DeFi Insight: Concentrated liquidity on Uniswap V3

Uniswap V3

Uniswap released its V3 version, which brings a variety of new features. Instead of just picking an equal value of two tokens, you can now select your preferred fee tier in any liquidity pool. By default, Uniswap provides three fee tiers you can choose from. This has led to increases in potential capital efficiency by the latest version of DeFi’s most popular automated market maker (AMM). Uniswap v3 also introduced liquidity concentration, which means that you can set a certain price range where you provide liquidity. This is a way of decreasing your impermanent losses. This range means you earn fees if the market price is within your selected range. One of the aspects of this new system is that liquidity providers will need to reset their price ranges in a volatile market to optimize returns. This can make providing liquidity more costly for providers with less capital due to gas costs associated with adjusting prices.

Figure 1: Uniswap V3 interface for deploying capital (Source: https://app.uniswap.org/)

Capital Efficiency and Position Liquidity of V3

Liquidity in Uniswap v2 is distributed across all potential values, ranging from 0 to, which means that a significant portion of the offered liquidity may never be “utilized” because price may not be swapped at that particular price. By enabling LP to deploy concentrated liquidity between any two “price ticks” (blue bars in figure 1), Uniswap v3 set out to address these capital inefficiency problems.

Figure 2: Unconcentrated liquidity (left) and concentrated liquidity right (Source: https://uniswap.org/whitepaper-v3.pdf)

Uniswap LP-tokens v2 identified and classified

A key function of automated market maker platforms is the liquidity provider (LP) token. LP-tokens allow AMMs to be non custodial, meaning they do not hold on to your tokens, but instead operate via smart contracts. Liquidity provider tokens also unlock new layers of token trade and access across the entire DeFi ecosystem, which has facilitated growth due to significant network effects. On automated market maker platforms, you remain in control of your assets by receiving LP-tokens in return for providing tokens like USD Coin (USDC) to the crypto liquidity pool, which is managed by smart contracts without the need of human operation. LP-tokens represent a crypto liquidity provider’s share of a pool, while the liquidity provider remains entirely in control of the deposited tokens.

Figure 3: Tokenbase list with top 10 Uniswap LP-tokens by total value locked (Source: https://bit.ly/3APv1wt)

The classification of Uniswap according to the ITC

The UNI token is the primary token for the Uniswap decentralized exchange and plays a vital role due to the fact that it offers holders an on-chain governance functionality so that they can participate in the decision-making process on how the platform is managed and developed in the future.

Figure 4: The Uniswap Tokenbase entry (Source: https://itin.itsa.global/FVJ07CC49)

The International Token Standardization Association (ITSA) e.V.

The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.

  • The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
  • The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to the market capitalization of classified tokens.
  • ITSA’s Tokenbase currently holds data on over 4000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.

Remarks

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International Token Standardization Association

International Token Standardization Association

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The International Token Standardization Association (ITSA) is a not for profit organization working on holistic market standards for the global token economy.