provide capital utilization, Uniswap V3’s liquidity is non-homogeneous, allowing liquidity providers to provide liquidity for different price ranges. When the actual transaction occurs in this price range, the liquidity provider can get a share of the transaction fee; when the actual transaction occurs outside this price range, the liquidity provider cannot get the share of the transaction fee. Uniswap V3’s LPs will have a competitive relationship, and they need to make predictions on the trading price range.
Second, the participation space of ordinary participants is compressed. In Uniswap V2, all liquidity providers receive the same transaction fee sharing method, which is equivalent to all liquidity providers can obtain “market average returns”. In Uniswap V3, liquidity providers can obtain “Alpha income” that exceeds the “market average return” through a more reasonable price range and fund allocation. But this is very difficult for ordinary participants. They cannot make a reasonable response strategy to price changes, and can only purchase the strategies and services of professional service providers. Professional strategy teams have ushered in new opportunities. They can obtain benefits by providing strategies or asset management. In the future, a professional strategy team will become a powerful force in Uniswap V3.
In Uniswap V3, the share of transaction fees received by LPs is affected by many factors, including price fluctuations, the range selected by other LPs, and additional fees for adjusting liquidity. Since these factors are not under the control of an LP, it is difficult for an LP to predict its own accurate returns in advance. LP needs to use historical data of price fluctuations, liquidity data that LP has provided, and methods to reset price ranges when formulating strategies. At present, a team has launched Uniswap V3 automated liquidity provision strategy to adjust the price range when the market price exceeds the price range set by LP, so that liquidity providers can obtain benefits. Of course, the existing strategies are relatively simple, and the market needs more sophisticated and complex strategies to further improve capital utilization.
Third, the additional gas fee paid for adjusting liquidity. It is very difficult for liquidity providers to choose a reasonable limited price range to obtain long-term transaction fee sharing. Especially for trading pairs with large price fluctuations, there is a greater probability that the actual price will deviate from the preset price range. Therefore, LPs also need to dynamically adjust the price range according to the actual changes in prices, which requires additional gas fees for them.
Fourth, under extreme market conditions, Uniswap V3 may increase the risk of LP. At present, the pricing power of many trading objects is controlled by centralized exchanges. In Uniswap V2, LP provides liquidity for the entire range, so no matter how the price changes, it will not use up all the liquidity. In Uniswap V3, LP provides liquidity for the set interval, and drastic price fluctuations may exceed this interval and run out of liquidity. At the same time, as liquidity outside the reasonable price range will decrease, transaction prices are more likely to undergo substantial changes.
The follow-up development of Uniswap V3
Although Uniswap V3 improves the LP’s capital utilization rate, running on the Ethereum mainnet will be subject to performance and gas fees. Therefore, Uniswap V3 previously planned to deploy the Layer 2 solution Optimism network to reduce transaction gas fees while improving user experience. A few days ago, the vote for Uniswap V3 to be deployed to the second-tier Ethereum network Arbitrum has received overwhelming support, and Arbitrum will also open the mainnet tomorrow on May 28. Deploying Uniswap V3 to Arbitrum can speed up transactions and reduce transaction fees, which is conducive to the long-term development of Uniswap ecology.
Vitalik suggested that Uniswap can provide predictive price data, which is also a development direction that deserves attention. Many DeFi projects require an oracle to continuously input the required price, and the transaction price of Uniswap V3 can become a price anchor. Uniswap V3 enables more liquidity to gather in a more reasonable price range, greatly increasing the depth of trading. If the perpetrators want to interfere and manipulate prices, they need to spend more money. Under the same other conditions, Uniswap V3 is more secure than V2, and is more suitable for providing price data for other DeFi projects, which can improve the stability of the price of oracles in the DeFi ecosystem.
The strategy of providing liquidity is the key area of Uniswap V3’s future competition. LP needs to use historical data of price fluctuations, liquidity data that LP has provided, and methods to reset price ranges when formulating strategies. Compared with Uniswap V2, Uniswap V3 can obtain greater benefits through more sophisticated and complex strategies. Of course, this also means that if the strategy is not properly selected, the LP’s income will be lower than the market average income, and their capital utilization rate will even be lower than Uniswap V2.
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