Uniswap V3 on Ethereum is version three of the Defi protocol launched on Ethereum. The deployment of Uniswap V3 on the Ethereum mainnet that took place in May 2021 helps users to generate more fees with the same capital invested in the assets. The protocol also diminishes risks for investors and increases the exposure of particular assets. The platform offers V3 protocol in the first layer on Optimism and the second layer on Ethereum to improve its scalability.
At the time of writing, it is the most powerful variant of the protocol that provides Concentrated Liquidity delivering incredible efficiency of the capital for liquidity providers (LPs). Also, it provides improved execution of trades, and excellent performance thanks to unique decentralized infrastructure. The Uniswap team calls it a breakthrough step that competes and surpasses traditional users’ experience. The experts say that it redesigns the future of automated market-making.
The main goal of Uniswap V3 is the improvement of its scalability. Also, the Uniswap team tried to improve the execution quality of the decentralized trading and increase the efficiency of capital. And it became possible when the liquidity providers (LPs) received the capability to make markets within customized price ranges.
How Uniswap evolved over time
Being a popular permissionless protocol of decentralized finance, Uniswap enables trading pairs of tokens in a decentralized manner. Version 1 was launched in 2018. It allowed creating liquidity pools between Ethereum and ERC-20 tokens. Higher popularity came to the protocol in 2020, when the second version of Uniswap was released. It provided the possibility of creation pools across all ERC-20 tokens. It managed to gather more liquidity within 2 weeks than version 1 within 2 years.
At the time of writing, Uniswap is the protocol with the highest TVL (total volume locked). It has also established the standard for AMM (automated market-making) model. The project has become revolutionary not only for the cryptocurrency industry but for the financial sector as well, changing the rules of the game. It has enabled any person in the world to buy and sell assets, but what is more important, the generation of new markets has become available for all people without exclusion. Users can trade without using centralized markets and costly services of market makers relying on the algorithm introduced by Uniswap.
Uniswap protocol on Ethereum
On May 5, 2021, the deployment of L1 Ethereum mainnet occurred which was one of the most anticipated events in the decentralized sector. L2 on Optimism launch took place a little later. Though the system is still in its infant stage at the time of writing, it has quickly acquired the necessary infrastructure for its smooth work providing a pleasant experience for users.
The characteristic features of the new version include Concentrated Liquidity that provides a more detailed control to liquidity providers who can see all ranges of price for their allocations. The aggregation of separate positions in one pool has enabled the formation of one combined curve that helps customers to trade. A new version also includes numerous fee tiers enabling compensation for different degrees of risk.
The concentration of liquidity enables liquidity providers to deliver the liquidity depth at the same level as v2 within specified price ranges and risking less capital at this. The capital saved in this way can be held externally for its investment into different assets. It is possible to deposit this capital elsewhere in DeFi or use it for better exposure within the specified price range thus earning much more on trading fees.
Thanks to the features described above, the AMM acquires more flexibility and efficiency with Uniswap V3. The capital efficiency increases up to 4000x times, consequently, liquidity providers can derive more profit from their capital. It also helps to achieve low slippage execution of trades that demonstrates better performance in comparison with AMMs on centralized exchanges and the ones that focus on stablecoins trading.
With a new version of Uniswap customers can improve their exposure to the chosen assets and decrease the risk of failure. There is also the possibility to exchange one type of asset to another thus increasing liquidity to a price range that is higher than a market price or, on the contrary, lower than that to move closer to a fee earning limit order executing along a smooth curve.
The introduction of the V3 has alleviated the integration of Uniswap’s oracles that have also become less expensive and more powerful at that. For instance, they can deliver time-weighted average prices when asked for any period of time (up to 9 last days). Previously, the integrators had to check the historical values, but this embedded feature has removed this step.
Despite the improved structure of the protocol, the Ethereum gas price still remains high at the time of writing. Those who are concerned about this issue should try Uniswap V3 on Optimism as the cost of transactions is much cheaper there.
Uniswap V3 security
Much attention is paid to security issues. The members of the team have spent hundreds of hours testing a new version of Uniswap. The members of the engineering team were also employed to audit the code. Additionally, independent companies were invited to fulfill the task and conduct the audit of the code testing the system working under Uniswap V3. For instance, the teams of such reputable companies as Trail of Bits, ABDK, and samczsun performed auditing. Apart from that, the team resorted to automated tools such as Echidna and Manticore. All these procedures helped to detect and fix numerous bugs in such a complex and sophisticated protocol as Uniswap V3. But the team has moved even further. Understanding the complexity of the protocol and the probability of new bugs in it, the company announced the launch of the Uniswap V3 Bug Bounty on March 23rd, 2021. The platform offered up to 500,000 USD for the discovery of critical bugs.
It is also worth adding that the Uniswap v3 Core protocol is licensed under BSL 1.1. This type of license empowers the projects in the issue of protecting commercial ventures from complete copying.