Apollo’s Moonshots: UniSwap v3 a real competitor to centralised exchanges
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Henrik Andersson, the chief investment officer with Australia’s leading cryptocurrency investment firm, Apollo Capital, shares his weekly take on what’s happening in the fast-changing and volatile cryptocurrency space.
The leading decentralised cryptocurrency exchange, Uniswap, was last week updated to version three, an upgrade that Henrik Andersson says is a major event in the decentralised finance world.
“They’ve been working on that for quite some time, people have been looking forward to this upgrade for a few months now,” Andersson said.
Unlike centralised marketplaces like Binance or a traditional securities broker which take custody of user’s funds, Uniswap is a “dex”, or decentralised exchange, meaning it operates without a central authority. Instead it relies on smart contracts to let users exchange between the numerous tokens that run on the Ethereum network without counterparty risk.
“Decentralised exchanges have really exploded in the last 12 months, we’re currently seeing dexes tracking $60 billion per month in volume and also surpassing many of the centralised exchanges.
“And Uniswap version 3 is bringing real innovation to their tech space.”
It’s all a bit complicated but Uniswap doesn’t rely on a traditional order book that most traders would be used to. Instead users trade against pools of assets provided by liquidity providers, who are rewarded by a slice of the fees. Prices are set by an algorithm.
“On v.3, it provides much more flexibility for the liquidity providers, and that creates a lot of possibilities,” Andersson said.
“I think what that means it that you will see even better pricing in the dex space. It will be really interesting to see how Uniswap will be able to compete with more specialised exchanges like Curve,” Andersson said. (Curve is designed for trading stablecoins, assets pegged to a fiat currency like the US dollar).
“I think Uniswap v3 will be competitive on a broader range of coins and crypto and I think dex-es will be even more competitive compared to centralised exchanges, because you will see even better pricing on dex-es going forward.”
The third version of the protocol also means users can’t be “passive, lazy liquidity providers” — liquidity providers have to be more active.
“It enables you to put in these price bands, so I think you will see the rise of Uniswap v3 market-maker type of active managers.”
Apollo actively uses decentralised exchanges to trade some of the $100 million of its funds under management, Andersson said.
“The liquidity is actually much better in many cryptos on centralised exchanges, especially the long tail of cryptos,” he said, referring to the smaller coins.
“If you’re trading the Bitcoin/Eth pair, the biggest liquidity might be on Binance, but if you’re trading on some of the smaller coins, it’s actually better on dex-es.”
The overall user experience is better as well, Andersson said. There’s no need to create an account, remember a password and then transfer one’s coins over to a centralised exchange.
“Instead you just connect your web wallet, and off you go. You don’t have to trust a third party with the security either, and you don’t lose custody of your assets until the trade happens.
“It’s better from a user experience, it’s better from a security experience and the liquidity is better, so it’s becoming superior to centralised exchanges, along a range of properties.”
Decentralised exchanges are a component of the broader movement towards DeFi, or decentralised finance, a major theme of the crypto bull market of the last half-year. DeFi refers to lending, borrowing and other capital activities that are governed by smart contracts, without a traditional middleman like a bank.
Most DeFi has occurred on the Ethereum network, but that’s changing, Andersson said.
“Binance Smart Chain has recently enormously risen in value and activity, and we’ve recently seen a rise in the protocol called MATIC, or Polygon is what they call themselves now.”
Polygon is a sidechain to Ethereum, aggregating transactions so they can be settled on the Eth network.
“It uses proof-of-stake, much faster and much cheaper to use than Ethereum,” Andersson said.
Curve has already launched on Polygon, very successfully, and on Friday another decentralised exchange called SushiSwap did so as well.
Apollo has MATIC/Polygon its portfolio and the coin has been performing “really well,” Andersson said.
Some of that DeFi action might be lured back to Ethereum in the next few weeks, as a layer 2 scaling solution called Optimistic launches.
“This is another momentous event happening in the crypto community. Optimistic is one of the main scaling solutions that is coming to Ethereum,” which in its current state can’t handle more than a handful of transactions a second.
“Some of the major protocols like Optimistic and Uniswap are about to launch on Optimistic in the coming few weeks, so that will be really interesting to watch. You might have some of the activity on Binance blockchain and MATIC go back to Ethereum.”
It’s a layer 2 “roll-up” solution, which Andersson said is the main scaling solution for Ethereum until version 2 of the network is launched.
“It’s really got a long way to go,” he said.
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.