Uniswap has mapped out what is perhaps the most anticipated DeFi product launch of the year with its post introducing its version three (V3) iteration.
The team confirmed what many hoped: following a targeted May 5th launch, a deployment to Optimism’s Layer 2 scaling solutionis “set to follow shortly after.”
As Uniswap trades currently cost roughly $50, and with optimistic rollups likely to bring down transaction costs by more than an order of magnitude, many herald the upgrade to Layer 2 as the main event of Uniswap’s V3 because it lowers the financial barriers to entry which have been arguably DeFi’s primary bottleneck so far.
Liquidity Provider Control
Uniswap’s V3 will also allow liquidity providers (LPs) to take “Concentrated Liquidity” positions. This means that instead of contributing capital to an entire range of prices for a trading pair, users will be able to provide liquidity for a specific range for a given trading pair, increasing capital efficiency.
“LPs can provide liquidity with up to 4000x capital efficiency relative to Uniswap v2, earning higher returns on their capital,” the post said.
A user could theoretically provide $5M of liquidity to a DAI/UCDC pair at a .995/1.005 range and collect the same amount of fees as would $2B allocated across the entire price curve in Uniswap V2.
Concentrated Liquidity will also include LPs to mimic “custom formulas like the ones used by Balancer and Curve, as well as ones that don’t have elegant formulas,” as Dan Robinson, researcher at Paradigm and the only non-Uniswap employee credit on the V3s whitepaper, said on Twitter.
Robinson anticipates Concentrated Liquidity positions will prompt other automated market makers (AMMS) to be built on top of Uniswap. A result of custom price curves is that liquidity positions are no longer represented as ERC20 tokens as they are not fungible. Instead,they will be represented by non-fungible tokens (NFTs). Common shared positions can be made fungible (ERC20) “via peripheral contracts or through other partner protocols,” the post said.
Surprisingly, the launch also included a proprietary software license. The license may be the first of its kind among major DeFi protocols, which have, until now, been mostly open source.
Uniswap was notoriously forked by SushiSwap last September, with the latter recently surpassing the former in terms of total value locked (TVL) according to DeFi Pulse.
The software license prevents Uniswap’s core V3 code from being used “in a commercial or production setting for up to two years,” according to the launch post, after which time the code will become open source.
Limit Orders, Flexible Fees, and Advanced Oracles
Uniswap’s V3 also allows LPs to “deposit a single token in a custom price range.” If the market price enters the range LPs can sell into the opposing asset, which the release’s post says “feels like a limit order.” Limit orders have thus far been exclusive to order book exchanges.
Uniswap V3 protocol fees will be off by default, but can be turned on by governance on a per-pool basis and set between 10% and 25% of LP fees.
Rounding out the features are flexible fees which allow LPs to choose their fee tier — 0.05%, 0.30%, and 1.00% –– depending on the expected volatility of the asset.
Oracles too, which provide time-weighted average prices (TWAPs) for any period in the last nine days, were improved removing “the need for integrators to checkpoint historical values,” the press release said.
The community reaction was overwhelmingly positive and of course, enthusiastic memes and replies were also peppered with the question: “when v4?”