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Uniswap V3 was publicly announced yesterday and I didn’t really get a chance to write about it, so I wanted to dedicate this newsletter to a review of V3 and the AMM space in general.
My initial reaction to Uniswap V3 in one, brutally honest word, was “meh.” But it got better when I read further into it, so let’s unpack what’s happening here.
Uniswap V3 is a solid upgrade and it’s clear that a lot of work went into it. But it under-delivers compared to the hyped up picture most of us had of the new Uniswap. People expected Hayden Adams to silence everyone and roll-out this amazing impermanent loss-protected and super efficient AMM that would leave Uniswap towering over everyone else.
Instead, V3 actually worsens impermanent loss, depending on your personal position and market movement.
The key innovation of V3, and the mechanism that worsens impermanent loss, is the concept of concentrated liquidity. This means that liquidity providers can now choose the price ranges in which they commit liquidity, instead of covering the entire zero-to-infinity range. To explain the mechanism, it’s important to first understand how AMMs work, in very simple terms.