Uniswap Comparison
Last updated
Last updated
As our project involves synthetic NFTs and we hope to adopt the DEX with the largest TVL, Uniswap presents itself as the most ideal option. The following is an analysis of the difference between v2 and v3 of Uniswap, which helped us to eventually decide on using Uniswap v2 to build our project because of its ease of use, higher number of swaps and trading pairs.
Uniswap launched its first ever product in November 2018 and released two new versions overtime. Uniswap v2 was released in 2020 where it offered swapping between ERC20-ERC20 pools, while it was only possible to do swaps between ETH-ERC20 pools in v1. Apart from this, v2 improved the user interface and experience of the v1 system, capturing over 99% of the volume in just 4 months after its launch (Treaqura, 2022). Coupled with the DeFi summer in 2020, the volume in that period also witnessed explosive growth from less than $10m volume per day in early May to $200m daily volume at the end of August 2020.
In 2021, Uniswap released its v3 with the main goal to surpass stablecoin-based AMMs such as Curve and centralized exchanges by facilitating low-slippage trade execution. Some new key features of Uniswap v3 include providing concentrated liquidity, flexible fees via a 3-tier pricing structure and the usage of liquidity oracle.
Concentrated liquidity refers to liquidity bounded within some price range. This means that a liquidity provider can concentrate their liquidity by providing their liquidity to a specific price range that they perceive traders utilize more. Traders can also potentially enjoy deeper liquidity in the price ranges that they frequent, as liquidity doesn’t have to be spread out across the entire range anymore. These tightly bounded ranges allow LPs to approximate their preferred reserves curve, while still being efficiently aggregated with the rest of the pool, thus offering better capital efficiency compared to V2 pools. However, a downside to this feature is that if the price moves away from the chosen price range, the LP’s position will become 100% composed of the losing asset, putting the LPs at the most extreme form of impermanent loss. The tighter the range, the faster the loss.
As for liquidity oracle, when the market experiences price change and goes beyond the LP’s specified price range, the liquidity is automatically removed from the pool and will no longer earn rewards. The liquidity will be shifted to a less valuable asset while waiting for the market to arrive at the specified price range. At the same time, LPs can update their price range to meet the current market price range to start getting rewards again.
In 2022, v2 had a total of 424400 unique wallets that made a swap with an average of 9.35 swaps per wallet, thereby dominating 67.1% of the total swaps on Uniswap as of 28th December 2022. In comparison, v3 had a total of 263263 wallets that made a swap with an average of 8.69 swaps per wallet (Treaqura, 2022) (Refer to Figure 1). In addition, an interesting note is that more than 50% of swaps are done on pairs existing on v2 only, which shows that there are exclusive trading pairs on V2, which accounts for over 62K different trading pair combinations (Refer to Figure 2).
The V2 dominance in trading quantity can be attenuated to its game changing feature of providing a platform for long tail assets. However, v3 has dominated in the overall trading volume (USD), accounting for 87.3% of the total volume as of 29th December 2022 (Refer to Figure 3). This trading volume dominance is heavily reflected is in the stable coin (i.e. USDC/USDT) trading space ever since the introduction of a 0.01% fee tier in November 2021, which undercut the major players in the stable coin space such as Curve Finance. In addition, the average and median value of a transaction on v2 is $5800 and ~$1000 respectively as compared to that of $53,000 and ~$5500 for v3 in 2022 (Treaqura, 2022). These values show that investors who swap larger values are more active on v3 as the pools have lower fee tiers, making trades cheaper.
Overall, v3 has become the dominant version for high volume trading, as the lower fee tiers offer lower cost to the trader. On the flipside, v2 remains the more popular version when looking at total number of swaps and users, and is mainly being used for the lower volume liquidity pools.
TVL (as of 19th Dec 2022)
$863.27m
$2.46b
Rebalancing of swap fees
Not necessary, everyone receives the same reward per dollar deposited
Yes, swap fees are collected separately from the pool and must be manually redeemed when the owner wishes to collect their fees.
Liquidity providers have to actively monitor and adjust their position and manually claim the rewards to obtain the best yield by compounding these fees
Fee Structure
Flat fee of 0.30%
Different fee tier levels across trading pairs
(0.05%, 0.30%, and 1.00%)
0.05% for stablecoins like DAI/USDC
0.30% for standard non-correlated pools like ETH/DAI
1.00% for the non-correlated pairs
However, a risk of this fee structure is the fragmentation of liquidity pools. A pool of 2 tokens can be found on both Uniswap v2 and v3, within v3, there may also be 4 pools of the same 2 tokens that exist in the different fee tiers (0.01%, 0.05%, 0.03% and 1% pools). This is thus not capital efficient.
Best suited for
For investors who prefer a more simple platform and those looking to trade new and exotic pairs
Investors who have a working strategy such as hedging to battle against the high impermanent loss on concentrated position.
Investors should also have capital that is large enough to outweigh the high gas fee on each rebalancing position / claiming reward on Ethereum
