What exactly is DEX under the DeFi wave?
Since the DeFi Summer in April, DeFi has attracted the attention of a large number of participants and has become one of the most popular areas in the entire blockchain industry.
Among them, DEX has always been on the most well-known track in DeFi. Recently, as the blockchain has become more and more well-known by more and more people, DeFi has also ushered in another climax.
As of October 28, the total amount of DeFi locked up has reached a record high of $103.75b. And as a DEX project well-known in the early days-Uniswap also reached $6.93b. The total locked position is second only to Curve Finance. Compared with Curve, which supports multiple chains, Uniswap, which is built on the Ethereum public chain, can obtain such a large amount of lock-up, which is enough to show its position in the DEX track of the Ethereum ecology.
Even in the case of a sharp decline in the market, Uniswap V3 still attracts attention, and the entire encryption market once locked its sights on the Uniswap V3 protocol.
Next, let everyone take a look at how the Uni V3 platform currently creates a good ecological environment for fund projects.
Advantages of Uni V3
In Uni V3, funds are mainly focused near the current price. Focusing on funds within a limited range will greatly reduce the trading slippage of Uni V3. Due to slippage, Uni V2 is not suitable for large transactions. After the slippage of Uni V3 is reduced, large transactions can become the norm.
Lower handling fee
There are a variety of handling fee rates to choose from. Users can choose the lowest percentage of handling fee (0.05%) of the flow pool to operate, thereby reducing expenditure costs.
Challenges facing Uni V3
The difficulty of LP market making has increased significantly. Uni V3 sets that when the price slides out of the range, it is necessary to decide whether to adjust the position. However, every position adjustment carries the possibility of loss. This provides the entry barrier for DeFi in the past and is more inclined to professionals.
Regarding the above advantages and challenges, let us take a closer look at how these projects work.
Why did professional LP choose Uni V3?
From the above point of view, there are indeed many benefits brought by Uni V3, but it should be noted that the migration from Uni V2 to Uni V3 will be carried out on a completely voluntary basis. As a distributed trading platform, Uni V3 provides services by converging liquidity. In theory, anyone can become a Liquidity Provider. But in fact, to efficiently provide liquidity, professional knowledge, in-depth data analysis and corresponding automation tools are required. So for less mature users, it may be difficult to provide liquidity.
Therefore, if Uni V2 is a completely negative AMM, then Uni V3 becomes a PMM that needs to be actively managed. Continuously increase the advantages of professional market makers to retail investors, and gradually create a new ecology.
In the traditional financial field, funds are an important existence that provides investors with daily liquidity, just like the liquidity provided by banks through demand deposits. Each type of fund requires a manager or a group of managers to be responsible for determining the fund’s portfolio and investment strategy, and the fund manager can provide professional knowledge to complete the debugging, maintenance and innovation of investment strategies according to market changes, and continue to realize value appreciation.
Therefore, in order to make better use of the advantages of the Uni V3 platform, and to enable DeFi to better return all investors, professional LP fund projects have begun to appear.
If you are a professional LP, you can perform larger capital operations in Uni v3 than in Uni v2, and can reduce the cost of handling fees.
If you are not a professional LP, then you have a simpler way to play
This is also the uniqueness and charm of Uni V3. So, how do you play? The following project examples will be revealed for you.
In Uni V3, projects that help customers manage funds and invest in them are being set up one by one. These projects will gradually form Uni V3 and even new branches and hot spots in the DeFi track. Take the following three projects as examples:
Hotpot v2 Hotpot v2 is a professional market maker established on Uni V3 as an open-end financial fund project (DeFi project). It combines its own Token pledge rewards and liquidity benefits, and consists of a set of smart contracts deployed on Ethereum.
In Hotpot v2, investors deposit any digital asset (ETH/USDC/USDT) into a public fund pool. The fund pool exists in the form of smart contracts. Except the investor himself, no one has the right to transfer user assets, and investors can deposit and withdraw at any time.
The manager is responsible for investment operations and invests the funds in the public fund pool into the Uni V3 liquid pool to obtain income. Fund managers can only carry out strategic portfolio investment operations within the scope set by the code, have no right to transfer any assets in the fund pool, and can only invest in selected Token types. Every operation is transparent, open, traceable, and can be taken out at any time. The most important thing is that only when the Hotpot v2 fund is profitable, the fund manager will share 10% of the profit. In the state of loss, no profit will be taken. The distance from traditional funds has been opened through a distributed transaction model. Users don’t need to worry about bearing the losses caused by each position transfer. The invested funds are also directly managed by the fund manager within the authority of the platform, which provides the freedom of traditional fund managers and also guarantees the safety of user funds. And Hotpot v2 supports the participation of individuals and institutions. Therefore, in addition to being friendly to individual users, Hotpot v2 also encourages institutions to create and manage funds on the platform.
In addition, you need to pay attention to its economic model. HPT (Hotpot Token) is launched by Hotpot v2 to screen and incentivize high-quality fund projects in Hotpot v2. For high-quality funds that have passed the review, the platform provides HPT reward support and helps attract traffic. At the same time, HPT has set up a destruction mechanism, stipulating that every fund on the Hotpot v2 platform passes through the controller contract. When a user or institution conducts each transaction, a corresponding proportion of HPT will be destroyed. And form a complete deflation, resulting in a continuous reduction in output, and thus the future price of HPT will be relatively supported.
Therefore, under this setting, the income of Hotpot v2 not only comes from the fee income of the fund, but also includes the reward income and price increase of HPT. So as to establish a good income guarantee for participants. Since Hotpot v2 went live in February, the total investment as of October 24 is $825.11K. The total yield is currently 24.33%. For the vast majority of individual investors, Hotpot v2 is simple and clear to operate, reducing the risk of individual investment and obtaining stable returns.
In addition to Hotpot v2, Charm and Visor also began to provide liquidity for participants in Uni V3
CharmCharm is an LP vault launched on Uni V3. It is a relatively simple and stable LP vault among similar products. It will automatically manage the liquidity on Uni V3 for investors.
Charm can use the new centralized liquidity function in Uni V3 to generate higher revenue. Its regular rebalancing function will keep the investor’s capital ratio in balance, so investors don’t have to worry about managing positions, just leave their deposits in the vault. This rebalancing is performed passively using scope orders to avoid swap fees and price effects, and transaction fees will also be automatically charged from the Uniswap pool. Vault shares are expressed as ERC-20 Tokens, so they are combinable and interchangeable. 5% of Uniswap’s fees go to Charm Treasury (Vault Project Pool), and these will be partly used to pay for rebalancing Gas costs. In the future, this agreement fee will be modified by Charm Token holders.
Due to its strategy and execution, Charm only passively rebalanced to avoid Uniswap’s 0.3% swap fee and any potential price impact. This fee may sound small, but if it is rebalanced frequently, it can have a huge impact on the performance of the LP.
Compared with the number of trading pairs of similar products, Charm can select trading pairs as shown in the figure below. However, the project cannot know the rate of return for the time being, so it is too early to estimate what the long-term APY or risk situation will look like.
At the same time, there is also a certain risk for users participating in liquidity, that is, participants need to pay a certain percentage of handling fees every time they participate regardless of profit or loss. Because for Charm’s rebalancing function, whether it will bring users a relative proportion of benefits to cover the cost of user participation fees, will become one of the factors that most participants need to control. Therefore, the majority of investors still need to pay attention to controlling risks.
VisorVisor is a programmable liquidity smart vault on Uni V3. It allows DeFi participants to use the NFT smart vault for liquidity supply and active liquidity management on Uni v3. The characteristics of Visor are also obvious. The first is active liquidity management. Visor manages assets in the top pool on Uni V3 through fee optimization and market-making strategies. The second is the reinvestment of fees. In Uni V3, the LP fees of investors will not be reinvested automatically. Visor reinvests fees for everyone who provides liquidity through Visor Smart Vault. The third is the capital momentum gradient. Projects can use Visor to actively manage their liquidity or run price-optimized liquidity mining programs.
In terms of economic model, Visor created its own platform Token-VISR. According to Visor Finance, it provides agreed income distribution to VISR mortgagers. VISR’s stakeholders will receive appropriate rewards for their participation, which plays an important role in the long-term development of Visor Finance. Visor is now introducing negotiated income distribution to VISR stakeholders. For the future of Visor Finance, it is very important for stakeholders to receive appropriate rewards for their participation.
Second, Visor collects fees by charging 10% of the reinvested Uni V3 fees. The fee will be reinvested every X hours, which is also the time when VISR is purchased at the same time as 10% of the fee, and then the VISR is distributed to those who put the VISR in their vault. Same as Charm, that is, participants need to pay 10% of the fee regardless of profit or loss, and participants still need to consider the risk invested in it.
From the analysis of the above three projects, they have their own characteristics in the distributed fund track. Charm and Visor ensure that the user’s fund pool is maintained at a relatively appropriate ratio through the rebalancing function. This ensures that the user’s funds will not suffer large shocks, and the price range is locked within a certain range to ensure the safety of funds. And every rebalancing action needs to pay a certain percentage of handling fees to maintain, and participants will be charged a 10% handling fee regardless of profit or loss. Hotpot v2, through the management of professional LP, can obtain relatively stable income while obtaining income through the pledge of Hotpot v2’s own Token, and professional LP only accepts a 10% handling fee when the participant is profitable. Handling fees are not accepted at the time.
As one of the most popular DEX in ETH, Uniswap V3 is currently the most representative distributed platform on the DeFi track. It gradually established an autonomous liquidity management platform, and realized functions such as connecting distributed wallets to exchange, transfer, and join the fund pool to earn income. However, as a new participant, self-management on DEX requires a certain learning cost.
In summary, fund projects such as Hotpot v2 are established under the Uniswap V3 agreement, and its one-key operation function provides users with convenience. Save a lot of time and cost, and ensure the safety of funds and a certain degree of profit. Will this be the beginning of a new wave? For DeFi, this is a new expansion, combining existing parts of human real life with the blockchain industry, and easily accepting DeFi in real life.