Uniswap, a leading DeFi application, is all set to launch Uniswap V3. Uniswap V3 is to be launched with features including concentrated liquidity, capital efficiency, active liquidity, range orders, non-fungible liquidity, flexible fees, and a license to use its open-source code. Concentrated liquidity completely transforms how LPs provide liquidity for AMM pools on Uniswap.
Uniswap says the concentrated liquidity feature will give the liquidity providers (LPs) to gain control over price ranges over their capital allocation. Also, the individual positions will be cumulated together into a single pool to form a single combined curve for users to trade with. Liquidity providers with Uniswap V3 will be enabled to create market spaces with customized price ranges along with creating individual price curves. By doing this, the liquidity providers can improve their capital efficiency. Uniswap claims that Liquidity Providers will be able to provide liquidity with up to 4000x to the capital efficiency when compared to V2.
The position of Liquidity Providers will now be made to form a single pool. The aggregated curve will then be provided for users to trade with. The Uniswap V3 thereby successfully eliminates the gas cost increase per LP. According to the announcement by Uniswap, “Trading fees collected at a given price range are split pro-rata by LPs proportional to the amount of liquidity they contributed to that range.”
Uniswap V3 will also roll out the tiered fee structure, and with the current 0.3% flat fee, V3 will introduce three tiers of fees for different pools, including 0.05%, 0.3%, and 1%. This structure will help Liquidity providers to set their margins given the volatility. For example, LPS can set the USDC/DAI at 0.05% fee tier and the ETH/DAI to be in the 0.3% range.
Uniswap V3 will also be introducing various other upgrades like oracles. The Uniswap V3 is foreseen to improve AMMs drastically, and its effectiveness will be crucial to attracting multifold capital inflow in DEX.