Uniswap, a popular decentralized exchange (DEX) on the Ethereum blockchain, has undergone two major updates in its short history. Uniswap V2, launched in 2020, was the original version and has since been replaced by Uniswap V3, which was launched in 2021. This article aims to compare and analyze the volume of trades on Uniswap V2 and V3, highlighting the key differences between the two versions and discussing the potential reasons behind the changes.

Volume Comparison

According to data from DappRadar, the volume of trades on Uniswap V2 significantly outpaced that of V3 in the early days of each version's existence. However, as time went on, the volume on Uniswap V3 began to grow at an unprecedented rate, eventually surpassing that of V2.

As of October 2021, the volume of trades on Uniswap V3 stood at approximately $35.8 billion, while the volume on Uniswap V2 was slightly lower at $32.3 billion. This marked a significant shift in the volume of trades on the DEX, with V3 now dominating the market share.

Key Differences between Uniswap V2 and V3

1. Liquidity Provided by Community vs. Liquidity Provided by Developers

One of the most significant differences between Uniswap V2 and V3 is the way in which liquidity is provided. In V2, liquidity is provided by community members through the use of liquidity pools. Users create pairs of tokens and deposit them into these pools, allowing traders to exchange the tokens at the rate established by the pool. In V3, however, liquidity is provided by developers through the use of a new mechanism called "liquidity providers." These providers can create their own custom liquidity pools and set the exchange rate for tokens within those pools.

This change in the way liquidity is provided has led to significant differences in the volume of trades on the two versions. As community members are no longer directly involved in creating liquidity pools, the volume on Uniswap V2 has declined compared to V3.

2. Cost of Trading

Another difference between Uniswap V2 and V3 is the cost of trading. In V2, trading costs were based on the "oracle fee" set by the developers. This fee was generally high, leading to higher trading costs for users. In V3, trading costs are based on the "miner fee" set by the users creating the liquidity pools. This fee is generally lower, leading to lower trading costs for users.

This change in the cost of trading has likely contributed to the increased volume on Uniswap V3 compared to V2. Users are now able to trade at lower costs, leading to more trades and a higher overall volume on the DEX.

3. Scalability

Another factor contributing to the increased volume on Uniswap V3 is the improved scalability. V3 uses a new protocol called Polygon, which enables faster transaction speeds and lower fees compared to the original Ethereum mainnet. This improved scalability has led to more trades being completed on Uniswap V3, contributing to the increased volume seen on the DEX.

In conclusion, the volume of trades on Uniswap V3 has significantly outpaced that of V2, primarily due to the differences in the way liquidity is provided, the cost of trading, and the improved scalability offered by Polygon. While Uniswap V2 still has a significant following, the shift in volume favorably towards V3 indicates that the newer version is better suited to meet the demands of modern traders.

As the decentralized finance (DeFi) landscape continues to evolve, it will be interesting to see how the differences between Uniswap V2 and V3 play out in the future. With advancements in technology and improved user experiences expected, it is possible that we could see further changes in the volume of trades on Uniswap and other DEXes.