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Uniswap leaving rivals in the dust again? Some guesses about V3

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What improvements will Uniswap V3 bring? Rivals may already be shivering.

Original title: "Uniswap once again leaves rivals in the dust? Some guesses about V3"

Original source: Babbitt

distanceUniswapAs the official release of V3 draws closer, speculation about what disruptive improvements it will bring is mounting.

Uniswap has always been the most commonly used form of decentralizationexchange(DEX), the number of active users (measured by address) is about 10 times that of competitors.

The next upgrade to the Uniswap protocol, V3, is a long-awaited upgrade for many Dex users and promises a major upgrade on V2 that is even more significant than the previous Uniswap V1-V2 upgrade.

This article, from The Block Research team, looks at publicly available information and makes inferences about what features Uniswap V3 will incorporate.

Public information (and speculation) about V3

Uniswap v3 is the latest iteration that the Uniswap team is working on privately.

Uniswap and Sushiswap (Uniswap)yThe biggest difference is that the Sushiswap community has stronger ownership. Sushiswap's roadmap is public, and its development is changing with a changing sense of community.

Given that Uniswap was developed in secret, it is hard to argue that it is community-owned.

However, given the nature of the content being developed, this is understandable.

The Uniswap community has been openly discussing the parts of the agreement that could be modified, including the discontinued UNI token subsidy, funding of the UNISWAP grant scheme (about 100 applications have been received so far) and whether to open up the distribution of the 0.05% commission fee to UNI token holders.

Uniswap V3 is an entirely new protocol that will be under the supervision of UNI token holders, and development decisions will go beyond simple integration and partnerships. Work on V3 was understandably kept secret until it was ready. This also gives the Uniswap team the potential to exceed expectations.

Following the release of Uniswap v3, Hayden Adams, founder of Uniswap, said he hoped that all future versions of the protocol could be built through public collaboration.

1. Reduce slippage points and improve capital efficiency

All the public information about V3 points to reducing slippage points and improving capital efficiency. It can be summarized as the amount a trader can buy without using the volume of trade. There is even information that V3 will give traders a zero slip trading experience.

To measureDeFiA common indicator of protocol success is the Total Lock-in Value (TVL). For transactions, the success of this metric is somewhat opposite to the goal of efficient exchange, since a high TVL is a measure of efficiency relative to volume. In short, the less TVL, the more transactions, the better. TVL seems to be important because the current AMM describes a direct functional relationship between TVL and slipppoints.

In order to improve capital efficiency, there are some notable AMM improvements attempted. First, if you know in advance that no volatility will occur between two assets, you can change the pricing curve. This is theCurveIn order to optimize theStable currencyTo stablecoin swaps. Curve charges a fee of just 0.04% (half of which goes to LP and the other half to CRV token holders), while Uniswap charges 0.3% and LP is protected from volatility unless asset prices collapse.

It is an open question what features Uniswap V3 will introduce to improve capital efficiency. However, for V3 to be 100 times better, the upgrade would have to be unprecedented and completely different from its current counterparts.

2. Deploy on both Ethereum and L2

Uniswap V3 is supposed to be a Layer 2 deployment and is expected to adopt an Optimistic Rollup developed by the Optimistic team.

Right now, developers don't have much choice if they want to stay in the Ethereum ecosystem unless they scale up. Currently, there have been many solutions for Ethereum capacity expansion, the most commonly used side chain isMaticAnd XDAI, both of which need to have their own set of validators and do not inherit from EthereumsecuritySex. True Layer 2 solutions such as Optimistic Rollup and ZK Rollup derive their security from the Ethereum underlying blockchain.

The main tradeoff between the two Rollup types is composability. Builds are allowed without permissionIntelligent contractOptimistic Rollup is easier to deploy, whereas many ZK-Rollup based projects (e.gdYdX, the Curve,Loopring, DeversiFi) are built in an application-specific environment.

In the best case, Uniswap's deployment on Optimism will trigger the migration of many applications to this same Rollup, which will allow for the type of atomic interaction between different protocols (which is the case with Ethereum today). There is a risk, however, that the launch of Optimism could be delayed. Delusions of Ethereum technology upgrades have been common in the past, not surprising.

3. Expenses as a function of volatility (per market)

The improvement is known, but the details are little known. One detail that has been discussed for a long time, though, is dynamic and market-based fees, rather than the same 0.3% fee for all pools of money. This is an issue raised many times in 2020, but the exact implementation remains a question mark.

A simple way to solve this problem is to calculate costs based on some time-weighted average of historical volatility. In August of last year, Hayden Adams mentioned that this had been considered, and that the V3 approach would be very different.

4. The price list

Another guess for V3 is to allow limit orders. There is literature on prediction markets that has studied this, combining function-based market makers with limit orders.

In theory, traders will first interact with the AMM, and as the forecast market becomes more liquid, most trades will match limit orders. Limit orders begin to aggregate around the market price, and then trade execution reverts to AMM at the end.

Limit orders work poorly on the base layer (especially Ethereum, which is currently in a high commission state) because of the large state size of the order book and the high cost of updating it unless the order is maintained by an off-chain repeater. This decentralized approach to functionality necessarily requires effective L2 deployment.

According to Hayden Adams, the order book can be enhanced with smart contracts, and until AMM is integrated with the order book, the efficiency/flexibility of AMM will continue to increase. The project from the AMM perspective will win. Arguably, this means focusing on easy-to-participate market-making strategies, a winning formula, but combining some aspects of traditional order book market-making.

Other possibilities

On the front end protection (may be later in the Optimism by MEV auction to ease), Uniswap v3 is harder to be bifurcate (accurate replication should be easy, but "add complexity" will be more difficult), and some other smaller supplement, such as leveraged (or others can build leveraged products), the single currency liquidity.

Overall, the message from Uniswap is that V3 is not just optimization, but an important step forward.