May 6, 2021

Uniswap V3 Detailed updates and More on Uniswap Exchange

One of the most anticipated recent developments in the crypto and decentralized finance community, was the launch of Uniswap Version 3. In a previous video we explained what the automated market-making protocol, Uniswap, is all about. In this video, flovtec's CEO and Co-Founder, Anton Golub, explains what is new in Uniswap V3 and which problems are addressed.

[Transcript of Video]

Hello everyone, today we are going to explain the version 3 of Uniswap.

First, lets explain that Uniswap is a part of the so-called decentralized finance or De-Fi. De-Fi is a group of protocols that use smart contracts to create financial products like borrowing, lending, trading or hedging that are executed fully through the blockchain without any intermediaries. In particular, Uniswap is something called an automated market making protocol.

This means that through the use of smart contracts, this protocol enables a swap between any two tokens that are listed on Uniswap at a pre-determined price. Since automated market making protocols or market making in general requires capital or tokens to enable all these swaps and transactions, Uniswap uses the so-called liquidity pools, that serve as a base to provide liquidity for all of these transactions.

So, to illustrate as an example, an individual or anyone else around the globe can list a particular token, then create a liquidity pool and supply some of the native token, some of the Ethers, or ETH, and then through Uniswap people can trade between ETH and this particular token at a pre-determined price.

Now, Uniswap has had a lot of success and that all spawned on a lot of copies of Uniswap meaning other market making protocols like Sushiswap or Pancakeswap that enjoyed a lot of success. But Uniswap also had quite a lot of issues as well. An important issue were actually the transaction fees. The gas fees on the Ethereum were actually way too high to enable transactions in an economically feasible way. The second issue was the capital and the tokens that were provided in the liquidity pool were used in a highly inefficient way because those tokens in the liquidity pools supported the transactions across the whole pricing curve that Uniswap uses.

Now, Uniswap version 3 tries to address a lot of problems that we discussed now but the most important problem that they are trying to address in our view is the inefficient use of capital in the liquidity pools. Let’s explain this with an easy example. So, if Uniswap version 3, if we have a token that’s traded against a dollar Stablecoin, then a person can decide to provide tokens in a liquidity pool that will satisfy a trading range. For instance, when it happens in the range between 100 and 110 dollars, and not outside of that price range.

What happens here is the capital efficiency of the tokens that are provided in the liquidity pool, highly increases because it can be specified and assigned to the price range where the token is actually traded now and not the whole price curve. If we think a little bit about what happens here, when a person provides tokens in a liquidity pool that satisfies a certain price range, we’re actually moving closer towards units of becoming an exchange and those specific price ranges and the capital provided to liquidity pools to satisfy those price ranges are very similar to limit orders that we can find in traditional order book driven markets. So, this is a very exciting development that, in our view, will improve trading in the automated market making protocols a lot. But at the same time will move automated market making protocols closer to becoming exchanges with limit order book.

I hope you enjoyed this video and looking forward to next time!!

Thank you very much

Stay Liquid!!

 

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