How Uniswap V3 launch will impact the token?

The summer of 2020 completely changed the crypto ecosystem as the rise of DeFi and decentralized exchanges posed a unique opportunity for many players in the crypto landscape. The elimination of KYC, no downtime, and convenience resulted in millions flowing into DeFi. Uniswap was at the forefront of this movement. The decentralized exchange token UNI, is currently in the top 10 rankings, and other projects such as PancakeSwap, SushiSwap, Curve Finance are not far behind.

Alternatives have emerged, alternatives that are eating into Uniswap’s market share. One of these alternatives, SushiSwap, is one that has been touched upon repeatedly. However, there is another food-themed DEX that is somewhat going under the radar despite its stupendous growth –  PancakeSwap.

While taking liquidity away from UniSwap, other DEXs are making it a point to remain relevant in the space, however, Uniswap may have a potential ace up its sleeves – the imminent V3 launch.

Uniswap V3; what changes all around?

AMBCrypto recently covered an article that describes the situation between current DEXs. PancakeSwap has risen up the rankings according to data; it was the 2nd largest DEX in terms of trading volume in Q1 2021.

However, the growth of PancakeSwap has been assisted by Binance Smart Chain, and with the V3 launch, Uniswap may be able to bridge the gap again.

In order to understand the importance of V3, we need to familiarize ourselves with the features established by the V1 and V2 versions.

Based on Automated Market Marker or the AMM model, Uniswap became popular after it replaced the Order Book method with Liquidity Providers (LPs), who invested in trading pairs in Liquidity Pools. However, V1 supports only ETH-ERC20 trading pairs, which meant that if a trader wanted to buy DAI tokens via COMP, they would need to swap COMP for ETH and then enter the ETH-DAI pool to get DAI.

The V2 version solved it and they introduced ERC20-ERC20 token pools, improving the platform and making it more user-friendly. However, with competitors raising their level, the V2 version alone did not avoid slippage and dropping liquidity. With V3, Uniswap might be aiming to cover all the bases.

Better Liquidity, Flexibility, and Range Order: Perfect Trifecta?

On 5th May, Uniswap’s V3 might be its most important launch based on the features it will be introducing to the platform. Some of the most vital features mentioned in their blog included Concentrated Liquidity, Range Orders, and Flexible Fees.

With getting into the technical crux of Concentrated Liquidity, this particular feature improves the space because it would allow LPs to see more fees at their price range.

Source: Uniswap

Consider the linear curve above. Earlier, LPs would need to distribute their liquidity evenly long this x*y=k price curve, which meant that most of the liquidity does not get used up and LPs are not rewarded with any fees. The risk has also remained high as trades involve high slippage because of thin liquidity across a wide price gap.

With V3, that completely changes as traders would be able to select a range where they want to allocate their assets and earn fees. For example, an LP putting down 5 ETH and 5000 COMP in the ETH/COMP pool may select the $2000-$2200 range. Therefore, whenever ETH is bought for any amount of COMP between $2000-$2200, LP receives fees for the swap. Once the price of ETH is above and under the range, the fees are stopped.

This particular feature could be extremely valuable because according to Uniswap, the maximum capital efficiency could be 4000x in a 0.10% price range.

How does it benefit the UNI token now?

The impact of Concentrated Liquidity could significantly improve the number of LPs joining the network. With increasing liquidity, slippage will continue to drop and traders would receive better prices during trading. The domino effect of more choice and flexibility may trigger a price appreciation for UNI tokens, as transaction volumes would begin to soar.

One minor dilemma remains the high fees, which according to Uniswap, will be solved by the introduction of Optimism, an L2 platform aside from the Ethereum mainnet. For Uniswap and Ethereum, high transaction fees have been a major problem, which BSC has completed neutralized.

Overall, Uniswap could be the leader among DEXs again, if its upcoming launch goes according to plan.