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DeFi bucks crypto market correction as Uniswap v3 leads the charge

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Decentralized exchange Uniswap successfully launched version 3 of its platform in May — resulting in high trade volumes despite a downturn across the cryptocurrency markets.

The latest version of the hugely popular decentralized finance (DeFi) automated market maker (AMM) has quickly attracted a sizable amount of trade volume, seeing it move into the top five decentralized exchanges alongside Sushiswap, PancakeSwap v2 and its predecessor, Uniswap v2.

The success of v3 cannot be understated, as the cryptocurrency space has been under pressure due to a market correction in May that has cast shadows over what has been the most prolific bull run that the space has seen.

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Uniswap v3 is now the leading dex in terms of trading volume, recording an average of $1.2 billion in daily transaction volume, while Uniswap v2, which was leading until very recently, currently processes just under $1 billion in 24-hour transaction value.

Furthermore, a number of fellow DeFi tokens led a rally in the markets after last week’s tumultuous correction, which has since been dubbed the biggest capitulation in the cryptocurrency markets. However, the overall market saw a $400 billion increase in value shortly after as several altcoins surged, with Maker’s MKR token gaining 91% and Yearn.finance’s YFI seeing a 72% increase. The native token of the Uniswap exchange, UNI, and AAVE also saw significant increases in value.

As a result, some analysts believe that Uniswap v3 could see increased use by liquidity providers and retail users given its improved functionality. But what changed, and is it ready to replace the previous version?

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Uniswap v3 revisited

The nature of software development means that applications and platforms are in a constant state of improvement, and Uniswap is no exception. The first version of the booming DeFi AMM was released back in 2018 and has garnered thousands of users and hundreds of millions of dollars worth of transaction volume in the three years since.

Given the nascent state of the DeFi ecosystem, changes come quick and fast, and developers are constantly looking to improve current protocols and offer new products and services on their platforms.

Uniswap v2 was launched in May 2020 and introduced direct token swaps and other features that improved the overall performance of the AMM. In the year since, Uniswap has facilitated around $135 billion in trading volume and has established itself as one of the biggest cryptocurrency spot exchanges worldwide.

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While the platform continued to contribute significantly to the popularity and use of DeFi, developers began work on Uniswap v3 behind the scenes, introducing improved control for liquidity providers on the platform and multiple fee tiers.

V3 is a success?

Uniswap v3’s launch in May has been heralded as a success, with the trading volume on the platform racking up some eye-popping numbers despite its inferior total value locked (TVL) compared with Uniswap v2.

Johannes Jensen, product and project manager at eToro, told Cointelegraph that the improvements made to critical issues existing in the designs of constant function market makers (CFMMs) have been a key driver in the immediate success of Uniswap v3:

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“The primary contribution is the ability for liquidity providers (LPs) to offer bounded liquidity in a certain price range. With the custom liquidity provision feature, trading fees are collected and held separately, rather than automatically reinvested as liquidity in the pool. An interesting consequence of bounded liquidity positions is that the systemic implications of LP shares are inherently mitigated.”

Jensen noted that Uniswap’s v2 model essentially gave liquidity providers proportional ownership of a liquidity pool, which created a complex payout function due to impermanent losses, making the feature more similar to an options contract than a direct claim to the underlying asset.

Elias Simos, protocol specialist at Bison Trails, believes that the early success of Uniswap v3 and its innovations will continue to attract capital from liquidity providers given its improved efficiency:

“With Uniswap V3, we are seeing the emergence of capital-efficient DeFi. For reference, since its launch in early May, Uniswap V3 has ended up printing something like 120% TVL utilization vs Sushi trading at 20%.”

Aniket Jindal, co-founder of transaction infrastructure firm Biconomy, highlighted the fact that despite high fees, Uniswap v3 has attracted new users, which suggests that the improvements brought by the latest version of the AMM have been met positively: “What’s even more surprising is even after gas prices went up to insane levels, Layer 2 DEXs became more popular.”

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Liquidity providers chase improved returns

The cryptocurrency ecosystem has become accustomed to things moving at breakneck speed, and the prospect of bigger, better returns could well be the catalyst to drive more liquidity providers to Uniswap v3.

Simos believes that the inherent complexities of moving across to v3 will be a short-term barrier to entry, but the bottom line, better yields and new products will drive the migration to the newest version of the AMM:

“Yes, concentrated liquidity provides new challenges, perhaps even more overhead for LPs, but firstly the yield is better, and secondly there will soon be an ecosystem of products around Uniswap V3 LP positions that will abstract some of the complexity away.”

While Jindal agreed with Simos’ sentiments that v3 could continue to attract liquidity providers, there are some factors that might create some friction in the migration of users from v2 who will have to reapprove their tokens for v3 and also for “liquidity providers who now need to select a ‘price range’ which can be complicated for many to understand.”

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Jensen believes that the increased capital efficiency of the Uniswap v3 model will continue attracting new liquidity providers and traders: “The ability to provide bo

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