DeFi Update | Week #12, 2021
Uniswap has announced the V3 version of its decentralized exchange, and they will use NFTs to tokenize liquidity positions. The team will protect their innovation with a 2-year business source license, to prevent forks and so-called liquidity vampire attacks.
Every week we talk through the week in the DeFi sector. Uniswap clearly stole the show this week. However, the crypto market has seen its prices pull back over the past seven days, and that included crypto majors like BTC and ETH. Also, it seems that TurtleDex was rug pulled for around $2.5M, providing another reminder of the risks present in the DeFi space.
Nevertheless, there has been plenty of exciting news as well. Enzyme Finance integrated Aave, and Very Nifty brought flash loans to the NFT space. Flash Loans have been very popular in the DeFi sector, and it will be interesting to see how they impact the various NFT segments. The first implementations will enable flash loans for Hashmasks to claim NCT tokens.
Introducing Uniswap V3
The biggest news in the DeFi space was the Uniswap announcement of its V3. The key feature in the new release will be concentrated liquidity, which will enable liquidity providers to contribute liquidity along specific price ranges. This should, theoretically, improve capital efficiency and also enable users to put in range orders. Uniswap will utilize NFTs to tokenize liquidity positions.
Liquidity providers (LPs) on Uniswap are basically market makers at the stock exchange, as they provide the liquidity and help traders to jump in and out of their positions. Thanks to the integration of NFTs, liquidity providers become more flexible. They can for example only provide liquidity when a token is trading between a certain price range.
Also of note, Uniswap will be limiting the commercial and production use of its source code for up to two years under Business Source License 1.1. After all of the debates regarding forked projects and “liquidity vampire attacks”, it looks like the Uniswap team wants to protect its IP. Uniswap V3 is coming to Ethereum on May 5th and mid-May to scaling solution Optimism.
Uniswap dominant force since 2018
The decentralized exchange has been a core part of the Ethereum DeFi ecosystem. Uniswap V1 appeared in November of 2018, which means that Uniswap was one of those projects that had to survive the DeFi winter during 2019. The protocol was a simpler version of the current AMM, with only ERC20/ETH pairs.
Source: Uniswap v1
However, the team kept building and in May of 2020 launched its V2. The new version enabled ERC20/ERC20 pairs and price oracles. The timing was great, as DeFi summer was just around the corner.
Uniswap became a popular destination for the initial dex offering (IDO) wave, since teams could independently launch pools, effectively listing their tokens. In August Uniswap announced its $11M Series A round.
However, the summer of DeFi was known for forks and governance tokens. Projects incentivized user activity by rewarding it with its native governance tokens. Teams could fork an established project and attract away its users by offering attractive yields. The competition with SushiSwap became particularly intense because of “liquidity vamping”.
It is unclear if the situation was a catalyst or not, but in September of 2020 Uniswap brought forth its UNI token. Of particular interest was the retroactive drop conducted by Uniswap, that rewarded past users of Uniswap with UNI tokens. The approach would become popular in the DeFi sector.
Now with a V3 coming soon, Uniswap is taking another major step forward. Many AMMs, both on Ethereum and other EVM compatible chains, can be considered descendents of Uniswap. However, with the V3 enjoying at least limited protection, it will be interesting to see how the competitors and new market entrants adjust.
The information provided here is for informational purposes only. This is not investment advice and should not be treated as such. Strategic Round Capital and/or the author of this article holds a position in BTC, ETH, AAVE, Hashmasks, NCT.