UNISWAP V3 vs V2

 

UNISWAP V3 VS V2

⭐ FIRST — WHY UNISWAP V2 HAD LIMITATIONS

In Uniswap V2:

🔴 Liquidity is spread uniformly across the entire price range (0 → ∞)

For example in ETH/USDC pool:

Liquidity is equally available for:

  • ETH at $1

  • ETH at $10

  • ETH at $1000

  • ETH at $1,000,000

But ETH will never go to $1 or $1,000,000.

Still LP money is wasted covering these useless ranges.

This causes:

  • Capital inefficiency

  • Low returns for LPs

  • High slippage for traders

  • Need for huge liquidity

  • Lower fees for LPs

⭐ UNISWAP V3 FIXES ALL OF THIS

The core idea:

⭐ Concentrated Liquidity: LPs choose the price range they want.

Instead of depositing liquidity from 0 → ∞,
an LP can say:

“I only want to provide liquidity between $1500 and $2000 ETH.”

So liquidity becomes customizable and focused where traders actually trade.

⭐ LET’S SEE WHAT UNISWAP V3 IMPROVED VS V2

⭐ 1. Concentrated Liquidity (Main Innovation)

LPs choose custom price ranges:

lowerBound = 1500
upperBound = 2000

This gives:

  • 10–20x more capital efficiency

  • Lower slippage for traders

  • Higher returns for LPs

  • Smaller liquidity needed for same depth

👇 Example:

V2:

100% liquidity spread across useless full range → low fee earnings.

V3:

Liquidity concentrated tightly → traders always hit your range → more fee income.

⭐ 2. Multiple Fee Tiers

In Uniswap V2, fees fixed at 0.30%.

In V3:

  • 0.05% (stable pairs, low volatility)

  • 0.30% (normal)

  • 1.00% (volatile pairs)

LPs can choose fee tier based on risk.

⭐ 3. Liquidity Positions become NFTs

In V2:

  • LP token = ERC20

  • Represents a share of entire price range 0→∞

In V3:

  • Each LP position has:

    • custom price range

    • custom fee tier

    • custom liquidity

  • So each position is unique → stored as an NFT.

This NFT stores:

  • fee earned

  • liquidity amount

  • price range

  • position ID

⭐ 4. Tick-Based Price System

Uniswap V3 uses a system of ticks:

  • Price range divided into small steps (ticks)

  • LP deposits liquidity into specific ticks

  • Concentrated liquidity implemented with ticks

Makes the system gas efficient and precise.

⭐ 5. Better Capital Efficiency

Uniswap V3 is up to 4000x more capital efficient.

Because:

  • LPs no longer need to provide across full curve

  • More liquidity exactly near current price

  • More trades executed with lower price impact

This is why V3 replaced V2 as the dominant AMM.

⭐ 6. Lower Impermanent Loss for Well-Chosen Ranges

If LP chooses ranges close to expected price movement:
→ More fee income
→ Less impermanent loss

But:
If price leaves range
→ LP becomes 100% one asset
→ Higher IL risk

So V3 gives LPs more control but requires more skill.

⭐ 7. Non-Fungible Liquidity = Active LP Management

Because LPs choose ranges, they behave more like market makers.

Uniswap V3 introduces:

  • active rebalancing

  • automated strategies

  • fee compounding

  • dynamic adjustments

This led to development of:

  • Arrakis

  • Gamma

  • Visor

  • Charm

These are automated LP managers.

⭐ 8. Improved Oracle System (TWAP)

Uniswap V3 gives:

  • more reliable on-chain price feeds

  • cheaper TWAP updates

  • granular observation windows

This increased usage in lending protocols (Aave, Compound).

⭐ 9. No Impermanent Loss Protection

V3 does NOT solve IL,
but it allows LPs to manage IL by choosing ranges.

⭐ SUMMARY: UNISWAP V3 VS V2

FeatureV2V3
LiquiditySpread across 0 → ∞Concentrated in chosen range
LP tokensERC20NFT
Capital efficiencyLowVery high
SlippageHigherLower
FeesFixed 0.30%Multiple tiers
LP controlNoneFull control
ILPassive and largeManageable, skill-based
OracleBasicAdvanced TWAP

⭐ 1-Sentence Summary

Uniswap V3 lets LPs place liquidity exactly where trades happen, making liquidity extremely efficient, increasing fee earnings while reducing wasted capital.

Comments

Post a Comment

Popular posts from this blog

Frontend-to-Blockchain Flow

Understanding the Frontend-to-Blockchain Flow: A Complete Guide As a Web3 developer, one of the most confusing aspects when starting out is understanding how your frontend actually communicates with the blockchain. Let me break down the entire flow from smart contracts to user interaction. The Complete Development Flow 1. Smart Contract Development & Deployment Your Starting Point: You have an application idea (decentralized, of course!) You write smart contracts with all your application's core logic Choose the right blockchain based on your requirements: Ethereum : Most secure, highest adoption Polygon : Low fees, fast transactions BSC (Binance Smart Chain) : Lower costs, high throughput Avalanche : Fast finality, customizable subnets Deployment Outputs: Contract Address Contract ABI (Application Binary Interface) The Frontend Integration Challenge Now you have a frontend and want users to interact with your deployed contracts. Here's where it gets interestin...
Read more

Graph

GRAPH   1. WHY THE GRAPH EXISTS (Root Problem) Ethereum RPC nodes allow only low-level reads : eth_getBalance eth_call eth_getLogs getBlockByNumber But if you want something like: “Give me a list of all swaps where user=0xA” Your only option is to: ❌ scan all blocks ❌ fetch all events ❌ filter in your backend ❌ store in your database ❌ query manually If you need: token history all NFT transfers Uniswap swaps All LP positions You’d need to scan millions of blocks , slow and expensive. So The Graph solves this. ⭐ 2. HOW THE GRAPH WORKS INTERNALLY The Graph has three big components: ✔ Graph Node Scans blockchain → extracts events → writes to your database. ✔ Subgraph Manifest Tells Graph Node what to index. ✔ Mappings Code (AssemblyScript) that transforms raw blockchain data → structured entities. ⭐ 3. WHAT EXACTLY IS A SUBGRAPH? A subgraph is: A definition file that tells Graph Node which smart contracts to watch , which events to index , and how to...
Read more