How Uniswap v3 Will Level Up UMA and DeFi

Published on: 03.05.2021

UMA introduced article how #Uniswap v3 opens new possibilities for synthetic tokens & also how it can revolutionize #DeFi in general.

uLABS and UMA eagerly await its launch scheduled on May 5th and have plans to take advantage of these new features.

In Uniswap v3, liquidity providers (LP’s) can concentrate their capital within custom price ranges which can act to provide greater amounts of liquidity at desired prices.This feature especially benefits many synthetic tokens built on UMA’s infrastructure that trade close to a peg or are bound by a tight range.

Concentrated liquidity in Uniswap v3 effectively combines the attributes of automated market making and limit order books. This opens up the possibility for LPs to dictate where and how they provide liquidity and allows them to more efficiently deploy their capital to earn fees. This allows all the many innovative tokens with unique risk profiles created by the UMA community to each have their own tailored bonding curve for optimal liquidity.

Uniswap v3 will give LPs greater control in tackling this problem. With the ability to define custom price ranges, LPs can shift their liquidity to where they believe the fair price of the call option token is. This would avoid the impermanent loss of being arbed at the wrong price while at the same time staying in the liquidity pool only around the fair price. If other LPs act in a similar way by moving their range orders, this would allow the pool to more quickly reflect the fair market price of the call option. To compensate for the risk they are taking in providing liquidity in options, LPs can also charge 1% fees instead of 0.3% fees which also gives them more cushion. We can also imagine protocols paying liquidity mining rewards to further compensate LPs for taking on this risk.