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Messari: The DEX market is saturated, how can Uniswap achieve alternative growth?

Messari

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Whether to open the fee switch (Fee Switch) is a big debate in the development of Uniswap.

Original title: "Expanding Uniswap&# 39 ;s Addressable Market"

Original author: Ashu Pareek, Kentrell Key

Original compilation: Wendy

Opinion Refining

In order to continue to maintain the current growth momentum, Uniswap must find a way to expand its reachable market (total addressable market).

Uniswap has successfully deployed on the Layer 2 (L 2 ) expansion plan, and the transaction volume accounted for L 2 in the third quarter of 2022 65 % of DEX (decentralized trading platform) trading volume.

Some projects have already used Uniswap's software development kit to integrate or enhance the Uniswap protocol.

Whether to open the fee switch (Fee Switch) is a big debate in the development of Uniswap. The question is whether new pools of capital for growth investments will offset a weaker competitive position with liquidity providers.

Uniswap has found the product-market fit. The release of Uniswap V 3 addresses the most glaring flaw of automated market makers — capital inefficiency. Uniswap, on the other hand, has managed to saturate its current reachable market: it is the largest DEX with a cumulative trading volume of $1.3 trillion, accounting for more than 70% of Ethereum DEX trading volume.

The dilemma is that this dominance arose precisely because Uniswap succeeded in eating the low-hanging fruit. This means that continuing to optimize DEXs and squeeze the growth of existing markets will not be enough to continue on their current trajectory.

However, Uniswap has remained true to its innovative and approachable spirit, and has begun to pull the most challenging lever of growth: expanding its reachable market. In other words, attract a larger audience. In the past, Uniswap has used fairly straightforward methods to scale markets, such as the deployment of L 2. It also employs more complex strategies, such as developing a robust ecosystem around funding, complementary projects, and integrations. As the core of the flow of value in cryptocurrencies, the results of initiatives such as NFT integration and fee switching will have a wide-ranging impact on the entire industry.

Multi-chain

Uniswap Labs launched its Ethereum mainnet in November 2018 The iconic product V 1 AMM, and in 2020 launched the V 2 . The launch of V 3 in 2021 addresses capital efficiency and marks the beginning of the protocol's expansion into a multi-chain future.

Messari: After the DEX market is saturated, how can Uniswap achieve alternative growth?

Except On the Ethereum mainnet, Uniswap V 3 was subsequently deployed to EVM-based expansion solutions Optimism, Arbitrum, Polygon, and Celo. These deployments quickly attracted liquidity and trading volume from other DEXs. The liquidity provided by these deployments is as high as 246 million US dollars, and in the third quarter of 2022, more than 65% of the DEX trading volume on these chains will be conducted through Uniswap. The L 2 transaction volume deployed by Uniswap has accounted for nearly 20 % of the total transaction volume of the protocol.

With the development of more EVM expansion solutions, Uniswap may be deployed on more chains. In October, a proposal to deploy Uniswap V 3 on zkSync 2.0 was implemented, which is expected to go live in the fourth quarter. In addition, in "Temperature Check" of Snapshot, Token Holders have expressed their support for deploying V 3 on Aurora. If the proposal passes, Aurora plans to incentivize Uniswap users, with $5 million to fund liquidity mining activities and long-term agreement development.

Multi-chain and Ethereum L 2 are cheap to deploy. In fact, there are often on-chain incentives to issue Uniswap users with their native Token . In addition, these chains have lower gas fees than Ethereum, effectively lowering the entry barrier for retail investors and expanding Uniswap’s user base. Given Uniswap's solid reputation and deep liquidity, newer chains tend to implement incentive strategies in the hope that users and their liquidity will remain in the long run.

Funding

Uniswap Labs recently received a $165 million B round led by Polychain Capital financing. These funds will be used to expand the development of the Uniswap product line to reach more users.

In addition to the capital infusion, Uniswap's vision is backed by a large community treasury holding more than 17 UNI worth as of press time One hundred million U.S. dollars. Token Holders are responsible for deciding how these funds are spent, funding internal organizations such as the Uniswap Grants Program (UGP) and most recently the Uniswap Foundation (UF).

Following its creation, UF absorbed and expanded UGP, which will allocate $60 million in UNI over the next three years. In the nearly two years since UGP launched, around $9 million in grants have been issued to a range of ecological proposals. These grants are intended to grow the Uniswap ecosystem, and the number of projects built on top of Uniswap will continue to grow.

In addition to donating funds, UF has supported several community-led projects - most notably, the ongoing Optimism on Liquidity Mining (LM) projects. UF did not directly launch the liquidity mining plan, but deployed the 800,000 OP obtained from the Optimism airdrop through community partners, including Arrakis Finance, xToken Terminal, and Gamma Strategies.

These projects provide active liquidity management services for the Uniswap V 3 pool, thereby supporting the effective distribution of incentives to users who provide "in-the-price" liquidity , resulting in a deeper pool. At the same time, some users are familiar with exchanging Token process, but they will not provide liquidity due to a misunderstanding of the flexible mechanism of Uniswap V 3, or the need for active management to maximize returns. As new and existing projects are allocated through these projects, they are exposed to the LP tools, reassuring them.

Supplementary project/ecology

Traders and liquidity providers are two completely different user group, and a third group that is often overlooked is developers. Since Uniswap is open source, all builders can take advantage of the Uniswap Software Development Kit (SDK) to apply their ingenuity to Uniswap. In practice, this means projects can integrate Uniswap or enhance existing platforms.

By letting other projects integrate its DEX, Uniswap can benefit from many of the latest DeFi innovations and experiments without any extra work. Additionally, when developers enhance the functionality of Uniswap, they attract more users to this DEX. Most of these projects either simplify the user experience or add more elegant ways to interact with the protocol without complicating the core user interface.

Messari: After the DEX market is saturated, how can Uniswap achieve alternative growth?

Integration

The integration of new projects can be roughly divided into three categories: aggregators, wallets, and other DeFi protocols.

Aggregators are probably the least impactful category in terms of Uniswap's user growth and acquisition. DEX aggregators in particular, like 1 inch and ParaSwap, exist purely to optimize execution (price, including slippage, fees, and gas costs). While aggregators have brought in 26.8 % of Uniswap's trading volume over the past two years, only 48.6 % of their trading volume is via Uniswap. Even if aggregators are a useful tool, they will not attract additional trading volume because they have no built-in growth flywheel or network effects of their own (i.e. for a DEX, trading volume increases liquidity and vice versa).

Dashboard (dashboard) also belongs to a category of aggregator. These non-custodial interfaces, such as Zerion, Zapper, and Instadapp, make Uniswap easier to use. They simplify the user experience by centralizing position data and enabling position management. Users can create new positions through position management (swap Token ) and liquidity provision, both of which can access Uniswap.

Another category that develops swap functionality is wallets. Wallets such as Trust Wallet and Rainbow Wallet have integrated the Uniswap protocol, meaning users can perform swaps directly in their wallets. Other popular wallets, such as Coinbase Wallet, are also available through DEX aggregators ( 0x) Token Swap functions will often end up being routed through Uniswap.

Other DeFi protocols integrate Uniswap in a number of different ways. Simpler integrations through protocols like Para Space and MakerDAO allow LPs to use their V 3 liquidity positions as collateral, increasing capital efficiency. Projects such as Opyn and Ondo Finance are integrating Uniswap into their options and structured products respectively to provide users with more complex strategies.

Enhancement

The enhancement of Uniswap refers to simultaneously extending the functionality and making the protocol easier to use.

In terms of liquidity provision, projects like Arrakis Finance have automated liquidity management on Uniswap V 3 and reintroduced composable LP Token . Arrakis Finance in particular currently manages approximately $880 million in liquidity on Uniswap V 3, or approximately 31% of its total liquidity. exist Token For swaps, traders can use projects like Sorbet Finance to place limit orders.

Other projects expand Uniswap's "non-human" market. As of now, trading bots are expected to account for 20 - 40 % of Uniswap trading volume. Open-source software like Hummingbot helps users create high-frequency bots that run market-making and arbitrage strategies alongside Uniswap.

NFT

Although Uniswap has used NFT to represent V 3 liquidity positions, but This is a big departure from the NFT integration in its roadmap, which promises to bring NFT swaps to the platform.

Uniswap Labs released an NFT announcement in June 2022, mainly about the acquisition of Genie, an NFT transaction aggregator. Since then, Scott Gray, the founder of Genie and now the head of NFT products at Uniswap Labs, has begun to add color to the Uniswap NFT roadmap.

The announcement of the acquisition of Genie and the integration of sudoswap shows that Uniswap decided to aggregate and obtain liquidity from multiple NFT trading platforms, rather than like its ERC-20 Token That way "owns" liquidity. Tactically, this makes sense because Token Markets rely more on depth (reducing slippage), while NFT markets rely more on breadth (variety).

This strategy could have far-reaching consequences in terms of user growth and acquisition, as NFTs currently have more Token Trade a larger reachable user base. All in all, the plan will bring a new and larger user base to this DEX while reducing customer acquisition costs.

Risk

The open source nature of Uniswap allows community developers to build on top of the protocol , promoting user growth and ingenuity. While these additional layers typically decouple clients from the core AMM, they can still introduce risk.

As an example, enhancements to simplify investment strategies require users to interact with smart contracts not developed by the Uniswap Labs team. Once this smart contract is attacked, users' funds will suffer losses, which may not be Uniswap's fault, but it will still have a negative impact on user confidence and the Uniswap brand. Additionally, the fragmentation of interaction points reduces Uniswap brand awareness and diverts attention to overlapping projects that cannot guarantee loyalty to the Uniswap ecosystem.

More and more Uniswap deployments are also at risk in terms of fragmentation. As current users extend liquidity supply in new deployments often in pursuit of incentives, existing pools are more likely to lose depth, which leads to higher price slippage during trade execution. That said, this dynamic can be offset by centralization of new liquidity providers and fee tiers. Higher slippage not only prompts traders to look elsewhere, but also reduces the chances of DEX aggregators trading through Uniswap pools.

Fee switch

For a long time, the fee switch has been the most discussed topic in the Uniswap community one. Currently, 100 % of transaction fees are shared by LPs based on their contribution to the liquidity reserve. This tax-free model was critical to Uniswap's development into the giant it is today.

The fee switch is controlled by Uniswap governance, which refers to the transfer of part of the transaction fee from the liquidity provider to the Uniswap DAO treasury as a protocol fee. Although the fee switch has not yet been launched, in July, Token holders voted in Snapshot to conduct a 120-day fee switch pilot for the three major stablecoin-ETH pools (DAI-ETH, ETH-USDT, USDC-ETH) Test, 10 % agreement fee. The fee switch will challenge the bottom line of liquidity providers, and at the same time increase the probability of liquidity supply being redistributed to other trading platforms.

If the proposal is successfully voted on-chain, the pilot will be one of the largest in Uniswap history. It will determine whether LPs reallocate their liquidity supply elsewhere, or stick to the DEX with the most volume. Some believe that activating the fee switch is a risky short-sighted move, and the focus should be on growth and user acquisition. Others argue that retaining agreement fees to UNI Token Holders provide a new tool that can be leveraged to facilitate the development of the protocol.

In October, UF announced funding for Alastor, a team that recently provided research on the qualitative and quantitative impact of fee switches to the community.

There was also some interesting discussion around fee switches and UNI Token value added. Nascent co-founder Dan Elitzer describes a future in which the Uniswap protocol will move to a specific application chain ("appchain") or rollup based on Ethereum.

The premise of the application chain argument is that there are three types of costs paid by traders: swap fees, gas fees, and MEV—and only swap fees can be paid by protocol controlled. In the world of application chain or rollup, the gas fee will become cheaper, for UNI Token Bringing more flexibility in the flow of value, it can be used to control validators. While a change of this magnitude seems unlikely to materialize in the short term, it does reveal the possibilities for innovation.

An additional risk is that the current state of Uniswap may reveal that Uniswap Labs and UNI Token Holders are increasingly divided. The $165 million funding round reportedly values Uniswap Labs at $1.66 billion, equivalent to the value of UNI held in the community treasury. On top of that, a total of 40% of the Genesis UNI supply was allocated to the team, investors, and advisors during the 4-year lock-up period. Therefore, although the distance from this part Token There are still two years left to unlock, but additional financing could deepen their interest in Token Added concerns.

Conclusion

Uniswap has successfully captured the DEX market, so what is the next step? Much of this success stems from ecological funding and open source development. Both moves pave the way for expanding its addressable market by launching new businesses. Multi-chain deployments, integrations, enhancements, and the acquisition of Genie have demonstrated vertical and horizontal expansion.

In addition to the aforementioned expansion, upcoming operational changes may negatively impact Uniswap's core user base. The fee switch experiment, if passed, would be an important test for both UNI holders and the protocol builders of crypto as a whole. No matter what happens in the end, Uniswap Labs has sufficient funds to continue building. The team that launched Uniswap during the last bear market may continue to innovate in this bear market.