Uniswap V3’s new obsession (1)
- Fairness issues
Uniswap V3’s allocation mechanism prevents LPs from being rewarded directly in proportion to the liquidity provided, which makes it much less attractive from the perspective of LPs providing liquidity.
In order to provide capital utilisation, Uniswap V3’s liquidity is non-homogeneous, allowing the liquidity provider to provide liquidity for different price bands. When actual trades occur in this price band, the liquidity provider receives a share of the transaction fee; when actual trades occur outside this price band, the liquidity provider does not receive a share of the transaction fee. In this way, there is competition between the LPs of Uniswap V3, which requires more effort on their part to then make accurate forecasts of the trading price range.
2. The space for participation by ordinary participants is compressed.
In Uniswap V2, all LP providers receive their share of the transaction fee in the same way, which equates to a ‘market average return’ for all liquidity providers. In Uniswap V3, liquidity providers can achieve an ‘Alpha gain’ above the ‘average market return’ through a more reasonable price range and allocation of funds.
This is very difficult for the average participant, who cannot make a reasonable response strategy to price changes and has to go for the strategies and services of professional service providers. The professional strategy team, however, has a new opportunity to generate revenue by providing strategies or capital management. In the future, specialist strategy teams will be a powerful force in Uniswap V3.
3. Additional gas charges for liquidity adjustments.
It is very difficult for LP providers to pick a reasonable finite price range to receive a share of the transaction fee over time. Especially for highly volatile pairs, there is a higher probability that the actual price will deviate from the preset price range. Therefore, LPs also need to dynamically adjust the price range in response to actual price movements, at an additional cost to them in terms of Gas fees.