The brutal growth of Uniswap V3

The most anticipated upgrade of top stream AMM is finally here! On May 4, the Uniswap V3 contract was officially launched on the Ethereum mainnet. After a full demonstration, we finally have some views on the advantages of Uniswap V3.

The biggest advantage of Uniswap V3 is higher capital efficiency. Under the same amount of funds, V3 has lower slippage than V2. Therefore, V3 can mobilize more stock funds than V2. In order to verify the capital efficiency of Uniswap V3, we compared the total lock-up turnover rate with Uniswap V2 and Sushiswap.

Image source: IOSG Ventures

Overall, Uniswap V3 does have higher capital efficiency in a short period of time. As shown in the figure, the TVL turnover rate of V3 is higher than that of V2 and Sushiswap. At the highest point, the TVL turnover rate of V3 is much larger than that of V2. Every $1 TVL in V3 can generate $0.7 in daily trading volume, while the same funds in V2 can only generate $0.2 in daily trading volume. In addition, the data after the launch of V3 shows that every $1 added to the pledged fund pool of Uniswap will generate a transaction volume of $5, while Sushiswap can only generate a transaction volume of $1.3 under the same circumstances.

NFT data: The 24-hour trading volume of the new project TIME Piece Community reached 23.09 million US dollars: The latest data from DappRadar shows that the top ten NFT projects in the past 24 hours and their trading volume rise and fall are as follows: TIMEPiece Community, Axie Infinity (+26.65 %), CryptoPunks (+135.61%), loomlocknft (+51.19%), Bored Ape Yacht Club (+96.99%), Art Blocks (-21.16%), The WynLambo, LOSTPOETS (-62.14%%), Sup Ducks (+ 34.16%), Cupcats Official (-56.84%).

Among them, the 24-hour trading volume of CryptoPunks led the rise (+135.61%), at $9.87 million; the 24-hour trading volume of LOSTPOETS led the decline (-62.14%), at $2.38 million. [2021/9/24 17:03:37]

As we all know, one of the problems of V2 is the impermanent loss faced by liquidity providers, and V3 also has this problem. But the size of the loss in V3 depends on the behavior of the liquidity provider. That said, in V2, LPs are fairly static relative to arbitrage, while in V3, both parties are able to actively manage their positions.

Uniswap 2020 Airdrop Tokens Now Worth $12K: Uniswap airdropped 400 UNI tokens to everyone using Uniswap in 2020, when the price was between $2 and $4, UNI is now worth about $30 , those holding airdropped tokens can redeem $12,000 in cash. (CryptoPotato) [2021/2/21 17:37:27]

So there are two possible situations. The first situation is that liquidity providers have better prices, which will drive arbitrageurs out of the market. This requires mature LPs to constantly adjust their price ranges to correctly map market price changes before arbitrageurs make a move. However, although this can ensure that LPs will not suffer losses, it will also reduce the potential transaction volume of the agreement, because automatic transactions account for a large proportion of Uniswap v2 and Sushiswap.

The second scenario targets less established LPs. Assuming that price discovery still exists in centralized exchanges like Binance, liquidity providers with too narrow price adjustment range and too slow movements will be defeated by arbitrageurs. A price range that is too narrow means a greater depth of liquidity, because the greater the price volatility, the higher the risk of loss.

Miller Opportunity Trust Signals Investment to Grayscale Bitcoin Trust: Miller Opportunity Trust, overseen by Miller Value Funds, said in a regulatory filing on Friday that "the fund may seek to indirectly Investment exposure to Bitcoin.” Miller Value Funds, founded by prominent investor and Bill Miller, managed $2.25 billion in assets as of Dec. 31, 2020, according to the fund’s website. (The Block)[2021/2/6 19:03:09]

For example, if the price of ETH is $3,500, LP can set a price range between $3,490 and $3,510. If the external price of ETH rises to $3600. A rational LP will immediately adjust its price range to around $3,600. Otherwise, she would be exposing the sell exposure to arbitrageurs due to the price difference. Conversely, if the price drops to $3,300, unless the LP adjusts her price downwards, she will not be able to provide liquidity and will not receive transaction fees.

Uniswap charged $7 million in ETH fees in the past month: Jinse Finance reported that in the past month, the fees of the decentralized exchange (DEX) Uniswap V2 have exceeded $7 million, ranking first on the Ethereum network. In addition, the DEX also dominates the trading volume of the market, reaching $233 million in the past 24 hours, accounting for more than 60% of the market share. [2020/8/19]

Although it is too early to judge, based on experience, we can look at the trading volume of the top 10 arbitrageurs in Uniswap V3 and V2. The more professional LP's market making, the less arbitrage activities, and the less losses of liquidity providers. The opposite is true if there is a large amount of arbitrage.

As shown in the table below, the total trading volume of the largest arbitrageurs on Uniswap V3 accounted for 12% of the total since V3 went live! This means that this address alone generated over $670 million in funds (identified as Wintermute by Nansen.ai). In addition, the top 5 arbitrage bots accounted for about 22% of the total trading volume, much larger than the level of V2. In the V2 version, the top 5 arbitrageurs accounted for barely 5% of the total trading volume. This also shows that LP suffered heavy losses in the early days of V3.

In the case of a huge amount of arbitrage transactions in the early stage of V3 launch, Uniswap introduced Visor Finance, an active-zce liquidity management tool, to manage multiple positions, automatically balance liquidity according to market prices, reinvest fees, rewards, etc. So, there are currently two paths. In the first case above, mature LPs are completely specialized; in the second case, less professional LPs rely on tools such as Visor to actively manage liquidity.

We expect arbitrage participation in V3 to gradually decrease over time for the following reasons:

Risk control: LP can better grasp risks after learning from the past

Innovative Design: Active Liquidity Management Tool Visor

Deploying Layer 2: Frequent adjustments can be made at low cost

In addition, the Uniswap ecology should not be underestimated. Take the Grants program as an example, which devotes a lot of resources to creating key developer tools, adding high-quality data, and launching key services in the Uniswap ecosystem.

Some ecological projects of Uniswap Grantee

For complete project details, please click the link: https://www.notion.so/3430a00270ea4d79be5c70d4ca99680a?v=cb2ce86b52194b759428b458f9717749

Uniswap V3 is off to a good start. Although there are areas for continuous improvement, we are still optimistic about the future development of V3. Eventually we will see more professional market makers become liquidity providers, crowding out arbitrageurs with better pricing. The savage growth of V3 has just begun, will it become the final match point of DEX competition? let us wait and see.

Attachment: This article is an introduction, we look forward to more discussions, welcome to leave us a message for interaction. Your comments or opinions will have the opportunity to be officially quoted as the next issue of IOSG weekly insight to be spread and shared in various channels. Discussion topics include but are not limited to:

Q1: Does V3 allow uniswap to win the competition? Or did it not have the desired effect?

Q2: When V3 is closer to the professional market maker and order book model, will it lead AMM to tilt in this direction as a whole, or will it form two camps? What do you think about this?

Q3: What changes will the price difference and arbitrage between V3 and centralized exchanges bring?

Q4: Where will passive liquidity mining providers transfer mining funds?

Q5: Other

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