With the rise of DEXs in recent months, liquidity protocols are continuing to garner a significant amount of traction within the DeFi community. Uniswap – a sector-leading liquidity protocols – looks to capitalize on the trend with the announcement of Uniswap V2.
🦄 We are thrilled to announce Uniswap V2, the second iteration of Uniswap!!!
V2 includes many new features and improvements.
Read the full details on our new Uniswap blog:https://t.co/Hjg20YWNaK
— Uniswap 🦄 (@UniswapExchange) March 23, 2020
Despite the success of Uniswap V1, the protocol is just beginning to scratch the surface on automated pooled liquidity. The upgrade introduces multiple improvements in order to allow the protocol to realize its potential as unstoppable, permissionless liquidity for global finance. Some of the notable features and changes include:
- ERC20 <> ERC20 Pairs
- Improved Price Oracles
- Flash Swaps
Oh and did we mention a new and improved logo?
With Uniswap V2, any ERC20 token can be pooled directly with any other ERC20 token. The introduction of ERC20 <> ERC20 token pools opens up the opportunity for a more diverse range of trading pairs for the protocol and new strategies for liquidity providers. One of the more notable possibilities with this improvement is stablecoin liquidity pools (i.e. USDC <> DAI).
Assuming both stablecoins are pegged to USD, stablecoin liquidity pools are one of the more attractive opportunities for liquidity providers as seen with the success of Curve Finance. This is largely due to the elimination of impermanent loss. Since both stablecoins should hold stable value over time, liquidity providers can rest assured that they’re not incurring a loss during times of volatility and are strictly generating a return from liquidity fees. If you’re unfamiliar with impermenant loss, we recommend reading this article.
Improved Price Oracles
Secure price oracles are one of the most critical pieces to the success of DeFi protocols and open finance at large. Uniswap V2 plans to implement new functionality into the liquidity protocol to enable highly decentralized and secure on-chain price feeds.
As an extremely high-level overview, the first improvement introduces price feeds that are expensive to manipulate as the price is set by the last transaction in a previous block. This makes it extremely difficult to manipulate the prices as an attacker can only profit if they’re able to selfishly mine two blocks in a row – something that has not been observed to date.
The second mechanism implements a time-weighted average price (TWAPS), allowing any external contracts to accurately track prices across any time interval.
There are still some nuances with using Uniswap as a price oracle, even in V2. If you’re interested in learning more about oracles in Uniswap v2, the whitepaper expands on them in details. In addition, developers can expect oracle-focused guides and documentation to be released in the near future.
While flash loans quickly gained an infamous reputation within the DeFi community, there’s significant potential for them across a wide range of use cases that benefit the greater good.
In short, Uniswap V2’s flash swaps will allow anyone to withdraw as much as they want of any ERC20 token (at zero upfront cost) and do anything imaginable with the funds.
The only contingency is that the user pays back the value of the tokens by the end of the transaction by either returning the tokens directly, paying a portion of it and returning the rest, or simply just paying for all of the tokens withdrawn. Flash swaps are one of the more interesting features enabled into Uniswap V2 as they entirely remove the need for upfront capital and any other constraints for using Uniswap.
The introduction of flash swaps democratizes arbitrage opportunities for anyone in the world. Ultimately, flash swaps will effectively minimize arbitrage opportunities that exist across decentralized protocols, making the underlying markets more efficient. A big step for maturing DeFi.
The last major change with Uniswap V2 includes its path towards sustainability. Today, Uniswap is a highly decentralized, permissionless, secure liquidity protocol and has the potential to act as the infrastructure for a global, open financial system. However, there must be a mechanism that will allow the protocol to grow in a sustainable, decentralized manner as more tools, features, and improvements will be needed in the future to help it fully realize this potential.
As such, the code for Uniswap V2 will include a small protocol fee. At launch, the protocol fee will be set to a default 0% and the LP fees will remain at 0.30%. This feature is intended to be hardcoded into the protocol, making the only way it will be turned on (and off) is via a decentralized governance process.
If the protocol fee is turned on, the standard 0.30% fee will be split as follows:
- 0.25% towards liquidity providers.
- 0.05% towards the protocol DAO
The addition of a protocol fee where the capital is governed by a decentralized autonomous organization (DAO) will enable the protocol to autonomously incentivize contributions for its own future growth and development.
To put this into perspective on how much it would generate in revenue, Uniswap is expected to generate $5M this year in annualized revenue (assuming no growth). If the protocol fee was turned, it would generate $830,000 in annualized revenue into this new decentralized, sustainable funding mechanism.
Uniswap’s upcoming V2 upgrade will provide massive improvements to one of the leading DeFi liquidity protocols. While these improvements are extremely exciting, there’s still work to be done before we see it live on mainnet.
Uniswap V2 smart contracts are undergoing formal verification and security audits, documentation and other guides are still being fleshed out along with some other required updates. In addition, the community can also expect additional bug bounties to be released to encourage wider participation.
Regardless, the V2 upgrade comprises of highly compelling improvements that will allow the protocol to proliferate into a core piece of infrastructure necessary for the success of open finance. We’ll continue to keep an eye out for any news surrounding the upcoming upgrade.
If you’re a developer, you can start playing around with V2 today as the factory and initial router smart contract are already deployed on Ropsten, Rinkeby, Lovan, and Gorli testnets.
Analyst at Bankless – one of the leading resources for open finance. Lucas is an active contributor to the DeFi ecosystem with appearances in other notable DeFi outlets including The Defiant and Our Network. He has years of experience working with dozens blockchain and token startups where he focused on token economics, marketing, and growth.