Why Uniswap V3 can become the king of decentralized exchanges?

By opening options for active-zce market makers and lazy LPs, Uniswap tries to match both parties and force them to participate in transactions according to the same set of rules.

Uniswap recently launched the third version (V3) of its acclaimed decentralized exchange (DEX). External reactions have been mixed, and the debate is mainly about how V3 changes the dynamic uncertainty between active-zce and passive liquidity providers (LP). The reaction has been mixed. Considering that Parsec Research published a prediction article last fall, "Uniswap's chance of success lies in replicating the Sharpe rate of Citadel, the king of hedge funds", it is necessary for us to conduct follow-up analysis.

The design of V3 presents a viable attempt to invalidate the trade-off space described in the paper, reconciling active-zce and passive LPs.

On the one hand, V3 is a superset of V2, if all LPs were to provide liquidity from [-∞, ∞], then your pricing curve would be the same as V2. LPs, on the other hand, can now provide liquidity in separate "buckets" in a limit order-like fashion. This upgrade is clearly aimed at improving the taker experience. The question naturally becomes: If we are already sacrificing inert liquidity, why not just build an order book?

UniCC, the world's largest darknet market for credit cards and debit cards will be closed on January 22: On January 13, according to Bloomberg News, UniCC, the world's largest darknet market for credit cards and debit cards will be closed on January 22 . According to data disclosed by Elliptic, in 2021 alone, UniCC received more than $100 million worth of Bitcoin in exchange for stolen credit cards. Elliptic speculated that UniCC’s sudden choice to cease operations may be to avoid upcoming law enforcement scrutiny.

As of now, several darknet platforms that use cryptocurrencies have ceased operations, such as the credit card darknet market oker's Stash, online illicit drug websites Monopoly Market and White House Market, and Silk Road. [2022/1/13 8:46:07]

The answer is: on the one hand, it is due to the constraints of the computing environment, and on the other hand, it is to challenge the view that inertial mobility must be sacrificed.

UniLogin, an onboarding solution for Ethereum users, shut down the project due to continued high gas fees: On September 18, UniLogin, an onboarding solution for Ethereum users, announced that it would shut down the entire project because of the high cost of subsidizing users due to the continued high gas fees of Ethereum , return the remaining funds to investors, and find a new direction. UniLogin said that the new direction they are considering is to implement a Layer 2-focused DeFi wallet or login solution in the Ethereum sidechain xDAI. [2020/9/21]

In a standard limit order book (LOB), trading venues provide a quote amplitude, usually $0.01 in stock trading, and cryptocurrency trading varies by trading venue. According to the size of the amplitude, the maker can quote orders one by one on any quotation, but all orders must be managed independently.

In Uniswap V3, a similar set of price amplitude services is also determined, but the order maker can specify a price change range in V3, and use the spread order to fully cover this range. This allows for a mix of passive and active-zce strategies, but importantly, for some semi-passive strategies, significantly reduces the number of operations.

Data: Uniswap transaction failure rate reached 22.4% in the past 30 days: According to the on-chain data of decentralized exchanges analyzed by the Tokenlon team in the past 30 days, it was found that several popular DEXs have a high transaction failure rate, such as 1inch transaction failure The failure rate of Uniswap is 14%, the failure rate of Uniswap is 22.4%, and the failure rate of Tokenlon is only 0.26%. Note: Common reasons for DEX transaction failure include transaction slippage exceeding expectations, GasLimit setting is too low, etc. [2020/9/3]

Assuming that LP believes that the price range of ETH/USDC is between 1900-2100 US dollars, the V3 spread position can complete all operations at one time, without the need to adjust bid orders and ask orders one by one and manage all orders, thereby significantly reducing transaction costs and maintenance costs.

Within 24 hours, the gas fee for transactions on the Uniswap chain exceeded 410,000 US dollars: according to the data of OKLink, the recommended gas fee exceeded 95.87Gwei, and the number of unconfirmed transactions was nearly 130,000. Among them, the decentralized exchange Uniswap within 24 hours Gas fees for on-chain transactions accounted for 16.36%, more than 1,000 ETH (totaling about $410,000). [2020/8/10]

Range Strategy on V3 vs. Order Book

Since V3 covers the order spread across the full range of swings, when an order crosses a level it is matched proportionally with LP capital. This is in contrast to LOBs, which are matched with different limit orders on a first-in-first-out (FIFO) basis. Details like this may sound trivial, but I assure you, they are absolutely not. In every liquid exchange environment, very minute details of execution can have a big impact on an algorithmic trader's optimal strategy. This is especially prominent in the context of public chains. In this case, the optimal strategy may have negative externalities on the entire chain. Since execution orders and fees accrue proportionally to the maker, it appears that there would be less scramble for trades to execute orders within a single tick.

When I think about the article linked earlier on the trade-offs of AMMs, there is a hole in the theory, the effect of aggregators. The accumulation of liquidity has a parasitic effect on lazy LPs, especially the PMM (Private Market Maker) model adopted by most leading aggregators on highly liquid exchanges. This is parasitic because active-zce market makers selectively join trades to fill the flow of non-toxic information without having to face a large, constantly changing market order as their counterparty. Over time, this erodes LP returns, as active-zce LPs can jump the queue on aggregator orders, and end traders' marginal gas fees increase.

This brings me to what I personally think is the real importance of V3 - a credible attempt to become the king of decentralized exchanges. By opening options for active-zce market makers and lazy LPs, Uniswap tries to match both parties and force them to participate in transactions according to the same set of rules. That's the beauty of having the retrospective order mix proportionally. By having an equal mix of lazy/active orders, the problem of parasitic aggregator market makers dies down. The design captures passive and active-zce LPs into the same order queue. The result is that active-zce market makers take on greater price/stock risk in exchange for a sizable cut in transaction fees. Passive market making still charges fees and benefits from increased taker traffic as active-zce traffic increases.

But this can only work if Uniswap routes directly to a large number of transactions.

In the long run, direct routing is difficult to grasp, but it can be achieved in two ways:

The latency/infrastructure cost of going market maker-by-market outweighs the price advantage of routing outside of Uniswap. This only happens when Uniswap is super liquid and has a congestion time of less than 15 seconds (e.g. rollup). Additionally, most aggregator routing schemes involve marginally increased user experience and gas costs (although this is primarily an approval-related cost, which will gradually decrease as accounts are abstracted and the approval flow is deprecated).

Direct routing is encouraged using the UNI token. Uniswap governance sits on ~$5 billion worth of UNI tokens, which can be used to incentivize direct trade flow, rewarding takers, and routing interfaces. Not sustainable as t → ∞, but worth it if it can make the first possible.

There are still many problems with this design mechanism. Are front running/sandwich deals still a persistent threat? Are order book exchanges actually a vastly superior environment for makers and takers? Still, the design is ambitious and changes the DEX dimension once again.

Written by: Will Sheehan, Founder of Parsec Finance Compiled by: Perry Wang

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