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Uniswap V3 Range Orders

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jamesbachini
@jamesbachini
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Uniswap v3 is due to be launched on May 5th with Optimism layer 2 integration going live by July.

Uniswap’s v3 update will introduce an entirely new set of contracts and it will be up to users to migrate their funds and trading activity across. There are a number of improvements, the most important of which are:

  • Concentrated liquidity improves capital efficiency and enables limit type orders
  • Variable fees – Stablecoin @ 0.05%, Standard 0.3%, Microcap 1%
  • Oracle improvements to provide TWAP and Liquidity accumulator data
  • Liquidity providers get a position specific NFT rather than a ERC20 LP token
  • Reduced fees via layer two scaling on optimism (expected Julyish)

Synthentix recently tested optimism staking and got block times down below 0.3 seconds and transaction costs 143x lower.

How Range Orders Work

https://www.youtube.com/watch?v=Gth6BVsE0Gg

In Uniswap v2 a user would deposit 100 DAI and 100 USDT to a liquidity pool and only a tiny fraction of that capital would be actively traded. If the USDT price of DAI moves to 1.01 then the user will end up with a tiny amount more USDT and less DAI along with trading fees. An algorithm would spread the capital efficiency across a price curve from zero to infinity.

In Uniswap v3 a liquidity provider can provide a range at which they want to concentrate their liquidity. A user migh concentrate liquidity between 0.99 and 1.01 which would enable much more capital exposure and earn significantly more fees. However if the USDT price of DAI moves to 1.02 then the user will end up with $200~ USDT and no DAI until the price returns to the specified range and becomes active again.

This increases capital efficiency up to 4000% and reduces slippage for traders to a point where it could be more efficient than order books on centralised exchanges. I believe it will also make 3rd party liquidty management tools an almost essential requirement for liquidity providers. This could be a big opportunity for yield farming platforms like Yearn Finance if they develop liquidity range management and risk aggregators.

The key here is if price moves outside of the range then they essentially end up with 100% of the token that dropped in value. This will lead to complete impermanent loss until the price moves back into the range.

Note: impermanent loss is arguably the worse descriptor in blockchain terminology. It was originally used to describe fluctuations in stablecoins which will for the most part return to the pegged 1 USD. However when the price of an asset pair moves and does not come back which is often the case when trading altcoins the users liquidity pool gets more weighted towards the token that goes down in price. This “loss” may be greater than the fees gained in trending markets and is very much permanent.

The concept of concentrated liquidity opens up the opportunity for Uniswap v3 users to execute range orders. A user can provide concentrated liquidity within a tight range to swap tokens at a set price. This creates a decentralised orderbook of sorts which opens up a world of new opportunities for DeFi trading. I think there’s a chance we will see a whole new wave of speculation on “Uniswap Gems” this summer if the optimism layer two solution gets rolled out while the bull market is still in full swing.

Check my blog for more information on how I built a trading bot on Uniswap.

Posted Using LeoFinance Beta