Saying goodbye to Fork Swap, is Uniswap V4 entering the era of "Ten Thousand Hooks"?

Original Title: "Farewell Fork Swap, Uniswap V4 Enters the Era of "Ten Thousand Hooks"?"

Original Source: YBB Capital Researcher Ac-Core

Introduction

Compared to the V3 version released two years ago in May 2021, V4 has more flexible asset composability and significantly reduces the Gas fees required for providing liquidity and trading. With the support of the new Hooks feature, developers no longer need to develop xxSwap, but only need to customize liquidity in Hooks and add frontend pages and elements that meet their own needs to open a "designated venue". At the same time, there is no need to worry about insufficient liquidity in the "designated venue". Let's explore how Uni V4 leads DeFi from the "Lego era" to the "Ten Thousand Hooks" era.

Uniswap V4—A Rare True Innovation in the Bear Market

The iterative upgrade of Uniswap has shown us the infinite potential of the DeFi world, and it has never deviated from the original intention and rules of X*Y=K. The innovation of Uniswap V4 mainly focuses on providing more customized trading logic, improving gas efficiency and developer experience, and enhancing the convenience and efficiency of transactions. Compared with using V3, both developers and users can get more open, free, and efficient automated market maker services. The following article will comprehensively introduce the upgrades of V4 and the two most important changes: Hooks and Singleton.

Revolutionary Introduction: Hooks

The core feature of Uniswap V4 - Hooks, allows every developer to create a customized DEX that meets their specific needs and build their own "Lego blocks". Hooks are an important concept introduced in Uniswap V4, which are plugins used for customizing liquidity pools, exchanges, fees, and liquidity provider (LP) position interactions. Through the Hooks mechanism, developers can perform specific operations at key moments in the liquidity pool's lifecycle, such as before/after the exchange or before/after the LP position changes.

Meanwhile, Hooks are also smart contracts that interact with the core contracts of Uniswap V4, and can be executed at different "key points" in the liquidity pool (key points refer to operations before/after the exchange, or when depositing/withdrawing LP, etc.), allowing developers to define and execute custom logic in a flexible way. Hooks can be bound to specific liquidity pools to control pool behavior and interaction. For example, developers can create a Hook that validates specific conditions before each exchange, or performs additional operations when the LP position changes.

YBB Capital Researcher Ac-Core Homemade

Through Hooks, mining pool creators can adjust mining pool parameters and introduce new features to AMM. They can even allow for the construction of various DeFi strategies on Uniswap, ultimately benefiting LPs/swappers even more. It is not difficult to imagine that the introduction of Hooks will bring greater flexibility and innovation space for developers, allowing them to create unique liquidity pools according to their own needs and strategies, providing more innovative and personalized trading experiences, such as:

● Time Weighted Average Market Maker (TWAMM): Developers can use the Hooks mechanism to create liquidity pools that support TWAMM strategies, which spread large orders over a period of time.

● Dynamic fees: Through Hooks, liquidity pools can dynamically adjust fees based on market volatility or other input parameters to better adapt to market conditions.

● Onchain limit orders: Hooks can create and execute limit orders on the chain, allowing users to trade at specified prices.

● Interaction with lending agreements: Developers can automatically deposit funds that exceed the liquidity range into lending agreements through Hooks, maximizing the utility of funds.

At the same time, Uniswap V4 currently supports eight Hooks callbacks as shown in the figure below. These Hooks can be executed before and after the transaction starts, thereby implementing on-chain limit order functionality. In actual operation, a limit price can be set before the transaction starts, and then it can be checked after the transaction ends to see if the limit price is met. If it is met, the transaction is executed, otherwise it is cancelled.

 YBB Capital Researcher Ac-Core Homemade

V4's Another Hooks - "Action Hooks"

In addition to Hooks, Uniswap V4 also has another "Action Hooks". It can only trigger the contract execution logic when the Flag condition is met, so it can be called during the contract execution period. Refer to the flowchart below to explain that before our asset exchange, the contract needs to check the Flag to evaluate the volatility of the liquidity pool. If the liquidity is high, the Flag will become True and run our Hooks. If the liquidity is insufficient, the Flag will become False and reject the Hooks to keep the interaction unchanged. By executing the "Action Hooks" operation as shown in the figure below, a more gas-saving method is enabled to execute the Hooks we need. Next, the Singleton structure and Flash accounting will be implemented in V4 to provide a cheaper asset exchange and contract deployment experience.

YBB Capital Researcher Ac-Core Homemade

全新的单例结构：Singleton

New Singleton structure: Singleton.

In previous versions of Uniswap, the Factory-Pool contract architecture was used from V1 to the present day and is also the most commonly used contract architecture for DEX and derivatives in the DeFi world. However, in V4, it abandoned the Factory-Pool and replaced it with a singleton contract structure. In V3, every time a liquidity pool was created, a brand new contract had to be redeployed, which was very expensive. But in V4, the singleton structure saves all liquidity pools in one contract, which maximizes the reduction of gas consumption in creating liquidity and cross-chain pools (contracts). This means that token transactions do not need to be transferred between different contracts and can even reduce gas fees by 99% compared to V3.

With the help of "Singleton" and "Flash Accounting", Uniswap V4 now supports Native ETH. Users can directly trade using Ether (ETH) without the need for additional conversion operations, thereby improving transaction convenience and saving on Gas fees. This tight integration between Uni and the ETH ecosystem serves to benefit Ethereum.

In terms of contract structure, there have been significant changes in the liquidity position data storage and packaging of V4. In version V2, liquidity was distributed throughout the entire range (as shown in Figure 1), so the Uni protocol used homogeneous tokens (ERC-20) as liquidity certificates. In version V3, due to the addition of limit order liquidity, the corresponding liquidity display was changed to non-homogeneous tokens (ERC-721) for display. In version V4, we speculate that liquidity display will not be tokenized, but will be managed by the address of each wallet. In addition, the "transient storage" (transient storage) of EIP-1153 in the Cancun upgrade is also beneficial to the V4 system, which helps to further achieve cost optimization.

 YBB Capital Researcher Ac-Core Homemade

How to enable customized Oracle and distribute internalized MEV to LP holders

UniSwap V4 is a decentralized trading protocol designed to enable trustless token trading on the Ethereum network. It provides higher liquidity and better trading experience by utilizing a customized Oracle implementation and an internalized MEV (Maximize Trading Value) distribution mechanism. To allow for the customized Oracle implementation and internalized MEV distribution to be provided to liquidity providers (LP holders), the following steps can be considered:

1. Design Customized Oracle: You need to develop an Oracle that can provide customized price data. Oracle is a contract that obtains external data and provides real-time market prices and other information to smart contracts. A customized Oracle contract can be developed based on trading pairs, time, or other factors according to your own needs.

2. Implement an internalized MEV distribution mechanism: MEV refers to the benefits generated in blockchain transactions due to changes in transaction order. UniSwap V4 distributes these benefits directly to liquidity providers through an internalized MEV distribution mechanism. You can design a mechanism that allocates a portion of the profits directly to the corresponding LP holders when MEV occurs.

3. Contract Integration and Deployment: Integrate the customized Oracle and internalized MEV distribution mechanism into the smart contracts of UniSwap V4. Simply modify and extend the corresponding contracts to support these features. Ensure that the best security practices are followed during contract development and modification, and conduct thorough testing and auditing.

4. Notification and incentive mechanism: Promote this new feature to liquidity providers and provide them with appropriate incentives. Communication with users can be done through social media channels or other means to let them know the benefits of the new custom Oracle and internalized MEV distribution mechanism.

5. Monitoring and Improvement: After deployment, closely monitor the system's operation. Monitor the effectiveness of transactions and MEV distribution, and make improvements as needed. At the same time, feedback and participation in community suggestions are crucial for further optimizing this mechanism.

Advantages of Customized Liquidity Pools

Uniswap V4 introduces the concept of customized liquidity pools, but customization is recommended on the basis of centralized liquidity. Therefore, this transformation not only affects the development pattern of Fork Swap, the existence of aggregators, but also brings many advantages to liquidity providers and traders.

● Choice of liquidity provision expansion: Traditional AMM models usually have fixed rules and parameters, which limits the choice of liquidity providers. However, Uniswap V4 allows for customized liquidity pools through Hooks mechanism, enabling liquidity providers to create different types of liquidity pools based on their preferences and strategies. This allows for various sizes of liquidity pools to emerge in the market, providing users with more choices and flexibility.

● Reduce costs and improve efficiency: The architecture of Uniswap V4 centralizes all liquidity pools in a single smart contract by introducing a "Singleton" contract. This architecture can reduce transaction costs, improve transaction efficiency, and simplify contract deployment and maintenance. In addition, customized liquidity pools can also set more suitable fee structures according to specific needs to meet the needs of different users.

● Provide a wider range of trading strategies and risk management tools: Customized liquidity pools provide traders with more opportunities for trading strategies and risk management tools. For example, by supporting the TWAMM strategy, large orders can be traded evenly over a period of time, reducing the impact on market prices. In addition, customized liquidity pools can also be integrated with other DeFi protocols, such as lending protocols and custom oracles, to provide users with more comprehensive trading solutions.

● Comprehensively enhance flexibility and creativity: Customized liquidity pools provide greater flexibility for liquidity providers. They can customize the management of their liquidity according to market demand and strategy. This flexibility and innovative potential can motivate more liquidity providers to participate, providing traders with diversified liquidity options.

Thought-provoking Questions

YBB Capital Researcher Ac-Core Homemade

1.Curve solved what problem for Uni V3?

Compared to V3, Curve solves the following problems:

1. Profit from low liquidity range: Uniswap V3 concentrates liquidity in specific price ranges, which, influenced by its AMM model, results in limited liquidity in other price ranges. This leads to higher transaction costs and limited liquidity when trading in larger price ranges. In contrast, Curve focuses on trading between stablecoins and increases liquidity within price ranges by using an adaptive liquidity curve. This means that users can trade stablecoins in larger price ranges with lower slippage.

2. Low-cost trading: As Curve focuses on trading between stablecoins, including assets with fixed price relationships, it employs specific algorithms and strategies to reduce slippage and costs in trading. This allows users to engage in stablecoin trading at more competitive prices.

3. Better price discovery: Curve offers greater liquidity across a wider range, especially when trading between stablecoins, it can provide better prices to be discovered. This means that users can more accurately obtain the market price of stablecoins, making better trading decisions.

4. Efficient Stablecoin Trading: Curve utilizes specially optimized algorithms and liquidity curves to provide efficient stablecoin trading. This allows users to quickly and securely exchange stablecoins without excessive price slippage or costs.

2. Double Token Economic Model DEX Created Using Uni V2: Camelot

Camelot was originally a project launched on Fantom, named Excalibur. However, it collapsed due to the use of UST as a stablecoin and was randomly migrated to the Arbitrum ecosystem, where it was renamed Camelot. Unlike GMX, Camelot focuses more on guiding liquidity for new projects, with its main innovative mechanism being the permissionless "Nitro Pools". The project can fully control its own incentive measures to establish the necessary liquidity types for its own development.

It is important to emphasize Camelot's dual token economic model, which combines Uniswap V2 and Curve's decentralized trading protocols, and supports both volatile and stable token trading, dispersing liquidity across the entire range from zero to infinity. Most importantly, it allows project parties to set the ratio of transaction fees based on market conditions and the specific situation of the protocol, achieving the goal of managing dynamically targeted transaction fees.

In addition, Camelot's custom Launchpad is also unlicensed, allowing projects to issue tokens and attract more liquidity. Moreover, each project launched or partnered with on the Camelot AMM can configure specific transaction rates for its LP to adapt to its own liquidity strategy needs.

Summary of the above

Uniswap V4, as an important upgrade of decentralized exchanges, brings greater flexibility and creative space to the DeFi ecosystem by introducing the concept of Hooks and customized liquidity pools. The Hooks mechanism allows developers to create unique liquidity pools according to their own needs and strategies, and provides rich trading strategies and risk management tools. Customized liquidity pools expand the choices provided by liquidity providers, reduce costs and improve efficiency, and provide a wider range of trading strategies and risk management tools.

However, the emergence of V4 will undoubtedly rebuild the underlying foundation of DeFi. It provides a large liquidity pool that developers can use to deploy their own Hooks or ecosystems, even without the need for a single-function xxSwap, to obtain high liquidity. This allows more developers to develop various multi-functional ecosystems on the Uniswap platform. Whether Hooks + SingLeton will combine with Curve+Camelot's advantages to influence the next development trend of DeFi remains to be seen.

Welcome to join the official BlockBeats community:

Telegram Subscription Group: https://t.me/theblockbeats

Telegram Discussion Group: https://t.me/BlockBeats_App

Official Twitter Account: https://twitter.com/BlockBeatsAsia