Attack of the clones
Uniswap, one of the most popular decentralized exchanges on the Ethereum blockchain has teased its long-awaited version three update this week. Amidst increased competition from clones as the battle for liquidity rages on in DeFi.
Uniswap v3 is expected to launch on May 5th but ultimately Uniswap is eyeing an integration “soon after” the Ethereum throughput booster Optimism is up and running.
Uniswap, an automated market maker (AMM) is arguably the most important DEX operating in the blockchain space as it accounts for over 10% of the current $51.4 billion dollars locked into Ethereum DeFi protocols or just over $5.3 billion dollars at the time of writing.
At one point in time, AMM’s were nearly entirely the domain of Uniswap, but they have grown in number along with DeFi’s evolution. Clones like Ethereum’s SushiSwap, BSC’s PancakeSwap, and more unique exchanges like 1inch have emerged and thrived in a sector where retail users are looking for staking and passive income options, fast transactions, all at low cost.
Attack of the clones… Not anymore
The word clone is not used lightly here as many of Uniswap’s main competitors are built from the open-source code provided by the exchange themselves. Version 3 however will have a 2-year copyright clause so clones such as SushiSwap cannot simply catch up by ripping their code. After the initial 2 years, the code will once again become open-source. A move they probably wish they had enacted from the get-go, but that wouldn’t have been in the spirit of decentralization now would it.
What else is new?
The new version promises greater capital efficiency relative to version 2 with a key change that Uniswap is calling “concentrated liquidity.” Concentrated liquidity will allow liquidity providers (LP) to set minimum and maximum prices on their portion of any given pool thus giving them more control over the price ranges in which capital is used.
Furthermore, Uniswap version 3 will also allow different pools to be created with different fees as previously all trades in Uniswap pools have had a 0.03% fee. This was felt to have worked well for some tokens but created a high barrier for other coins. Moreover, more than one pool can be created with different fees.
Another major change for the composability of Uniswap is the removal of native ERC-20 tokens to represent liquidity provider (LP) positions. The v3 updates force this issue by making completely fungible liquidity tokens impossible and the firm indicates in the whitepaper that others can create their own ways of representing these positions using non-fungible tokens or NFTs. The blog post promises that this actually increases flexibility for users, stating:
“Over time we expect increasingly sophisticated strategies to be tokenized, making it possible for LPs to participate while maintaining a passive user experience. This could include multi-position, auto-rebalancing to concentrate around the market price, fee reinvestment, lending, and more.”
SushiSwap vs Uniswap
As mentioned, Uniswap has come under attack from a stream of copycat services. While some first saw these as cheap imitations, many have stood the test of time and gathered impressive total value and a growing number of users. One such project was SushiSwap.
At the time of writing, Uniswap has a TVL of $5.3 billion while SushiSwap has $4.6 billion. Interestingly, SushiSwap doubled its TVL in January 2021 and the gap has been decreasing ever since.
Over the summer of 2020, it was revealed that Uniswap had an $11M funding round. The project was at the center of the DeFi universe with many projects operating on the platform. Still, despite the governance token boom, Uniswap’s team opted to not issue one. Leaving the door open for competitors to give the market what it wanted.
SushiSwap forked Uniswap and added a governance token and higher rewards for liquidity providers. In the past, YAM had tried to stitch together smart contracts from multiple different projects. SushiSwap, on the other hand, kept the operational structure intact and simply added on top of it.
Furthermore, popular centralized exchange Coinbase recently listed the native SUSHI token for sale on its platform, further legitimizing the project. It is clear that SushiSwap has no intention of going anywhere and that there are more competitors lining up as Uniswap drops version 3.
Binance got in on the action
PancakeSwap is another decentralized finance application but this time running on Binance Smart Chain. PancakeSwap is fundamentally a forked version of SushiSwap running on the BSC with the bonus of quicker and cheaper transactions for users. Something that has become a far bigger deal as more retail investors entered the space in late 2020 and early 2021 looking to invest hundreds instead of thousands.
A $50 gas fee on a $500 transaction is hard to stomach, whereas $50 on $100,000 can be considered a good deal. Moreover, Binance Smart Chain’s rising number of DeFi alternatives has also given the industry what it wanted, when it wanted it. More importantly, BSC’s growing DeFi ecosystem helped them take the lead over Ethereum in February 2021 in regard to transaction volumes and users. Signaling a possible changing of the guard after years of Ethereum dominance across all dapp categories.
It could however be argued that Uniswap is looking for longevity and a higher caliber of a customer on which to build its platform. We look forward to the May release.