Consider this: Uniswap is a fascinating marketplace where you can trade various sorts of tokens without the need for a middleman. It's decentralized, which means it doesn't rely on a centralized authority to get your swaps/trades done.
Its story began in November 2018 and has since grown in popularity in the field of decentralized exchanges (DEXes).
Before I get into the details of Uniswap V4, I like to give a brief overview of how Uniswap evolved through from V1 to V3 and then into V4.
1️⃣ Uniswap evolution from V1 to V3
2️⃣ V4 - What’s New?
3️⃣ V4 - Benefits
4️⃣ V4 - Criticisms
5️⃣ Concluding Thoughts
Uniswap evolution from V1 to V3
The first version was Uniswap V1. It had a clever algorithm for calculating token pricing, called the constant product formula, where x*y=k, but it had limits. If you wanted to make large swaps, high slippage would make these trades difficult.
Then Uniswap V2 arrived in May 2020, and boy did it change the game. It addressed several of V1's shortcomings by incorporating various new features, including:
ERC-20 to ERC-20 pairs: This allowed users to exchange any two ERC-20 tokens without first converting one of them to ETH.
Wrapped ETH: This enabled users to deposit ETH into Uniswap without incurring gas fees.
Fee tiers: This allowed users more flexibility over how much they spent in fees.
Uniswap V3 debuted in May 2021. It added some fantastic features to the mix:
Concentrated liquidity: This enabled liquidity providers to provide liquidity for a specified price range as opposed to the complete price range. This enabled liquidity providers to collect more fees while taking on less risk.
Range orders; enabled consumers to submit orders that would only be fulfilled within a certain price range. Users now have more control over their deals.
Non-fungible liquidity: Users were able to supply liquidity for non-fungible tokens (NFTs).
To date, Uniswap V3 is the protocol's most sophisticated version. It has several characteristics that make it a more powerful and versatile DEX than its predecessors.
A simple summary across V1, V2 and V3 is as below:
Here is a more detailed version:
I thought that v3 would have been its last iteration. Surprise! Uniswap just made itself better. An ever-evolving DEX powerhouse that never fails to excite and innovate for a better trading experience for users.
What would await us in Uniswap V4? 👇
Uniswap V4 - What’s New?
Uniswap is 5 years old and just unveiled its v4!
They’ll be releasing the draft code for the upcoming v4 version. This means that the development of v4 will happen in a transparent and collaborative manner. The community provides feedback and contributes to code changes. This will be worked on for several months to build out the best version of Uniswap.
Here are the new features that you need to understand: (dumbed it down to my best ability)
Hooks
Hooks are a powerful feature that allows developers to customized how pools, swaps, fees, and LP positions interact within the Uniswap Protocol.
What this means is that V4 is able to support:
Dynamic fees, allowing for flexible fee adjustments based on market conditions for each pool.
On-chain limit orders will enable users to place specific buy or sell orders at predetermined prices.
Time-weighted average market maker (TWAMM) mechanism, which will help distribute large orders over time, promoting liquidity and reducing market impact.
Autocompounded LP fees, where the fees generated from trading activities are automatically reinvested back into their LP positions.
Internalized MEV (Miner Extractable Value) profits are distributed back to LPs, allowing them to benefit from the additional value generated through efficient trading execution.
Out-of-range liquidity, LPs can now deposit tokens outside of the predefined price range into lending protocols, allowing them to explore additional yield-generating opportunities.
Customized on-chain oracles, more precise and tailored price data, enhancing the accuracy of trading decisions and enabling them to optimize their strategies based on specific market conditions.
Possibilities are endless with Uniswap V4 Hook
Singleton Contract
Uniswap v4 introduces a singleton contract architecture, where all pools are now held in one central contract, resulting in significant gas savings and making swaps even more efficient.
These advancements enable fee tiers to be more flexible and customizable, while also bringing back support for native ETH. Users will see further gas saving.
Flash Accounting
This feature complements the Singleton Contracts. Flash accounting eliminates the need to transfer assets in and out of pools after each swap, resulting in a more efficient process that saves on gas costs.
With this new system, asset transfers are now based on net balances. Say goodbye to unnecessary transfers and enjoy the benefits of a smarter accounting approach.
Singleton contract is able to capture the MEV benefits
Business License
Similar to V3, Uniswap V4 will have Business Source License 1.1, limiting use of the V4 source code in a commercial or production setting for up to four years. Uniswap is community-governed, and this can be changed under the Uniswap Governance and Uniswap Labs.
Uniswap V4 - Benefits
Without a doubt, the V4 would bring benefits not only to Uniswap but also to its users and partners.
New Vault Strategies and Partnerships - With TWAMM, limit orders, and dynamic fees, users and builders will rethink how they can utilize these upgrades to their advantage to build new strategies. This creates a new partnership opportunities for new protocols that want to build on top of Uniswap and a new design for V4 strategies.
Builds Sticky Liquidity - Hooks allow liquidity providers to determine fees, and possibly better utilize of capital provided to earn users more fees. This itself creates a game theoretical effect together with withdrawal fees, disincentivizing users from removing their capital from the LP.
Lower Gas Fees - Ethereum support and flash accounting help reduce gas costs for users. Overall, this increases trade volume, swap fees, and in turn brings a lot more value back to the protocol.
Uniswap V4 - Criticisms
A false sense of being open source with BSL
Uniswap V4 is a fork of Balancer V2 @defi_naly
Whales are bullish on $UNI @lookonchain
Uniswap has been preparing for this day with the subdomains that was minted some time back. @cory_eth
Even with V4 it does not help Uniswap overcome its competitors who are innovating ahead of it @TheDeFinvestor
Uniswap is just a copy of many other protocols @adamscochran
Potential vulnerability for the Singleton Contract
Concluding Thoughts
Uniswap v4 brings efficiency and cost-effectiveness, but also adds complexity to the crypto world. I am particularly hooked on the Hook feature that it brings, as I foresee that it will create a new paradigm for new strategies and a lot more layers that can be built on top of Uniswap.
What are your thoughts here for possibilities that can be built? (leave a comment below)
CEX experience
I believe that in the race to dominate the DEX space, it all boils down to the one DEX that can offer a CEX-like experience. Mass adoption is key here, and the first one to do that will rise as king, and the rest of its competitors will follow suit.
Balance
Though Uniswap is still far from being the best DEX, the space is always struggling to find a balance between technology, innovation, and user friendliness. Modeling after features from other protocols, isn’t a concern for me, that’s how we all learn from each other. It’s really about amalgamating all these features, and making sense of it for users in the simplest way possible. Not all users are that technical to go down into the details to compare the technical features of all DEXes, they rely on what they see, how easy it is to use, and, whether it gives them the best rates and returns. which would give it an edge over its other competitors.
Education
Relaying technical materials in the most digestible form could be something Uniswap is good at, giving it an edge over others. Uniswap is one of the longest standing protocols, and a lot of OGs have been with it. They know how best to communicate the message, and their words hold a good amount of weight. I think that might have been the challenge for many protocols for the longest time. Ultimately, the goal is to dumb down the technical information and dApp interaction for widespread adoption.
Source: https://twitter.com/arndxt_xo/status/1669013453489717250