Uniswap V3: A New Opportunity For Liquidity Providers

tl;drUniswap is the most popular decentralised exchange and, in fact, the most popular dApp on the entire Ethereum ecosystem. Uniswap released an update, Uniswap V3, which revolutionised how liquidity pools provide yield for liquidity providers. Let’s learn all about this huge update!
Uniswap V3: A New Opportunity For Liquidity Providers
Uniswap V3: A New Opportunity For Liquidity Providers
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What Is Uniswap V3?

Uniswap V3 is an update of the largest decentralised exchange and Ethereum dApp Uniswap, released in March 2021 on the Ethereum and Optimism mainnet. The most significant update on Uniswap V3 is a change and feature called concentrated liquidity.

What Is Concentrated Liquidity Without Uniswap V3?

In short, concentrated liquidity makes your assets provide even more yield for you. How? It is done by giving your assets "conditions". Here is an example. In previous versions, you were looking to invest in a liquidity pool and become a liquidity provider. By doing so, you were lending your assets to the pool, and in return, the pool collected transaction fees from the trades on that pool and gave those fees as yields to you. Behind the scenes, the pool took your assets and spread them evenly among traders to trade between the prices of 0 and infinity dollars. It means if the asset you provided skyrocketed to $100k or crashed to $10, the money you'd provided would be fairly allocated across every price range for traders. This is precisely the aspect that Uniswap V3 changes.

What Is Concentrated Liquidity in Uniswap V3?

In Uniswap V3, you can select where you want to deploy your concentrated liquidity instead of letting your assets be spread thin across all price ranges. You can provide a pair of assets, for example, ETH and DAI, and make the rule that "only let these assets be used in the range of $2000 and $3000. The most important thing this feature does is multiply your capital.

When the price falls out of the range you've chosen, two crucial things happen.

  1. You stop earning fees because your assets are not being used at all based on the rules and conditions you made. 
  2. The two assets you have provided would turn into one asset. For example, Ethereum is crashing to below your chosen range ($2000-$3000). All of your capital that used to be in Ethereum and DAI is only in the form of Ethereum. 

How Does Uniswap V3 Algorithm Work?

By supplying between the ranges you've chosen, you place a $2000 Ethereum limit sell order and a $3000 Ethereum limit buy order. In simple terms, it is as if you're telling the algorithm, "if the price of Ethereum goes above what I've chosen, spend my money buying Ethereum, and if the price goes below what I've chosen, sell all of my Ethereum ."Keep in mind that this includes the risk of impermanent loss. 

Concentration Multiplier in Uniswap V3

Now that we know what Uniswap V3 brings let's see its benefits in action. Let's assume the price of Ethereum is $1750, and A and B each decide to supply $10000 worth of Ethereum to a liquidity pool. A does it the V2 way; they spread the liquidity evenly across all price ranges. However, B goes the V3 way; they make a condition that their money must only be used when the price of Ethereum ranges between $1500 and $2500. In this example, A receives a 4% APY, which is $400 in a year. B, however, earns 8.33x of that, which is $3332. There is always the risk of impermanent loss, but even though both A and B invested the same amount, B is earning a much higher APY than A.

Active and Inactive Liquidity In Uniswap V3

If you supply liquidity of two tokens between the prices of $25 and $35, and the cost of one of those tokens drops out of the range, your liquidity will instantly turn into one token, which is the token that is dumping. If the price keeps freefalling, your liquidity stays "inactive," and you won't be earning anything from it.

Uniswap V3’s NFT Liquidity Tokens

Liquidity tokens or LP (liquidity provider) tokens are the assets liquidity providers receive as proof that they have supplied liquidity to a specific pool. Liquidity providers can later exchange these LP tokens for the asset they've provided at any time. In previous versions, there was only one type of LP token per pool, but now that price ranges are a thing, Uniswap creates NFTs (Non-Fungible Tokens), which carry specific data. For example, a liquidity provider can have an NFT USDC/ ETH LP token with the data for the price range of $1000 to $2000. 

Licensing For Uniswap V3

After releasing Uniswap V2 and enabling liquidity pools for assets other than Ethereum, Uniswap became the most popular dApp on Ethereum. However, it is also probably the most forked project on Ethereum. Many decentralised exchange dApps are Uniswap's code with different branding. Uniswap V3 came up with a unique idea to temporarily fix this problem, Licensing. With this update, users can't copy or fork Uniswap's code for two years.

Uniswap V3 Financial Analysis

Uniswap V3 token (UNI token) is currently being held in more than 330,000 wallets, and the trading volume in the past 24 hours (May 16, 2022) has been over $146 million. UNI has a liquidity score of 63%, meaning it is rather easy to sell this asset in a bear market. Today, UNI's market cap is $2.4 billion and ranks #34 among the market cap rankings. However, UNI's yearly ROI has been -86%, which indicates it has underperformed similar projects, which had an annual ROI of 5,045%. The price of UNI currently is -88.8% lower than its all-time high on May 3, 2021 ($44.92) and is 388.3% higher than its all-time low on Sep 17, 2020 ($1.03).

Disclaimer: Don't take this article as financial advice. You need to DYOR (Do Your Own Research) before investment.

Uniswap V3 Price Prediction

The following sections will analyse Uniswap V3’s price prediction for the next three years (2022-2025). Just bear in mind that these are only predictions of crypto experts and an eye-opener and must not be considered financial advice.

Uniswap V3 Price Prediction For 2022

Crypto experts predict that the average price of UNI in 2022 will be $6.09, with a minimum of $5.86 and a maximum of $6.71.

Uniswap V3 Price Prediction For 2023

In 2023, the price of the UNI token is estimated to be $9.02 on average. It may go as high as $10.26, and the minimum cost of UNI could be $8.71 this year.

Uniswap V3 Price Prediction For 2024

The price of each UNI token is expected to be $12.53 at a minimum and $15.20 at max. The average cost of UNI in 2024 is estimated to be $12.98.

Uniswap V3 Price Prediction For 2025

Experts predict that the minimum price of each UNI token can be $18.03 in 2025. It can touch a high level of $21.75, and on average, it is estimated to be $18.68.

Is Uniswap V3 A Good Investment?

Even though the UNI token has underperformed this year, it doesn't mean Uniswap V3 has not shown any potential. Now that it has provided a new passive income strategy for liquidity providers and has licensed its source code, experts are even more bullish on this famous and popular dApp. To stay on top of your game, you can visit Cryptologi.st, as it provides all the tools and information you need to calculate your options and make the smartest investment decision.

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