Uniswap V3 + Market Thoughts
Quite a lot to unpack here so get ready
Hey all! Apologies for the slight delay here, in the past 2 weeks we closed our latest raise and went live with the ARCx token so things have been a wild ride. That being said, I’m now easing back into things and wanted to take this time to be almost a stream of consciousness about what I see going on and where this all might lead.
Okay so all up I think Uniswap v3 has very mixed reactions, which is usually a good thing since “in non-consensus there is alpha” - h/t @ Santiago. That being said let’s dig into all the various angles going on here (since there are a lot).
The move to liquidity around certain buckets rather than a continuous region. This is the novel insight that made Curve as efficient as it is for stablecoins. Uniswap’s new algorithm will allow them to compete effectively for stables and should be an interesting competitor to Curve, however it also enables Curve-like efficiency for pairs that aren’t similar in nature (Curve mainly does stables <-> stables, eth <> eth, btc <> btc). The idea around the HCFMM is that a certain region of the pricing curve is flat while the others are extreme. Enabling this thinking but for non stables is exciting! My take here is that there will be some magic that we see when this pricing algorithm goes live due to more efficient fat-head markets such as ETH/USDC or WBTC/ETH. Uni doesn’t care about the random long tail anymore, a distinct change in the strategy as we’ll explore in the next point.
Uniswap has made it pretty clear that it doesn’t value community driven incentives and will happily rely on it’s brand and p/m fit to get usage (which I think more teams should do since excessive yield farming is cheap cocaine that will expose many projects in a market down turn). My thesis is that for this reason they decided that making LP tokens non-fungible (NFTs vs ERC20s) explains this thinking. While many lamented this loss, the Uniswap team probably doesn’t mind since it doesn’t align with their broader strategy. That being said it does destroy a certain class of primitives being built around LP tokens. I’m sure some smart people will come up with ways to re-unify this liquidity but it’s overall going to be a sub-par user experience and never the same as “provide LP tokens, stake and farm” that we all love and know. L2 will solve this IMO but let’s save that next.
While NFT LP shares create problems on L1, the thinking here is most likely that any technical complications can be magic-wanded away through some fast L2 latency and throughput. The other thing here is that with continuous liquidity buckets it allows greater inerop between L1 <> L2 for MMs since they know what deal they’re signing up for on both L2 and L2 regardless of how the market moves on either domain (most likely L2 given the illiquidity and UX challenges when it begins).
Speaking of L2, Uniswap is betting the farm on Optimism and will most likely live or die the success of it. Given that Uniswap has the most DAUs & MAUs in Crypto with strong brand, they’re betting that people will happily move to Optimism and with these networks effects the rest of the DeFi ecosystem should sprout up around it. I would usually buy this thesis but the problem is that crypto is so tribal in nature that other DeFi apps will go hard on the L2 that serves their best interests at the end of the day and the users will experience liquidity fragmentation. I touched upon this in the last post around understanding L2. Where Uni places an opinionated bet on Optimism, Sushi and others will take up other communities. I get why Uni decided to go hard on Optimism but I still don’t know if the risk/reward ratio of being exclusive to 1 L2 ecosystem is a good play as a DeFi protocol. As the crypto stack becomes increasingly more complex, investors will pour money to projects that will allocate appropriately to the right “scalable solutions”. DeFi protocols are meant to build and follow the users, not make such strong concentrated bets imo. Tribalism costs $ to investors, it’ll start costing projects even more.
The random copyright license that prevents others from forking Uniswap for 2 years. I get that the PTSD from the Sushi saga would make them do this but it also shows that Uni was heavily impacted and somewhat worries about a v3 competitor springing up at the same time. The license probably won’t even be enforceable if the team is full of anons. Also, the clause itself doesn’t really have any material impact but gives us some clues as to how the Uni team thinks about competition moving forward and a general theme from this announcement was that Uni is less open and less down to collaborate. Not having this clause altogether would have probably been better as it would give a stronger front but the inclusion of the clause sends counter signals about how they view competition/forking.
Okay so there’s a lot to take in there, how would I summarise it all? Here’s my current thinking:
Uniswap’s is loved for its simplicity and strong brand where new degen tokens are listed making it the sweet heart for majority of DeFi. V3’s technology forces them to focus on fat head markets rather than the long tail. I’m unsure if this guide was prompted through research or technology working backwards to the customer. A change in strategy given the current status-quo achieved is risky and may not yield the benefits they’re hoping for. I’d almost think this new version of Uniswap should have been marketed as “Uniswap Pro” and be exclusive to professional market makers (which it is). By forcing a higher complexity product with nuanced strategies to all their users they’re going against their core target market. Creating a differentiated product line and targeting different users could have achieved the same effect with less downside. Coinbase achieved this quite nicely with Coinbase and Coinbase Pro. Alternatively, a new sub-brand could have been an interesting strategy to further de-risk.
Second of all, the marketing plan of hyping V3 to the moon was probably not helpful looking back. By creating mystique of what V3 would be, it created misaligned expectations allowing the market to dream what they wanted v3 to be. I think in general teams hyping the launch of a new product can create more damage than harm if not communicated effectively and doing active expectation setting. V3 was meant to change the world but instead left everyone feeling a bit confused as to what it really means for the future on Uniswap.
Uniswap’s future game plan is basically: make fat tail markets more efficient, cater to professional market makers, bet heavily in L2/Optimism and full-send it. However I think this approach feels overall misaligned with what made Uniswap amazing in the start: simplicity. Everything about the new strategy screams complexity, which brings efficiency, but not what the core Uniswap brand follows. The execution and strategy risk is quite high but given UNI is the largest DeFi token they have plenty of room to adapt and adjust depending on how quickly they’re willing to react to the data.
The landscape is rumbling, everyone can feel it.
While speaking and looking at various deals in the market, there’s two very distinct observations:
I hate paywalls as much as you do, however I want to make sure I can continue to write amazing content for you all. Subscribing is a gesture that I’d personally really appreciate since it allows me to keep making DeFi Weekly even better.