Summary

• In June 2023, Uniswap released the code draft of Uniswap V4, proposing the main new features of the decentralized exchange platform (DEX) protocol.

• New features include “pegs” for customizable liquidity pools, a singleton design to improve cross-pool liquidity efficiency, and the return of native ETH trading pairs.

• Uniswap V4 is expected to offer many benefits, including better customization, greater efficiency, lower gas costs, and improved trading strategies.

• However, Uniswap V4 also has some limitations. For example, Uniswap can charge part of the withdrawal fee, and its license limits the use of source code.

What is Uniswap ?

Uniswap is a decentralized exchange (DEX) running on the Ethereum blockchain. Through the platform, users can trade various digital assets using the automated market maker (AMM) model, eliminating the need to use traditional order books.

Ethereum developer Hayden Adams was originally inspired by Ethereum co-founder Vitalik Buterin’s on-chain automated market maker concept. Founded Uniswap in 2018.

Uniswap has become the leader in the DEX market, with considerable trading volume and higher liquidity than other DEXs. As of 2023, Uniswap ranks among the best DEXs based on various indicators such as trading volume, liquidity, and active users.

Uniswap has gone through many iterations, launching Uniswap V2 in 2020 and Uniswap V3 in 2021. June 2023 In March, Uniswap released the code draft of Uniswap V4, which contains several major new features.

Before we dive into the new features of Uniswap V4, let’s review past versions of Uniswap to better understand its evolution.

Uniswap V1 Introduction

Uniswap V1 is the original version, launched in 2018 Launched as a proof-of-concept platform in November. Its main innovation is the introduction of the constant product market maker (CPMM) model.

Uniswap does not rely on a traditional order book-based system, but instead pools all those with idle tokens into a specific Trading pairs (such as ETH/DAI), and collect a certain handling fee from users who trade with the liquidity pool in return.

Uniswap V1 facilitates token swaps between ERC-20 tokens and Ethereum (ETH). It also allows exchange between two ERC-20 tokens. The process of exchanging between two ERC-20 tokens is divided into two steps:

Convert ERC-20 token 1 Convert to Ethereum (ETH).

Exchange Ether (ETH) for ERC-20 tokens2.

This process is necessary because the Uniswap V1 smart contract only supports ERC-20 tokens and Ethereum (ETH). direct liquidity pool between.

Although Uniswap V1 is groundbreaking, it also has its limitations, including an inefficient pricing algorithm that may be exploited by arbitrageurs. and high slippage on large trades.

Introduction to Uniswap V2

In order to meet the challenges faced by Uniswap V1 , Uniswap V2 was launched in May 2020 with several key improvements. Uniswap V2 adjusts its AMM model to support direct token-to-token exchanges, thereby reducing slippage and improving capital efficiency.

In addition, V2 also introduced Flash Swap. Users can withdraw any amount from the liquidity pool and use these funds to do anything. thing, as long as they return the amount withdrawn (plus fees) in the same transaction. This feature drives the development of arbitrage and provides liquidity mining opportunities without upfront funds.

Uniswap V2 also introduces the concept of time-weighted average price (TWAP), through which other decentralized applications can update Use Uniswap prices easily and securely.

Uniswap V3 Introduction

Uniswap V3 will be launched in May 2021. Committed to solving issues related to capital efficiency and centralized liquidity. With Uniswap V3, liquidity providers can choose to use specific price ranges of their assets, thereby earning higher fees through improved capital utilization.

Uniswap V3 also introduced a fee level system (0.05%, 0.30% and 1.00%) to better cope with Different risk levels and trading volumes.

Another new feature is non-fungible liquidity (NFL), through which liquidity providers can charge on their behalf For NFTs that are a share of the liquidity pool, users can trade, sell or transfer their liquidity positions without affecting the underlying assets in the pool.

Another important feature of Uniswap V3 is the integration with the Ethereum Layer 2 solution Optimism, which is designed to reduce transaction fees and improve the scalability of the platform.

What are the new features of Uniswap V4?

Although Uniswap V4 has not yet been released, its future features and improvements have been announced in code drafts and white papers. These include:

1. "Hooks" and custom pools

Uniswap V4 will allow everyone to customize it by introducing "pegs", which are contracts that run at different stages of the liquidity life cycle.

To better understand "pegs", it is important to realize that every liquidity pool has a to the life cycle of adding, removing, or adjusting. "Hooks" allow developers to add code that performs specified actions at key points throughout the pool's lifecycle.

For example, liquidity pools can be allowed to support native dynamic fees by adding a "hook", adding an on-chain limit order or as a time The weighted average market maker (TWAMM) gradually disperses large orders to minimize the price impact.

Customization of liquidity pools through "pegs" can be unlimited, from using multiple on-chain oracles to deposit unused liquidity into lending protocols. Basically, “pegs” will provide developers with significant flexibility in customizing liquidity pools to meet specific needs.

2. Singleton

In Uniswap V3, each liquidity pool deploys a new contract, so the cost of creating a pool and performing multi-pool swaps is higher.

A big change in Uniswap V4 is that all fund pools are stored in one contract. This move saves significant gas costs, as exchanges will no longer require transferring tokens between pools in different contracts. Uniswap estimates that Uniswap V4 can reduce the gas cost of creating a capital pool by 99%.

3. Lightning accounting

The singleton design is in addition to an architectural change in Uniswap V4 called Lightning Accounting.

In previous versions of Uniswap, token exchange or adding liquidity to the fund pool ended with the transfer of tokens. In Uniswap V4, external transfers are only made at the end, which simplifies the operation of the fund pool and reduces costs.

Single instance and lightning accounting not only improve the efficiency of cross-pool routing, but also reduce transaction costs. This advantage will be useful considering that the introduction of “pegs” increases the number of liquidity pools.

4. Native ETH trading pair

Uniswap V4 resumes support for native ETH trading pairs.

As mentioned above, Uniswap V1 only supports ETH/ERC-20 token pairs. In Uniswap V2, the native ETH trading pair was removed due to implementation complexity and concerns about liquidity fragmentation between WETH and ETH trading pairs.

Both Uniswap V2 and Uniswap V3 require the vast majority of users to encapsulate their ETH into WETH before trading on the Uniswap protocol, which requires Additional fuel charges.

After Uniswap V4 introduces singletons and lightning accounting, it supports transactions on both WETH and ETH trading pairs. This will benefit users as native ETH transfers (21,000 gas) are approximately half the gas cost of ERC-20 transfers (40,000 gas).

What are the advantages of Uniswap V4?

Uniswap V4 is committed to providing more possibilities for ways to create liquidity and ways to trade tokens on the chain. Its advantages include:

1. Customization

Developers pass "Pegs" allow for great flexibility in adding new functionality to liquidity pools. This is expected to lead to the creation of innovative pools with customized trading capabilities.

2. Efficiency

"Hooks", singleton contracts and lightning accounting can improve the efficiency of transaction routing.

3. Reduced fuel costs

Uniswap V4’s new features are expected to further reduce gas costs, attracting more users to the protocol.

4. Liquidity providers may increase profits

There may be a dynamic fee structure that provides liquidity providers (LPs) with more control and may increase their earnings.

5. Advanced trading strategies

New features such as Time Weighted Average Market Maker (TWAMM), limit orders, and dynamic fees enable advanced trading strategies that were not possible in previous versions. This is very attractive for experienced traders.

What are the potential limitations of Uniswap V4?

Uniswap V4 has certain limitations. These include:

1. Fee collection

Uniswap V4 There are two independent governance fee mechanisms: exchange fee and withdrawal fee, each of which is different. Similar to Uniswap V3, Uniswap governance (Uniswap DAO and UNI token holders) can choose to charge a certain percentage of exchange fees in specific fund pools.

In Uniswap V4, if the "peg" initially chooses to enable withdrawal fees for the fund pool, the governance department can charge the withdrawal fee the highest percentage.

2. Restricted use license

Uniswap V4 will be released under the Commercial Source Code License 1.1, which limits the use of Uniswap V4 source code in commercial or production environments to four years, at which time it will be converted to the General Public License (GPL), permanently efficient. Therefore, some community members have criticized Uniswap’s latest version as not being a true open source product.

Conclusion

The decentralized exchange platform (DEX) market continues to develop, and new protocols and platforms are constantly emerging. Uniswap is a dominant player in the DEX space. It was founded in 2018 and released its fourth generation version 5 years later. Each past iteration of the protocol has added new upgrades and improved functionality.

Major changes in the design of Uniswap V4 are aimed at unleashing the infinite possibilities of DEX. While this open design gives developers virtually unlimited room for experimentation, it can significantly increase the complexity of the user experience. Before interacting with a liquidity pool, users need to carefully study how the pool operates and understand the role of each "peg".

However, the potential advantages of Uniswap V4 should be great. It is important for users to always do their own research (DYOR) and fully understand the model they are about to adopt.

Extended reading

• Uniswap concept is extremely operational Introduction to the method

• What is an automated market maker (AMM)?

• What is the liquidity pool in the DeFi field? How do they work?

• Detailed explanation of bid-ask spread and sliding spread

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