V3 Exchanges & The Benefits of Token Transition

V3 Exchanges & The Benefits Of Token Transition
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RADAR is transitioning from V2 DEXs to V3 DEXs, but why?

As the DeFi landscape continues its rapid evolution, the spotlight is now on the transition of tokens from V2 DEXs to the improved V3 DEXs. With promising enhancements such as concentrated liquidity, this shift promises more efficient liquidity. As RADAR prepares for this pivotal transition, we unpack the rationale behind such a move and why it aligns with DappRadar’s vision for the future.


What is a DEX?

DEX is the abbreviation for decentralized exchange, a program on the blockchain that allows users to swap cryptocurrencies. These DEXs are powered by the community, meaning that anybody can provide the liquidity to support such a pool. Providing liquidity to a so-called liquidity pool comes with rewards, acquired from the trading fees generated by the liquidity pool.

The history behind V3

The story of V3 begins with the lessons learned from V2. V2 DEXs marked a revolutionary phase in DeFi already – offering decentralized platforms for token swaps. However, issues such as high fees, slow transaction speeds, and the ever-present specter of impermanent loss still left much to be desired. Furthermore, the one-size-fits-all liquidity provision model often led to suboptimal results for providers.

Recognizing these challenges, the DeFi community set out to innovate and redesign, and thus, V3 DEXs came along. 

V3 DEXs enhance returns and user experience

V3 decentralized exchanges represent the latest iteration in the world of decentralized finance (DeFi). They have been designed with the intention of addressing many of the challenges that plagued their V2 predecessors.

Platforms like Uniswap V3 and SushiSwap V3 have spearheaded this new phase, boasting features that optimize returns for liquidity providers and enhance the overall user experience.

Why it’s different from V2

The main key differences that set V3 apart from V2 DEXs include:

  • Concentrated liquidity: Concentrated liquidity allows liquidity providers to set specific price ranges where their funds are utilized, offering granular control over their capital allocation. As a result, they can earn fees more efficiently and optimize capital usage. Moreover, all individual positions within this system are aggregated into a single pool, creating a unified trading curve for users to interact with.
  • Pool Rebalancing: In V3, liquidity provision involves defining a price range along with the usual token ratios. If the current price falls within mid-range, your position remains balanced (e.g., 50/50). Otherwise, the ratio of one token to the other shifts, depleting liquidity for one token.
  • Multiple fee tiers: The pool rebalancing feature allows liquidity providers to strategically optimize different fee tiers, deciding whether to stay in a wide range for stability or narrow for higher fees while risking going out of range. This dynamic creates a game-theory-based approach for efficiently deploying capital based on potential earnings and risk.

The risks and the rewards of V3 exchanges

While V3 promises many rewards, it also comes with its set of risks. Let’s explore some of them below:

V3 Rewards

  • Optimized returns: Concentrated liquidity can mean better returns for liquidity providers.

Liquidity cost optimization: Better returns for liquidity providers means incentivizing a token’s liquidity becomes cheaper.

V3 Risks

  • Fragmented liquidity: With multiple V2 and V3 pools on a chain, it could lead to fragmented liquidity with numerous low liquidity pools creating high slippage and negative trading conditions
  • Sidelined liquidity: If asset prices shift outside a provider’s set range, their liquidity and rewards can be sidelined until prices return to the specified range. 
  • Balancing risks: Due to the novel balancing system of V3 pools, it can also lead to liquidity pools being one-sided, at times losing the input higher quality token at the expense of gaining a lower quality token.
  • Management overhead: The need for continuous management of set price ranges might require a greater time commitment.

Tokens that have made the shift

Several coins and tokens from different areas of Web3 have already transitioned to V3 exchanges. Some that we can mention are PEPE and SHIBA, SAND and MANA, and even MATIC, BUSD, among hundreds of others that you certainly know.

The Stargate token (STG) migration to V3 took place in early 2023 in order to diversify liquidity sources and leverage the advantages of the different platforms – through Uniswap V3 and Curve.

ApeCoin was another to openly discuss with its DAO community the transition of the token to V3, highlighting the cost savings from V3 as the main advantage.

RADAR is transitioning to V3

DappRadar’s choice to transition RADAR from V2 to V3 stems from a commitment to optimize liquidity costs and align with the best practices in the industry.

By moving to V3, RADAR aims to benefit from enhanced liquidity management, better user experiences for LPers, and the wider opportunities V3 offers. This transition mirrors decisions taken by other notable tokens in the DeFi space.

Be a part of the DappRadar community and help us build the World’s Dapp Store on our DAO and Discord server. The V3 transition was submitted to votes in our Forum and members contributed with their opinions regarding the change.

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