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The Uniswap version 3.0 brings along the concept of Concentrated Liquidity resulting in better capital efficiency for liquidity providers.
On Wednesday, May 5, automated market maker Uniswap announced its version 3.0 going live on the Ethereum blockchain network. The newly launched version of the automated market maker aims to attract more crypto-traders and high-net investor funds.
As revealed by Uniswap in March, version 3.0 will make the on-chain exchange of tokens more capital efficient. Decentralized exchange Uniswap first appeared on Ethereum back in 2018. Currently, it is the fourth-largest Ethereum-based DeFi application with over $7 billion in staked assets. The official blog post of Uniswap notes:
“Uniswap v3 is the most powerful version of the protocol yet, with Concentrated Liquidity offering unprecedented capital efficiency for liquidity providers, better execution for traders, and superior infrastructure at the heart of decentralized finance”.
The announcement notes that developers can start building immediately on UniSwap V3. Besides, the pool interface for liquidity providers supports the creation of V3 positions along with concentrated liquidity ranges and multiple fee tiers. Each position has been represented as an NFT and serves as a unique piece of on-chain generative art.
Uniswap Version 3.0: Concentrated Liquidity
One of the most innovative things of the Uniswap version 3.0 is “concentrated liquidity”. This enhances the basic functionality of an AMM fr all the users. The basic AMM will allow market participants to deposit two tokens in any liquidity pool. Each pool then offers a price for both tokens.
When traders buy or sell tokens from such AMM pools, they have to pay a small fee for each trade transaction. The protocol shares this fee among all pool’s depositors on a pro-rata basis. This approach can leave a lot of liquidity unusable. Thus, it would prevent the traders from making large-sized trades.
On the other hand, the concept of Concentrated Liquidity will allow liquidity providers to define a band in which their deposits will trade. Thus, if the traders deposit 100 USDC and 100 DAI in a pool, the concentrated liquidity ensures that the USDC will never trade less than 0.99 DAI or even greater than 1.01 DAI. In an email to CoinDesk, Peter Johnson of Jump capital writes:
“Uniswap v3 is a big step forward for the protocol. The increased flexibility it provides market makers on how they provide liquidity into the protocol makes liquidity provisioning more attractive, and should make trading on Uniswap more efficient for traders.”
UniSwap’s native DeFi token UNI has surged significantly this year. The UNI price has jumped more than 8x year-to-date and is currently trading at $42 with a market cap of $22.05 billion. UNI is among the top cryptocurrencies in the market.