Decentralized exchanges (DEX) have become a groundbreaking advancement in the crypto world, and when discussing this transformative technology, one name inevitably appears at the forefront – Uniswap. The platform is the largest DEX protocol and has proven to be a trailblazer in the DeFi ecosystem, introducing innovative concepts such as automated market makers (AMMs) and processing over $1.5 trillion in transaction volume.
Since its launch in 2018, it has gone through multiple iterations or upgrades, the latest being Uniswap V4. The fourth version of the renowned platform promises a more flexible and customizable experience for liquidity providers (LPs) and traders alike, while improving cost efficiencies. In this article, we’ll take a deep dive into the exciting developments in Uniswap V4 and how they impact DeFi users.
Uniswap was launched in 2018 by Hayden Adams (CEO of Uniswap Labs) as a decentralized trading protocol that will serve as a public infrastructure in the crypto ecosystem. It is an Ethereum-based protocol that enables users to exchange ERC-20 tokens. As a decentralized exchange, it does not involve order books or intermediaries, but relies on the automatic market maker (AMM) mechanism and uses smart contracts to ensure liquidity and transactions. The fact that it incentivizes liquidity providers through transaction fees has been one of the main reasons for its exponential growth over the years.
As mentioned earlier, Uniswap has had multiple versions available to users since its launch. Version 1 of the protocol allows users to swap between ETH and ERC-20 tokens.As an upgrade from V1, Uniswap V2 proved to be a huge improvement as it supports ERC-20/ERC-20 swaps, lifting the limitations that existed in the previous iteration Cryptocurrency exchange solutions. Other notable upgrades to V2 include price oracles and flash memory swapping.
If V2 was impressive, Uniswap V3 is even better. The most prominent feature of this upgrade is the concentration of liquidity. It allows limited partners to pool liquidity within a price range, allowing them to earn higher potential returns while requiring lower capital. Other standout features of V3 include multiple fee tiers (005% – 1%), range orders, non-fungible liquidity, advanced oracles, and dynamic fee switching.
While Uniswap V3 gives LPs more control over how much risk and reward they are willing to take when pooling funds and makes the system more efficient, new features will always result in higher fees and procedures Code complexity. For example, the use of advanced oracles allows the system to retrieve real-world updates from the real world, such as the prices of different cryptocurrencies. However, this feature makes the system cost of the switch higher. Furthermore, according to on-chain data, proactive management and position changes do not always lead to better performance compared to conventional settings. This highlights the need for improvement.
The latest version of the Uniswap protocol, V4, introduces a new feature called “Hooks” that allows anyone to make these trade-off decisions by enabling customizable liquidity pools.
What is a hook?
Pegs are basically snippets of code or plugins that customize how pools, swaps, fees, and LP positions interact. They achieve this by performing specific operations at key stages throughout the pool’s lifecycle. Essentially, by seamlessly integrating with V4’s smart contracts, Hooks provides developers with the opportunity to leverage the liquidity and security of the Uniswap protocol to build personalized AMM pools.
Through the implementation of hooks, DeFi users can: –
- Placing an on-chain price limit order is like setting rules for buying and selling an asset.
- Automatically put their tokens into lending platforms or reinvest their fees to earn more money.
- Create customized market making strategies with specific fee structures and pricing rules.
Hooks allow LPs to use their funds more efficiently, making Uniswap’s liquidity more versatile. Additionally, hooks facilitate MEV internalization, somewhat similar to a feature on Osmosis called ProtoRev. However, its network fees are higher because it involves complex calculations, the guarantees on transaction order are slightly weaker, and flash loans can be more costly.
In V3, each market or pool has its own smart contract, making it more expensive to create new markets or even trade in different markets. V4, on the other hand, has a feature called Singleton that allows any number of markets to exist within a single smart contract. This further results in a reduction in gas fees (an estimated 99% reduction) since assets do not need to be moved in and out of the market every time someone swaps. They move based on the net balance at the end of the transaction, making the system more efficient. This system is called “flash accounting.”
These changes and improvements are governed by a new proposal called EIP-1153, which introduces a new method of storing data on Ethereum. The proposal makes it easier and more cost-effective to utilize storage, which is only needed for a short period of time. The proposal is expected to be part of the next Ethereum upgrade by the end of 2023.
Fee tiers become more flexible as singleton and flash accounting become more efficient. Pool creators can choose the level that gives them a competitive advantage and can even customize it with effective fee pegs. V4 introduces support for native ETH, further saving gas costs.
Uniswap V4 makes some big changes in how fees and governance work. Someone from Uniswap said:
“As always, we firmly believe that core financial infrastructure should be open and transparent. We also believe that the Uniswap community—the people and teams that support, use, and build the protocol—should manage v4 of the protocol just as they managed previous versions. “
In the long run, just like in V3, Uniswap DAO can collect a percentage of fees when people swap tokens in the pool. In addition to this, as a new feature in V4, the DAO can also charge a percentage of fees when people withdraw funds from a specific pool.
Another big change is that governance no longer has a say in fee levels or proximity to price. This gives the pool more freedom. Additionally, withdrawal fees for each pool can now be customized using pegs, and there are no longer standard fees.
Additionally, the Uniswap V4 code will be available through a commercial source license 1.1, which limits its commercial period to a maximum of four years. After that, it will transition to GPL licensing. Also, in V4, governance can vote on whether to add fees to the pool, but it’s there.
Uniswap V4 comes with new features to help traders, market makers, and others in the crypto world. These features make it more flexible, improve how trades are completed, and reduce the risk of losses for liquidity providers.
Some of the main features are summarized below:
- Singleton model: Mining pools can use their own price data or data from other sources without the need for oracles.
- Efficient data storage: Better at saving and reading small data, thereby saving gas costs.
- Consolidation of Uniswap pools: All Uniswap pools are brought together into one place, which makes transactions cheaper.
- Use EIP-1153 for flash accounting: This helps save gas by preventing SSTORE operations from temporarily changing data during transactions.
However, some of these features aren’t entirely new. For example, limit order execution is similar to 1inch Izumi Financial. In addition, the Singleton function that integrates all mining pools into one smart contract already exists in Balancer V2.
While V4 does make Uniswap more flexible, it does not solve all the problems of the DEX protocol, such as LP permanent loss and transaction quality. In fact, there may be more competition among liquidity providers, which may make transactions more expensive and reduce transaction quality, thus offsetting some of the gas savings.
Overall, V4 makes the Uniswap protocol easier to use and more creative thanks to features like hooks and singletons, but it hasn’t solved all the problems yet.
Uniswap V4 marks another milestone in cryptocurrency exchange development, providing traders and liquidity providers with new tools to enhance their experience. Essentially, Uniswap remains at the forefront of DeFi with its innovative updates.
While Uniswap V4 is still under development and its draft code is available on GitHub, it will likely be several months before it is fully ready for release. The features we explore in Uniswap V4 are just the beginning of what this new version has to offer. To gain a more complete understanding of its advancements and possibilities, we encourage you to delve deeper into the whitepaper, where you can fully grasp the potential of Uniswap V4.
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