Uniswap V3 was released last week, with several upgrades. The big change is allowing liquidity providers to make markets within customized price ranges, which is being called ‘concentrated’ liquidity. LPs are responsible for placing their assets into liquidity pools, where Uniswap users trade. V3 also introduces multiple fee tiers, letting liquidity providers be appropriately compensated for taking on varying degrees of risks.
For the uninitiated, Uniswap is a decentralized exchange (DEX). Uniswap also has it’s own token, called UNI. There are other kinds of DEXs too, for example OKEx has it’s own. OKEx DEX is a decentralized exchange powered by it’s own blockchain, called OKExChain. OKExChain is a set of open-source public blockchains aiming to promote large-scale commercial applications.
What is a DEX?
Most people understand that exchanges are centralized. Meaning, they are run by a single organization. Centralized exchanges act as the middleman between traders facilitating transactions. These are the norm in the cryptocurrency industry, but the issue with it is that it’s a single point of failure.
With decentralized exchanges, there is no single point of failure. DEX’s are an exchange that allows peer-to-peer trades, where there is no company or person in the middle facilitating the transactions.
DEX’s are built by developers who want to build a system that is not reliant on a single entity, so there is no central point of failure. Having to trust the exchange is removed, and it opens the door to all kinds of new trades and price discoveries and doesn’t have the hassles of KYC and AML rules and regulations.
From the Uniswap announcement, the new DEX features are:
LPs can provide liquidity with up to 4000x capital efficiency relative to Uniswap v2, earning higher returns on their capital.
Capital efficiency paves the way for low-slippage trade execution that can surpass both centralized exchanges and stablecoin-focused AMMs.
LPs can significantly increase their exposure to preferred assets and reduce their downside risk.
LPs can sell one asset for another by adding liquidity to a price range entirely above or below the market price, approximatinga fee-earning limit order that executes along a smooth curve.
Uniswap is the current leader among DEXs in terms of total value locked (TVL), taking up 39% of the market share. Average trading volume surged by 22% to $2.78 billion. SushiSwap came in a close second, with $1.94 billion TVL.
Impermanent Loss
V3 has drawn some criticism, where LPs are now more exposed to impermanent loss. This is because LPs suffer from impermanent loss when the market price moves beyond their customized price ranges. The tighter the price range, the greater the impermanent loss. This creates a trade-off between capital efficiency and impermanent loss, as liquidity providers earn trading fees at the expense of suffering from impermanent loss.
was originally published in OKEx Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.
