Uniswap V3 evaluation: how to lead the next wave of DeFi bull market?


If you only look at it from a micro perspective, especially for traditional traders, V3’s granularization concept is unremarkable, and its trading method is closer to a centralized exchange. But in the long run, V3 brings more customization and composability to investors, greatly expanding the boundaries of DeFi investment strategies.

The significance of V3 is to provide more customizable strategies to be compatible with more investment needs, and the NFT-based LP Token has become a value unit that matches small investment demanders and professional team suppliers, and realizes the delivery of the Internet of value. The greatest innovation of DeFi today.

There is an impossible triangle problem in investment in return, risk, and scale. V3 improves the efficiency of capital use to increase returns, but also amplifies risks. Therefore, it is particularly critical to provide Uniswap V3 with external feeding data and to achieve risk pricing.

The tightening of global supervision and heavy pressure on CEX is the key node for the DEX platform to grab the market. DeFi’s realization of value transfer on the decentralized blockchain is the general trend, but it also requires the right time and place to truly break out. The V3 ecology is currently in a gestation period, and more innovative projects will appear to be compatible with it in the near future, such as new liquidity machine gun pools, customized strategies, etc.

The imagination of NFT-based LP Token

In Uniswap V2, after the user adds liquidity, Uniswap will return an ERC20 token to the user, which is an LP Token. This type of LP Token represents the ownership of the liquidity provided by the liquidity provider. When users want to redeem liquidity, they only need to destroy their LP Token to get the share of the corresponding token in the fund pool.

Since Uniswap V2 adopts the overall fund pool model, LP Token is a standard ERC20 token. But in V3, each LP creates liquidity based on a different price range, so the liquidity provided uses ERC721 tokens as warrants. Uniswap will also issue customized NFT cards for each liquidity provider.

This simple NFT card represents a value unit, carrying the time cost, risk cost, and strategic value of the liquidity provider. In the development of the Internet, the standardization of value units has laid the cornerstone of various Internet platforms, such as Amazon’s product links and Instagram pictures. Nowadays, the blockchain world is just like the Internet in 2003-2004. It is on the eve of an explosion. The improvement of value units will allow users to standardize and grow rapidly, and eventually form a network scale effect.

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The essence of NFT-based LP Token is asset securitization. As a financial tool, asset securitization is designed to improve the allocation of resources and increase the efficiency of capital operation. In traditional finance, the opaqueness of asset securitization has led to the hidden danger of out-of-control risks, which has been criticized all the time. But in a decentralized world, the trusted value of the blockchain greatly eliminates such concerns.

Decentralized liquidity machine gun pool

Ordinary users cannot respond quickly under Uniswap V3’s liquidity plan, and it is more difficult to grasp a reasonable price range. The oligopoly effect is obvious, and the professional quantitative market maker team has more advantages. Uniswap V3 granulation has derived more customized strategies, thus creating a liquid machine gun pool market.

In the short term, the decentralized liquidity machine gun pool project has great value to the investment demand side, and in the long term it has positive feedback incentive benefits to the asset supplier. The core lies in the data algorithm between supply and demand. Data feedback helps to form a benign curatorial market. High-quality and stable strategies are sorted and screened, and high-risk and low-return strategies are quickly filtered and eliminated, so that efficient resource allocation can be achieved.

Under the synergy effect of the innovative machine gun pool project, Uniswap V3 will be constructed into a more stable derivatives system to buffer the risk of malicious smashing by the project party and further protect the interests of investors. The underlying asset corresponding to LP Token is a combination of basic token and project token. This means that in the case of drastic fluctuations in market conditions, the rate of change in the value of pledges will be reduced, thereby achieving a liquidation buffer.

Impossible triangle

Uniswap V3 introduces mechanisms such as “centralized liquidity”, “customized rate”, “range order”, “non-homogeneous position”, etc., all to improve capital efficiency. While helping liquidity providers avoid impermanent losses as much as possible and create higher returns, risks are inevitably increased. In the classic law of investment transactions, it is impossible to increase returns, reduce risks, and expand scale. It is difficult to achieve the three at the same time.

In Uniswap V3, the liquidity provider’s rate of return has increased significantly, but the capital risk has increased significantly. Especially under extreme market conditions, when the price of a certain type of asset in a trading pair soars and falls, and the price exceeds the price range set by the liquidity provider, the liquidity in the range will be drained by market arbitrageurs, and risk control becomes the liquidity provider. Difficult problem.

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When the risk of Uniswap V3 cannot be effectively controlled based on its own mechanism, liquidity providers can only rely on external risk data feeding. At this time, the NFT-based LP Token will play an important role as a value unit that bridges the world beyond DEX.

As an innovative derivative, LP Token also needs to be used efficiently. There is no lack of a large number of liquidity providers in the DeFi field. After they pledge trading pairs in the liquidity pool, they can only obtain unilateral benefits of liquidity mining, and the funds are not fully utilized. As a certificate of capital equity, LP Token can not only be circulated in the market, but also can be pledged to achieve a higher capital utilization rate.

Uniswap V3+CDO mode

The full name of CDO is Collateralized DEX Offering, which is developed by the DeepGo team. Users can achieve continuous financing through the risk classification of pledged bids. After Uniswap V3 provides initial liquidity, the market maker locks the LP Token as a pledge in the CDO agreement to continue to obtain liquidity buying.

When Uniswap users provide liquidity in V3 and set a larger interval, the fluctuation range of the value of the liquidity subject based on the functional currency is smaller. The following figure simulates the curve of the change of the overall value of the target with the token price after the user pledged the target of the same value in the V2 and V3 versions. Obviously, the value curve in the V3 version is smoother.

If the CDO supplier pledges the LP Token in the Uniswap V3 version, the pledge will significantly improve its anti-risk ability under extreme market conditions, which will also make the boost pool system more robust: when project tokens are rising sharply, do a good job Reasonable risk early warning; in the event of a sharp drop in tokens, take a good risk buffer. The combination of Uniswap V3 and CDO will ultimately enable high-quality assets to rise for a long time, and non-performing assets will gradually decline and be liquidated.

More precise risk pricing

In the CDO model, in order to achieve more precise risk pricing, risks need to be classified to form a fixed income tiered fund. In addition to the initiator (IP) of the project, there are also two types of main actors involved, which are divided into important participants (GP) and fixed income earners (LP). These two roles will provide continuous capital input for the project. As the direct investor of the project, GP will convert all the principal into project tokens, and the LP funds will be used as leverage of GP to help the project achieve more Great value growth.

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In the CDO model, IP pledges of high-quality assets (Uniswap V3’s LP Token) are allowed, which adds a layer of protection to GPs and encourages a large inflow of GP funds. Each inflow of GP funds will inject capital into Vault to store LP’s risk reserves and profits. With the increase in the volume of Vault funds, LP’s investment willingness has been gradually enlarged.

as follows:

to sum up

Uniswap V3 looks normal after the upgrade, but it provides a lot of innovative foundation for DeFi applications. Now that CEX has internal and external troubles, it is the critical moment of the rise of DEX. How does DeFi lead the next bull market? The core is to absorb the composability advantages of traditional finance, create more easy-to-use and efficient strategic products, and achieve the implementation of inclusive finance, thereby attracting more entrants.

According to the author, Uniswap did not originally have a moat, but as soon as V3 came out, it provided more composability solutions. In the world of open finance, the alpha benefits of V3 will derive many innovative products, thus forming a real head effect. This is its important strategic layout. However, DeFi is an inclusive finance rather than an oligarchic game. How can small investors through a certain agreement also enjoy the alpha benefits that scientists or giant whales can obtain? It is our current focus to explore the direction.

Author/ Translator: Jamie Kim
Bio: Jamie Kim is a technology journalist. Raised in Hong Kong and always vocal at heart. She aims to share her expertise with the readers at blockreview.net. Kim is a Bitcoin maximalist who believes with unwavering conviction that Bitcoin is the only cryptocurrency – in fact, currency – worth caring about.