What should we do with Uniswap that is being drained of blood?

Fortunately, Uniswap has announced that it is developing the V3 version of the protocol, and Hayden Adams has publicly stated that the next version will solve all the problems currently encountered by AMM.

Written by: Donnager

A forked project that has only been online for two weeks has already accumulated far more funds than the original project that has been in operation for two years. Things that are unimaginable in the business world happen naturally in the DeFi world.

SushiSwap is the hottest topic in the cryptocurrency world, especially in the DeFi community. Its story is full of ups and downs and can be called a soap opera. With its vampire-like brutal invasion of Uniswap, the protocol with the largest trading volume in the decentralized exchange (DEX), SushiSwap has become the DEX protocol with the largest total locked volume in the industry.

This may be good news for traders: the largest total locked volume means that SushiSwap is more suitable for token trading than Uniswap because the slippage may be lower.

SushiSwap's website style

Vampire attacks bring changes to Dex ecosystem

But for Uniswap, it is absolutely bad news: liquidity providers are losing, liquidity is losing, and users are losing.

The core reason why SushiSwap can surpass Uniswap is that it has given Uniswap a super patch: adding a native token to the entire protocol. As for what the native token can be used for? SushiSwap's solution does not talk about those empty words, but directly grants dividend rights, which can capture the overall value of the protocol more directly than the governance tokens of Compound or MakerDAO.

Interestingly, if we go back a year, the DeFi community would still praise Uniswap for not considering issuing coins: Uniswap was once in the "automated market maker AMM" track with another decentralized trading platform Bancor. The biggest difference between Uniswap and Bancor is that it does not have a native token, but instead shares the transaction fees collected directly with liquidity providers, reducing the transaction friction brought about by the addition of native tokens.

But the situation is completely different now. It is almost certain that Uniswap will launch the protocol native token in the next V3 update, which may become the most important strategic change. At present, there is relatively little public information about Uniswap V3. Uniswap founder Hayden Adams has only publicly revealed that the new version will solve all the problems of AMM (automated market makers) on the market.

Of course, judging from the data, Uniswap still has a great advantage at present. The number of users and transaction volume are far ahead of other DEXs, accounting for half of the total transaction volume of Ethereum DEX. The worst case scenario for Uniswap is that as long as SushiSwap has better liquidity, other liquidity aggregators (such as 1inch) will route more transactions to SushiSwap, reducing users' transaction slippage.

But this is good news for the DeFi ecosystem. The overall liquidity of Ethereum DEX has been significantly improved due to SushiSwap, with more than a billion dollars of locked assets added. Users with trading needs can get a better trading experience with better liquidity.

An exact replica has brought about changes in the entire ecosystem, which is laughable, but we have to accept this reality.

Token Incentives vs. Organic Growth

If it weren’t for the emergence of the vampire SushiSwap, Uniswap should be enjoying its most comfortable time.

Uniswap was previously the protocol with the largest amount of locked assets and the largest number of trading users among Ethereum DEXs. Especially since the start of the liquidity mining craze and the use of Uniswap for token issuance in the middle of the year, its locked liquidity has grown more rapidly, from tens of millions of US dollars to more than 300 million US dollars.

This fully reflects the natural growth rate of custodial assets in the Uniswap protocol without token incentives. The growth in the number of users and transaction volume is also in line with this growth rate, with the number of independent addresses reaching about 20,000 per day.

Trend of daily unique addresses on Uniswap in the past three months

SushiSwap's migration of Uniswap's liquidity can be described as a "vampire attack", but from another perspective, it can also be said that it has invisibly "helped" Uniswap to preview its potential growth rate if token incentives or liquidity mining are added.

The effect was indeed immediate, and Uniswap’s previous natural liquidity growth was insignificant compared to token incentives: Uniswap’s locked assets soared to a peak of nearly US$2 billion within two weeks.

Of course, there are also institutions making plans here.

For example, Sam Bankman-Fried, the founder of FTX and Alameda Research, participated in the ecological construction of SushiSwap very early, and finally became one of the nine multi-signature members of the project. He also frequently disclosed his personal ideas and thoughts on the future development of the SushiSwap project. One of the most likely directions is to explore more with Serum, the DEX project he recently participated in.

Uniswap data is still impressive

But SushiSwap may catch up soon

Although Uniswap's liquidity has dropped by about 70% since the completion of SushiSwap's liquidity migration, and is currently less than half of the former, compared with the data before SushiSwap was launched, Uniswap's overall locked assets have increased from US$300 million to US$460 million, an increase of more than 50%.

Another aspect is that from the perspective of the number of users, Uniswap is still far ahead, exceeding the total number of users of all other DEXs. Referring to the number of independent addresses counted by DeBank, after the liquidity migration, the number of SushiSwap users accounted for only a fraction of Uniswap.

However, from the perspective of user transaction needs, SushiSwap will have more advantages, after all, the latter has better liquidity. If we refer to the transaction slippage data of the transaction aggregator 1inch to evaluate, for a slightly larger transaction of 10,000 ETH, most of the transactions will be routed to SushiSwap for execution because it has better liquidity.

Therefore, with the popularity of user-oriented trading aggregators such as 1inch, protocols that can control more liquidity provider (LP) assets can generate more transactions and gather more users.

Of course, the algorithm and mechanism of the AMM itself is also a factor that affects liquidity. At present, the differences and barriers between similar algorithms such as Uniswap, Balancer or SushiSwap are not large. Compared with execution, newly emerging AMM protocols that introduce other algorithms such as DODO or Mooniswap are more

There are technical barriers or competitiveness.

How did Uniswap make a comeback?

Uniswap has gained a lot of fans and influence in the community thanks to its extremely simple market-making algorithm, because for any asset that requires market making to provide liquidity, Uniswap is the default choice, reducing the role of the original market makers - they are replaced by algorithms.

Because the algorithm is extremely simple and open source, the cost of forking it for other projects is very low. For example, MakerDAO, an early DeFi project that is also open source, has a much more complex system, with several times the number of contracts as Uniswap. In addition, because of the protocol governance tokens and decentralized autonomous organizations (DAO), the difficulty and cost of forking are relatively high. These directions are at least potential business barriers that Uniswap and similar protocol products need to consider.

Fortunately, Uniswap has announced that it is developing the V3 version of the protocol. Hayden Adams has publicly stated that the next version will solve all the problems currently encountered by AMM, and will strengthen cooperation with institutional traders to provide products that are more suitable for such users. In addition, it will use Ethereum's second-layer technology to improve transaction performance and reduce gas fees paid by users. Obviously, the founder hopes to distance himself from the forked project in terms of product evolution.

The most important thing is, of course, the protocol’s native token. Many people in the community believe that Uniswap’s top priority is to issue native tokens, otherwise the total market value of the entire Uniswap project cannot be reflected because there is no tradable item (that is, tokens). If dividend-based tokens like SushiSwap have regulatory risks, then adopting a governance token solution like Compound or MakerDAO is at least a safe option.

The other two issues that need to be addressed are the large slippage and impermanent loss that AMM has been criticized for. Curve optimizes the slippage and impermanent loss issues by introducing custom curves and supporting specific assets, while DODO attempts to solve these two problems by introducing oracles. It is worth paying attention to how Uniswap V3 solves this problem.

In addition, there is another hot demand for how to achieve user popularization. The biggest obstacle at present is that the transaction cost on the chain is too high. Although the Ethereum Gas fee has decreased to around 100 in recent days, it is still at a high level, so the introduction of Layer 2 can lower the user threshold and introduce more users with less assets.

Ultimately, the most important competitive advantage for Uniswap is the team’s development and execution capabilities. Even if SushiSwap forks Uniswap’s code and assets, the team that developed this AMM formula algorithm is still Uniswap. If they can continue to create new features to meet the needs of both LPs and traders, Uniswap still has a great chance of winning.

In this round, SushiSwap is slightly ahead; the fun is just about to begin.