In addition to the core aggregate liquidity, the V3 version also brings functions such as multi-level rate control, Range Orders, and historical oracles, serving LPs, traders, and third-party application developers.
Written by: Pan Zhixiong
The highly anticipated Uniswap finally released the 3.0 version of the new automatic market maker (AMM) program, and jointly released this version of the white paper with Paradigm researchers. Uniswap V3 adds a granularity control function called “aggregate liquidity” to the original AMM curve to “upgrade capital efficiency by 4000 times.”
The team said that Uniswap V3 has gone through multiple rounds of audits, but due to the large changes, it will be launched on the testnet in a few days, and then it is planned to officially launch the Ethereum mainnet on May 5, and then it may be deployed. To the second-tier solution Optimism network to further reduce Gas costs.
In addition to the core aggregate liquidity, the V3 version also brings functions such as multi-level rate control, Range Orders, and historical oracles to serve LPs, traders, and third-party application developers.
However, the complexity of the protocol also brings some potential problems or shortcomings. For example, more complex liquidity aggregation may increase the cost of Gas, the non-homogeneity of LP Token may also affect composability, and Uniswap protects its own protocol. The early advantages have also changed the software license agreement, and other commercial applications can only use Uniswap’s open source code after two years.
New function: “aggregate fluidity” with granular control
The core highlight of Uniswap V3 is the addition of “granularity control” to the otherwise plain “XY=K” curve. Users can concentrate their capital efficiency in the most frequently traded interval to obtain maximum benefits. For example, most of the USDC/DAI prices are in the range of 0.99 to 1.01, and users can put their funds only within the XY=K curve in this range, without considering extreme situations.
Similar operations can also be performed for some conventional trading pairs. For example, ETH/DAI is often in the range of 1000 to 2000, then LP (liquidity provider) can put funds only in the curve of this range, without using Consider outside the curve. In this way, for an LP hoping to earn transaction fees, it can cover most of the transaction volume with less funds.
In addition, the addition of this new mechanism can partially solve another problem: impermanence loss. This is one of the shortcomings of AMM that is often criticized by the community, but through granular control, users can invest their own funds into a very small range. If the price deviates from this range, the user will automatically stop the loss and not participate in the range. Foreign transactions.
New feature: Multi-level rates
Uniswap V3 provides three levels of rates for LPs, which are 0.05%, 0.30% and 1.00%. Through these settings, you can set a higher rate on the higher-risk trading pair (ETH/DAI), and set a lower rate on the lower-risk trading pair (USDC/DAI).
The Uniswap team believes that one possibility is that a 0.05% handling fee can be used for assets with small price fluctuations, and a 0.3% handling fee can be set for ETH/DAI trading pairs with high trading volume but large fluctuations. Fees, and other types of assets can set a 1% handling fee.
New feature: Range Orders
Uniswap V3 also provides a brand new function for traders and LPs: Range Orders to supplement current market orders. This function is a bit like an upgraded version of Limit Orders in the exchange.
The user can recharge an asset within a certain price range set by the user. If the asset enters the range set by the user, the asset will gradually be replaced by another asset of the trading pair. If the price of the asset exceeds the range of the price range , It will all be replaced by another type of asset.
All of the above can be achieved automatically through the protocol. The Uniswap team believes that this function can be used in scenarios such as obtaining revenue, buying the dip, or issuing tokens.
New function: The oracle can read multiple historical data, and the cost is also reduced
Uniswap has added the time-weighted average price (TWAP) oracle function in the V2 version to provide price data for third parties, which has been integrated into dozens of projects.
The major improvement of the V3 version to the oracle is that a third party can calculate any TWAP price in the past 9 days through one on-chain call, and at the same time, through overall optimization, it reduces gas consumption by 50% compared to V2.
Disadvantages: Gas may be increased, but it can be solved by the second layer
Uniswap’s gas consumption has always been one of the lowest in DEX, but the launch of the aggregate liquidity function may increase the overall complexity and increase gas consumption. Fortunately, the launch of Optimism’s Layer 2 can solve this problem.
Interestingly, the team first stated in the article that the gas consumption of the V3 version will be slightly lower than that of the V2, but then said in detail that “more granular capital pools may increase the gas cost of the transaction.” How can it be known only when the mainnet is online.
Disadvantages: LP Token becomes a non-homogeneous token, that is, the position is NFT
Since each LP can provide liquidity for different price ranges this time, each LP Token may be unique, so the LP Token will not be an ERC-20 token, but an NFT. This may cause composability problems for third parties who integrate Uniswap LP tokens.
The Uniswap team also made some assumptions. For example, shared positions can be exchanged through other contracts or third parties, or other complex strategies can be tokenized (standardized as other agreements?). These strategies may be multi-positions. Automatic rebalancing around market prices and so on.
Question: How to aggregate the liquidity of Layer1 and Layer2?
Although Uniswap will launch the Ethereum mainnet and the Optimism second-tier network as early as May, the liquidity of the two is currently separated, and the team has not disclosed too much about this matter. Maybe they have thoughts. The mechanism design in this regard has not yet been made public. There is also a possibility that they think they may all go to the Optimism network in the future, so there may be no need to merge liquidity.
Disputes: software licensing
Uniswap has been a little passive since the vampire attack by SushiSwap, especially their token issuance plan may have to be done under the stimulation of SushiSwap.
So Uniswap also made a big change to the software license this time (Business Source License 1.1). Although it will eventually give third parties the direct use of power (GPL 2.0), within two years, commercial or production-level applications are not allowed. Use Uniswap V3 code directly.
Perhaps this is a kind of moat set by the Uniswap team. After sufficient liquidity can be accumulated within two years, other protocols cannot provide liquidity like theirs even if they directly use their code.
But since the mechanism and scheme of Uniswap V3 are public, it is not unreasonable whether other DeFi protocols will bypass their specific open source codes and implement them in other ways. Moreover, even some teams themselves are anonymous, whether these terms can really be implemented, it may be a question mark.
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