Summer 2020 has completely changed the crypto ecosystem, with the rise of DeFi and decentralized exchanges creating a unique opportunity for many players in the crypto world.
The elimination of KYC, no downtime, and convenience has caused millions to flow into the DeFi space. Uniswap has been at the forefront of this movement. The decentralized exchange token UNI is currently in the top 10 and is ahead of other projects such as PancakeSwap, SushiSwap, Curve Finance.
Alternatives emerged. Therefore, alternatives reduce Uniswap’s market share. One of these alternatives, SushiSwap, is one that has been mentioned over and over. However, there is another food-themed DEX that, despite its enormous growth, somehow fell under the radar: PancakeSwap.
Significant Improvement for UniSwap
While other DEXs have received significant liquidity from UniSwap, UniSwap now has an important trump card: the upcoming V3 launch.
In an article describing the situation among the existing DEXs, PancakeSwap rose in the rankings according to the data; It became the 2nd largest DEX in terms of transaction volume in the first quarter of 2021.
However, the growth of PancakeSwap was supported by Binance Smart Chain, and with the launch of V3, Uniswap could close the gap created again.
To understand the importance of V3, we need to be familiar with the features created by V1 and V2 versions.
Based on the Automatic Market Marker or AMM model, Uniswap became popular after replacing the Order Book method with Liquidity Providers (LPs) investing in trading pairs in Liquidity Pools. However, V1 only supports ETH-ERC20 trading currencies. This means that if a trader wants to buy DAI tokens through COMP, they must trade the COMP for ETH and then enter the ETH-DAI pool to get DAI.
The V2 version solved this problem and introduced the ERC20-ERC20 token pools, improving the platform and making it more user-friendly. However, the V2 version alone did not prevent lowering the spread status and liquidity, as it raised the levels of competitors. With V3, Uniswap may aim to cover all bases.
Better Liquidity, Flexibility and Price Range Layout
On May 5th, the V3 version of Uniswap may be the most important launch according to the features it will introduce to the platform. Some of the most vital features mentioned on their blog include Concentrated Liquidity, December Orders and Flexible Fees.
When entering the technical basis of Concentrated Liquidity, this special feature improves the area. Because it allows LPs to charge more in their price range.
Consider the linear curve above. Previously, LPs would have to distribute their liquidity evenly along this x * y = k price curve. This meant that most of the liquidity was not exhausted and LPs were not rewarded with any fees. Risk remained high as transactions included high drop due to weak liquidity across a wide range of prices.
With V3, this is completely changing as traders can choose a range where they want to allocate their assets and earn fees. For example, an LP that puts 5 ETH and 5000 COMP in the ETH / COMP pool could choose the range 2000-2200 $. So, when ETH is purchased for any COMP between 2000-2200 USD, the LP charges for the swap. When the price of ETH is above and below the range, fees are halted.
This particular feature can be extremely valuable because the maximum capital efficiency can be 4000x in the 0.10% price range, according to Uniswap.
How Will It Benefit The UNI Token?
The effect of concentrated liquidity can significantly increase the number of LPs participating in the network. With increasing liquidity, price differences will continue to decline and traders will find better prices during trading. The domino effect of more options and flexibility could trigger a price appreciation for UNI tokens as transaction volumes will begin to increase.
High fees remain a minor dilemma, according to Uniswap, with the launch of Optimism, an L2 platform as well as the Ethereum mainnet. For Uniswap and Ethereum, high transaction fees have been a major problem the BSC has completed to neutralize.
Overall, Uniswap could still be the leader among DEXs if its upcoming launch goes according to plan.