Uniswap V3 Goes Live, New DeFi Boost Coming?
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Uniswap, the most active decentralized exchange, has deployed its new smart contracts to the Ethereum (ETH) mainnet, opening a new stage in DeFi trading. The launch of Uniswap V3 on May 5 boosted ETH trading, supporting the prices around $3,451.61.
Uniswap has existed in its Version 2 algorithmic trading for a year, expanding to $1.2B in trades each day. The creation of Uniswap as a functioning exchange brought the concept of a trading curve based on the ratio of two assets locked in a liquidity pool. Uniswap gave rise to multiple similar exchanges, either on Ethereum or depending on alternative protocols.
The biggest change in Uniswap V3 will be the presence of risk-management tools to avoid some of the big price swings of uncontrolled algorithmic trading. Liquidity providers, the risk-takers which lock in their assets, now have a choice on how to allocate the funds and limit the type of asset and price range.
Thus, LPs can escape the original V2 price curve and choose their own ratio and price range according to their risk preference. Uniswap V3 will also allow a comparison between V2 and V3 and point to the more beneficial type of trade.
It is possible for the market price of a token to move outside of the range of the liquidity provided. In that case, the liquidity provider will not receive fees. It is possible that an asset’s price moves into a range where there is no liquidity on Uniswap, but also that LPs move in to take the risk at another price range.
What Uniswap Means for Ethereum
The V3 launch arrives at a time when ETH market prices are close to $3,500, with expectations of more appreciation. After the announcement, the price of UNI remained almost unchanged around $42 following the recent rally.
Using Uniswap is still affected by high fees, possibly barring liquidity providers with smaller amounts of ETH available.
At the same time, relatively high fees may prevent some liquidity providers from executing a fire-sale if prices start to crash, thus deepening the losses. Uniswap remains a staple in crypto space, and the new ranges of liquidity will continue to set the pace for multiple DeFi projects.
Uniswap is still not integrated with solutions like Polygon (MATIC), which offer sidechain computations for lower-fee trades. Uniswap fees depend on general Ethereum network usage and the gas prices at the current moment, so some of the trades may have 90% lower fees compared to periods of high activity.
The coming days will see more volume moved from the old contracts into V3. There may be a congestion of attempts in case of insufficient gas fees, while V3 increases its locked-in value. Uniswap V2 has more than 32,000 active smart contracts, some of which are starting to be copied for V3.
Uniswap Relies on Large-Cap Liquidity
Despite the potential to list brand-new small tokens on Uniswap, the exchange still relies on large cap coins for most of its liquidity. Uniswap locks in more than $75M in ETH, as well as $75M, as well as $77M in USDC, USDT and DAI dollar-pegged coins.
The total value locked in Uniswap V2 is up to $9.6B, and V3 is yet to show its attraction. Uniswap attracts more than 54,000 users per day, and is the fourth most active DeFi app on the Ethereum network.
Uniswap still has a long tail of smaller tokens adding to its volume. The V3 launch is one of the solutions to slippage, volatility and rug pulls. The concentrated liquidity tools may help investors to more confidently lock in their coins, without the danger of suffering large impermanent losses in case of price swings to an unexpected range.
Traders have already tested the V3 and become aware that much smaller targeted liquidity can achieve more stable markets.
Uniswap carries stablecoin markets that allow limited arbitrage or bridging between different types of dollar-pegged coins. Even for those assets with a small fluctuation, targeted liquidity is a tool to limit unintentional losses.
Trade Curves Turn to NFTs
Uniswap has added another incentive to LPs, as their positions and liquidity targets are presented in a visualized section of the trading curve. The exact curves and liquidity range are then recorded as an NFT, entirely preserved on the blockchain.
Unlike image-containing NFTs, there is no chance this token will disappear. The entire event of providing liquidity remains fully recorded on the blockchain. Just a day after the launch, 2,545 holders of Position NFTs were already recorded as supplying the liquidity pools.
Uniswap remains one of the important additions to the Ethereum network. Locked-in liquidity means there is less ETH to be sold off rapidly.
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