The day when Uniswap V3 is officially released is getting closer, and there are more and more speculations about what disruptive improvements V3 will bring.

Uniswap has always been the most commonly used decentralized exchange (DEX), and the number of active users (measured by address) is approximately 10 times that of competitors.

The next upgrade of the Uniswap protocol, V3, is the long-awaited upgrade for many DEX users, and promises to carry out a major upgrade on top of V2. The importance of this upgrade even surpasses the previous Uniswap V1 to V2 upgrade.

The content of this article comes from The Block Research team, focusing on publicly available information and inferring what features will be integrated in Uniswap v3.

Public information (and speculation) about v3

Uniswap v3 is the latest iterative version that the Uniswap team is developing privately.

The biggest difference between Uniswap and SushiSwap (Uniswap's fork agreement) is that the SushiSwap community has stronger ownership. SushiSwap's roadmap is public, and its development changes with the change of community consciousness.

Given that Uniswap was developed in secret, it is difficult to say that Uniswap is owned by the community.

However, this can be understood from the nature of the content being developed.

The Uniswap community has been publicly discussing the parts that can be modified in the agreement, including the terminated UNI token subsidy, funding of the Uniswap grant program (about 100 applications have been received), and whether to open the 0.05% handling fee to the UNI generation Coin holders.

Uniswap v3 is a brand new protocol that will be under the supervision of UNI token holders, and development decisions will go beyond simple integration and partnership. V3's research work has been kept secret until ready, which is understandable. This also gives the Uniswap team the possibility of exceeding expectations.

After Uniswap v3 was released, Hayden Adams, the founder of Uniswap, said that he hopes that all future versions of the protocol can be built through public collaboration.

1. Reduce slippage and improve capital efficiency

All public information about V3 points to reducing slippage and improving capital efficiency. It can be summarized as the amount that a trader can purchase without using the transaction volume. Some information even believes that V3 will bring zero slippage trading experience to traders.

The common indicator to measure the success of the DeFi agreement is the total locked value (TVL). For transactions, the success of this metric is somewhat contrary to the goal of effective exchange, because a higher TVL is a measure of efficiency relative to transaction volume. In short, the less TVL, the more transaction volume, the better. TVL seems important because the current AMM describes the direct functional relationship between TVL and slippage.

In order to improve capital efficiency, here are some significant AMM improvement attempts. First, if you know in advance that there will be no fluctuations between the two assets, you can change the pricing curve. This is what Curve does to optimize the stablecoin-to-stablecoin swap. Curve only charges 0.04% of fees (half of which is given to LPs and the other half to CRV token holders), while Uniswap charges 0.3%, and unless asset prices plummet, LPs will not suffer losses due to fluctuations.

What functions will Uniswap V3 introduce to improve capital efficiency is an open question. However, if V3 is to achieve a 100-fold improvement, this upgrade will have to be unprecedented and a completely different upgrade from the current similar products.

2. Deploy on both Ethereum and L2 at the same time

Uniswap V3 is speculated to be a Layer 2 deployment, and it is expected to use the Optimistic Rollup developed by the Optimism team.

At present, if developers want to stay in the Ethereum ecosystem, they don't have much choice unless they expand. At present, there are many solutions for the expansion of Ethereum. The most commonly used side chains are Matic and xDAI. They all need their own validator sets and will not inherit the security of Ethereum. Real Layer 2 solutions such as Optimistic Rollup and ZK Rollup derive their security from the underlying blockchain of Ethereum.

The main trade-off between the two types of Rollup is composability. It is easier to build Optimistic Rollup that allows permissionless smart contract deployment, and many ZK-Rollup-based projects (such as dYdX, Curve, Loopring, DeversiFi) are built in an application-specific environment.

In the best case, the deployment of Uniswap on Optimism will trigger the migration of many applications to this same Rollup, which will allow the type of atomic interaction between different protocols (this is the case with Ethereum today). However, there is a risk in this, that is, the start of Optimism will be delayed. It is not surprising that it is common for Ethereum technology upgrades to be delayed in the past.

3. Fees as a function of volatility (based on each market)

This improvement is known, but the details are rarely known. However, there is one detail that has been discussed for a long time, that is, dynamic fees and market-based fees, rather than charging the same 0.3% fee for all fund pools. This is a question mentioned many times in 2020, but the exact implementation is still a question mark.

The simple way to solve this problem is to calculate the fee based on some time-weighted average of historical volatility. In August last year, Hayden Adams mentioned that this has been considered, and the v3 approach will be very different.

4. Limit order

Another guess of V3 is that limit orders are allowed. The literature on prediction markets has already conducted research on this, combining function-based market makers with limit orders.

In theory, traders will interact with AMM first, and as the prediction market becomes more liquid, most transactions will be matched with limit orders. The limit order starts to be aggregated around the market price, and then the transaction execution returns to AMM at the end.

Limit orders work poorly on the basic layer (especially Ethereum, which is currently in a state of high handling fees), because the size of the order book is large and the update cost is very high, unless the order is maintained by an off-chain repeater . This kind of function performed in a decentralized manner necessarily requires effective L2 deployment.

Hayden Adams (Hayden Adams) said that the order book can be enhanced through smart contracts, and the efficiency/flexibility of AMM will continue to improve before AMM is integrated with the order book. Projects carried out from the perspective of AMM will win. It can be said that this means focusing on easy-to-participate market-making strategies, which is a magic weapon for winning, but will combine certain aspects of market-making on the traditional order book.

Other guesses

Front-end protection (may be mitigated by MEV auctions on Optimism later), Uniswap v3 is more difficult to fork (precise replication should be easy, but "increasing complexity" will be more difficult), and some other smaller ones Supplement, such as leverage (or others can build leveraged products on it), single currency liquidity.

In general, the message of Uniswap is: v3 is not only an optimization, but also an important step forward.