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Ethereum’s Favorite “Money Lego” Gets Major Upgrade

Ethereum Price: $213.98
Ethereum Price (BTC): 0.021901BTC
ETH Leveraged in DeFi: 2.63M (2.37% of circulating supply)
Market Cap: $23.75B
ETH Network Dominance*: 52.22%
7 Day Candle**: $190.26 / $217.00 / $186.63 / $213.98

After releasing the details in late March, Uniswap finally went live on Ethereum mainnet with the second version of its liquidity protocol. The launch features a handful of new improvements and features, including a new sleek UI/UX and an improved portal to quickly track on-chain metrics like volume, liquidity, price and trading history.

The newest version of Ethereum’s leading liquidity protocol comes after the DEX saw a massive spike in quarter-over-quarter volume. In Q1 2020, Uniswap’s volume surged over 225% from Q4 2019. According to DeFi Pulse, Uniswap currently has the 5th most value locked in DeFi with over $40M followed by Aave with $53M.

Uniswap V1 Liquidity Growth

Uniswap V1 Liquidity Growth

Uniswap’s new upgrade should improve the overall trading experience for DeFi users. The most notable features with the upgrade include new ERC20/ERC20 trading pairs, Uniswap-native price oracles, and flash swaps.

ERC20/ERC20 Trading Pairs

That said, the addition of ERC20/ERC20 trading pairs is likely the biggest change new users will see. In the first version, Uniswap mandated all pairs to be denominated in ETH. However, while this was bullish for ETH as it created a new gravity well for consuming Ethereum’s native asset, it did create some issues surrounding impermanent loss. For those unfamiliar, impermanent loss is a major side effect when using Automated Market Makers (AMMs) as it results in liquidity providers losing returns on their holdings if there’s volatility in the trading pair. This effect is most apparent with the ETH/DAI trading pair when recent volatility in the price of ETH resulted in a loss for those providing liquidity.

Further Reading

But now, with Uniswap V2, liquidity providers have a much wider range of choices with the addition of new trading pairs. This is most notable with stablecoin/stablecoin liquidity pools (like USDC/DAI) where both assets are pegged to a dollar, effectively mitigating impermanent loss entirely as there’s little volatility in the trading pair. What’s interesting is that even if two ERC20 tokens are not paired directly, they can still be swapped as long as a path exists between them via routing contracts. i.e. BAT/USDC could exist via routing through USDC/DAI and BAT/DAI.

While some Ethereum bulls may feel threatened by Uniswap’s move away from ETH-only trading pairs, we can expect that Ether will still remain one of the dominant players on the protocol given it’s the most liquid asset with the highest available economic bandwidth in the entire Ethereum ecosystem.

What are Flash Swaps?

Uniswap V2 also includes a novel new feature called flash swaps. Similar to the flash loans introduced by Aave, flash swaps allow users to withdraw as much as you want in any ERC20 token on Uniswap at no upfront costs. When executing a flash swap, users have the ability to do anything they want with the assets on the sole contingency that by the end of the transaction (which must occur in same block) the user a) pays for all the ERC20 tokens withdrawn, b) pays a percentage of the withdrawn token balance and returns the rest, or c) simply returns all of the ERC20 tokens that are withdrawn.

This is an entirely new crypto-native mechanism and the exact effects are largely unknown. However, we can imagine that users will leverage this feature for arbitrage opportunities as well as some other actions that the ecosystem has yet to discover.

Uniswap Price Oracle

The last major upgrade with Uniswap V2 is the introduction of the Uniswap-native price oracle, enabling a decentralized and manipulation-resistant price oracle for the DeFi ecosystem. For those that have been following the crypto space for a long time, you may recognize that price oracles are one of the biggest weaknesses for the DeFi ecosystem. That said, the launch of a Uniswap price oracle should provide developers with a more resilient price oracle for their applications.

Key Takeaways

Despite the protocol’s simplicity in V1, Uniswap has established itself as a vital piece of Ethereum’s open finance movement.

After initially receiving $100,000 from a grant in November 2018, the Uniswap liquidity protocol somehow found itself dominating the rest of the Ethereum DEXs in terms of usage – despite the fact that many of them raised tens (or even hundreds) of millions in capital from the ICO boom in 2017.

For reference, in the past 7 days, Uniswap has experienced nearly $70M in volume. This currently dwarfs its ICO competitors – like 0x and Kyber – who’ve experienced $21M and $19M in weekly trading volumes, respectively.

Uniswap’s new upgrade should only aid in the future adoption of the liquidity protocol. In the next few weeks and months, we should expect V1 liquidity providers to begin their migration over to the newest version

If you’re interested in trading with V2, becoming a liquidity provider, or simply looking to see the state of the protocol, you can visit the official V2 dashboard here.

* calculated as: (ETH Market Cap / Ethereum Network Market Cap)
** open / high / low / close