UniswapX: A new paradigm for off-chain order matching to assist on-chain AMM.

Source: Haotian (Twitter: @tmel0211), blockchain security practitioner.

The originally flat-laying framework @Uniswap is finally going to lead the AMM revolution. If the launch of V4 is not enough for paradigm innovation, UniswapX's off-chain order matching and on-chain AMM direction is a new paradigm. So, what are the core functions of UniswapX? How does it work technically? Can it bring a new round of prosperity to the chain? Next, let's explore it together from the perspective of technology and business logic.

Due to the native characteristics of the on-chain environment, such as unstable gas, controllable miner packaging order (easy MEV), and AMM price mechanism easily affected by market fluctuations (large slippage), the current DeFi boom has stagnated. It is difficult to match the trading experience of CEX in terms of attracting entry funds, promoting mining innovation, and friendly market making. The emergence of UniswapX is precisely to solve these problems.

How to solve it?

UniswapX has introduced a set of off-chain node suppliers (Relay Network), which can collect user orders to establish a local order book, share it with other nodes, and ultimately package the order status transition on the chain.

In this battle, UniswapX aimed its first shot at miner nodes, forcing them to reform their rules. Because at least 60% of on-chain TXS are transaction attributes, miners do not want to lose liquidity and are likely to embrace the change.

With this set of off-chain order matching service providers, users can go through an off-chain environment after initiating a transaction. The user's 0 gas transaction, batch packaging, optimal price matching, and anti-MEV experience all rely on this off-chain service link to supplement. Based on this background, I have distilled the core functions of UniswapX into three highlights:  

1) User 0gas admission threshold, to be precise, UniswapX has designed a set of user gas fees borne by Pool liquidity providers LP, and ultimately subsidized by UniswapX to subsidize LP's commercial internal circulation with transaction fees. This is to reduce the user's entry cost and attract more users to DEX trading. The only concern is whether the gas cost borne by LP can be offset from the platform subsidy. If the gas savings from batch packaging are included, it should be able to cover.   

2) Anti-MEV. UniswapX has introduced some features in the off-chain order matching stage, including incomplete price sorting, execution of limit orders, and local ledger digestion of price differences, which ultimately makes transactions presented in the Mempool difficult to predict, squeezing out the Arbitrage space of MEV. The reason why MEV exists is the mechanical mechanism that miners prioritize packaging according to gas fees. With the regulation of off-chain ledgers, MEV will indeed be improved.   

As for other limit orders, stop-loss orders, introduction of weight fees, customized slippage, algorithm optimization, and monitoring tools, these services can be categorized as part of the three core functions mentioned above. Overall, you will find that the experience of UniswapX is becoming more and more similar to that of centralized exchanges. Yes, this is exactly UniswapX's ultimate strategic intention, to challenge CEX head-on.

The first group of users to be targeted are those who use CEX, because once the 0 gas internal circulation mechanism is implemented, the decentralized and uncontrollable risks such as unfair MEV and malicious Aggregators will be eliminated. Users who use DEX will have the same experience as CEX, and will naturally flock to DEX. Secondly, it will give rise to a group of on-chain market makers. The new off-chain ledger mechanism can provide sufficient space for market makers, driving mainstream liquidity into the on-chain environment.  

As for the influx of a massive user base and liquidity, I remain observant as to whether it will spur the next wave of DeFi market prosperity. This is because the DeFi Summer sparked by governance token mining has brought about irrational factors, such as exaggerated APY and emerging combination gameplay. The overall direction of UniswapX is to standardize market resources and refine the allocation of stock market liquidity. Whether off-chain node providers and aggregators will give rise to new gameplay remains to be seen.  

Overall, I believe the launch of UniswapX can be considered a paradigm innovation. There are many details, such as how to incentivize off-chain node service providers, how to standardize Pool Oracle prices, how the Dutch auction aggregator mechanism works, and how old miner nodes and new off-chain nodes compete with each other, etc. If the overall DEX market continues to grow, these unknown variables will have to be further defined by the market. Looking forward to it, let's roll out new opportunities!  

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