In a blog post published on 24 March, the company said the upcoming update will make Uniswap “the most flexible and efficient AMM ever designed”.
Version 3 of the protocol will introduce concentrated liquidity, providing individual liquidity providers (LP) with granular control over what price ranges their capital is allocated to. According to the company’s post, individual positions will be aggregated together into a single pool, forming one combined curve for users to trade against.
In Uniswap V2, liquidity is distributed evenly along a price curve, with assets reserved for all prices between 0 and infinity. And while this provides a greater fee-earning range, it means the majority of the liquidity in a pool is never put to use. The new version of the protocol enables LPs to concentrate their capital within custom price ranges, providing more liquidity at different prices.
The update will also allow liquidity providers to be compensated for taking on more risk by introducing multiple fee tiers. This will enable LPs with a capital efficiency up to 4,000 times higher than on Uniswap V2. With an increased capital efficiency, the platform can provide low-slippage trade execution that can surpass both centralized exchanges and stablecoin-focused AMMs. The Uniswap V3 whitepaper states that there will be three separate fee tiers per pair—0.05%, 0.30%, and 1.00%.
“This array of options ensures that LPs tailor their margins according to expected pair volatility,” the company explained.
Version 3 will also bring a major update to its oracles. It offers significant improvements to the time-weighted average price (TWAP) oracles introduced in V2. The improvements make it possible to introduce any TWAP for the previous 9 days in a single, on-chain call, making it easier and cheaper to create more advanced oracles that include simple-moving averages (SMAs), exponential moving averages (EMAs), outlier filtering, etc.