DeFi Insight: Concentrated liquidity on Uniswap V3
by Christian Viehof on Jul 1, 2022 7:00:00 AM
As of July 20, 2021, Uniswap (UNI) is ranked at position 20 on CoinMarketCap and at position 1 for decentralized exchanges on DefiPulse. The International Token Standardization Association released a list with the top 10 Uniswap v2 liquidity provider (LP) tokens by total value locked in the Tokenbase. ITSA has assigned 10 unique token identifiers to the Uniswap LP-tokens and classified each token according to the International Token Classification (ITC). Uniswap was founded in the fall of 2017 by mechanical engineer Hayden Adams and it is a non-custodial cryptographic token exchange that offers trading and automated liquidity provision solutions. As of today, Uniswap has reached a total value locked of 7B$ and operates over 50,000 trading pairs with individual LP-tokens for each pool proving the need for unique token identifiers such as ITIN.
Authors: Christian Viehof, Valentin Kalinov
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.
Providing liquidity on Uniswap v3 requires a more active presence compared to the earlier version of the platform. Recent analysis has shown that active providers will most likely outperform passive liquidity providers. There are currently services being built that will handle the active management to remove the complexity for liquidity providers looking for a passive solution and Charm.Finance with their alpha vaults is one of them.
An additional feature of Uniswap V3 is also the use of NFTs instead of fungible LP tokens. With Uniswap V2 you had to exchange your assests (e.g. ETH and USDC) for funigble LP tokens. However, this creates slippage, which leads to losses for the liquidity provider. Uniswap V3 has solved this problem thanks to NFTs and offers a much more efficient method for depositing capital.
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.
As compared to Uniswap v2, deploying liquidity to a particular range is significantly more capital-efficient. Hayden tweeted about this, and Tienshaoku provided the following analysis:
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.
As of today, Uniswap operates over 50,000 trading pairs with individual LP-tokens for each pool proving the need for unique token identifiers such as ITIN. Therefore, ITSA has set the goal of bringing more transparency in the DeFi space by clearly identifying and classifying LP-tokens via their smart contract addresses. For now, ITSA has listed the 10 most popular Uniswap v2 LP-tokens by total value locked in the Tokenbase. In the future, most liquidity provider positions will be represented as non-fungible tokens (NFTs) under the Ethereum ERC-721 Standard as opposed to the fungible Ethereum ERC-20 Standard. The conceptual design of the ITIN comes handy here as it supports both standards equally.
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.
Economic Purpose (EEP): Uniswap is listed as a Settlement and Governance Token (EEP22TU03) due to its design as a means of collateral combined with governance functionality.
Industry Type (EIN): The issuer of Uniswap is active in the field of Decentralized Exchanges, Markets and Market Making (EIN06DF01).
Technological Setup (TTS): Uniswap is an Ethereum ERC-20 Standard Token(TTS41BC). The Class “Ethereum ERC-20 Standard Token” captures every Token that is implemented by means of the ERC-20 Standard on top of the Ethereum blockchain.
Legal Clam (LLC): Uniswap does not entitle its holder to any legal claim or rights against the issuing organization, therefore it is listed as a No-Claim Token(LLC31).
Issuer Type (LIT): The dimension “Issuer Type” provides information on the nature of the issuer of the token. Uniswap’s platform is built by a team of programmers and engineers that make up the core contributor community. Its Issuer Type is a Private Sector Legal Entity (LIT61PV).
Regulatory Framework (EU) (REU): The dimension “Regulatory Status EU” provides information of the potential classification of a token according to the European Commission’s proposal for a Regulation on Markets in Crypto Assets (MiCA, Regulation Proposal COM/2020/593 final). Uniswap qualifies as an Utility Token (REU52) according to the definition provided in Article 3 (5) of Regulation Proposal COM/2020/593 final.
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.
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Christian Viehof is an Executive Director at the International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database including a classification framework and unique token identifiers and locators. He completed his Bachelor in Economics at the University of Bonn, the Hong Kong University and the London School of Economics and Political Science with a focus on Behavioral Economics and Finance. Currently pursuing his Master of Finance at the Frankfurt School of Finance and Management, you can contact him via firstname.lastname@example.org and connect with him on Linkedin, if you would like to further discuss ITSA e.V. or have any open questions.
Valentin Kalinov is an Executive Director at International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database, including a classification framework and unique token identifiers and locators. He has over five years of experience working at BlockchainHub Berlin in content creation and token analysis, as a project manager at the Research Institute for Cryptoeconomics at the Vienna University of Economics and token analyst at Token Kitchen. You can contact Valentin via email@example.com and connect on Linkedin if you would like to further discuss ITSA e.V. or have any other open questions.