The Problem
Last updated
Last updated
In the ever-evolving landscape of cryptocurrency and decentralized finance (DeFi), there exists a set of challenges and issues that have, at times, hindered the seamless flow of digital asset transactions. This chapter is dedicated to identifying and understanding the pain points that crypto enthusiasts, investors, and liquidity providers commonly encounter in the realm of liquidity provision and decentralized exchange (DEX) platforms.
Uniswap is the largest decentralized exchange (DEX) and one of the cornerstones of Decentralized Finance (DeFi). Uniswap uses liquidity pools to provide Automated Market Making (AMM) functionality for exchanging cryptocurrencies on the EVM blockchains (Ethereum, Polygon, Arbitrum, Optimism).
Uniswap v3 provides increased capital efficiency and fine-tuned control to liquidity providers, improves the accuracy and convenience of the price oracle, and has a more flexible fee structure. Uniswap v3 introduces a number of new features, notably the concentrated liquidity feature, which allows liquidity providers to concentrate their liquidity in a specific price range, leading to increased capital efficiency.
Because of the complexity of Uniswap v3, 95% of liquidity providers don't generate any rewards on their capital, and the rest 5% of liquidity providers are receiving impermanent losses on their positions without any Web3 tools to properly hedge this and rebalance liquidity. This situation completely eliminates the advantages of the Uniswap v3 protocol and creates a huge barrier to its TVL growth.
1) Ineffective liquidity distribution in the Pool dramatically decreases the capital efficiency of the Uniswap v3 protocol. That's also the major reason why Uniswap v2 still has $1B TVL.
2) Disbalanced Liquidity Pools make an asset swap in Uniswap v3 highly ineffective with a big price impact and a high potential for MEV attack, in some cases that make asset swap even impossible and the trading volume goes to other DEXes. This happened because users can't monitor their position 24/7, and rebalancing of the liquidity can cost a lot of Gas Fees and complex calculations. The Common problem in 40% of Uniswap v3 Pools.
3) Impermanent losses are potential losses that funds are exposed to when they are in a liquidity pool. It occurs when the mathematical formula adjusts the asset ratio in a pool to ensure they remain at 50:50 in terms of value. The pool can become uneven by large trades that drain one asset from one side of the pool, forcing a significant rebalance of the pool. The quantity of the tokens deposited into the pool changes based on the trading activity. Upon withdrawal, the user is issued the tokens equivalent to their ownership “share” of the pool. The loss is not realized until the user withdraws their funds from the liquidity pool. Uniswap v3 makes impermanent losses more dangerous for positions because of the concentrated liquidity and without the proper rebalancing tools you can't protect yourself from IL
3) Another big disadvantage of Uniswap v3 protocol is its NFT-based liquidity positions. Each time someone provides liquidity into the Uniswap v3 pools, the protocol mints new NFT (+gas fees) representing this position. Uniswap LP NFT standard ERC-721 does not allow it to use in other protocols (liquidity farming, liquidity lock, leverage, lending, DAO, etc.), which is blocking the huge external opportunities of Uniswap v3.
So let's fix it all with only one Protocol - Convectium
