By Jake Coleman
- Uniswap V4’s draft code was released by Uniswap in June 2023, introducing significant enhancements to the decentralized exchange (DEX) protocol.
- The new features encompass customizable liquidity pools through “hooks,” enhanced efficiency in cross-pool liquidity with a singleton design, and the reintroduction of native ETH trading pairs.
- Uniswap V4 offers various advantages, such as enhanced customization, improved efficiency, lower gas costs, and advanced trading strategies.
- Uniswap V4 has a few limitations to consider, including Uniswap’s ability to collect a portion of withdrawal fees and its source code license restrictions.
What Does Uniswap Stand For?
Uniswap, a DEX, functions on the Ethereum blockchain. Users can engage in digital asset trading through an automated market maker (AMM) model, which eliminates the reliance on conventional order books.
Uniswap, developed by Ethereum developer Hayden Adams in 2018, was influenced by Vitalik Buterin’s idea of an on-chain automated market maker.
Uniswap has emerged as a prominent player in the DEX market, exhibiting substantial trading volumes and enhanced liquidity compared to its counterparts. Uniswap is currently recognized as one of the leading decentralized exchanges (DEXs) in 2023, performing exceptionally well in terms of trading volume, liquidity, and user engagement.
Uniswap has experienced different iterations, including introducing Uniswap V2 in 2020 and Uniswap V3 in 2021. Uniswap V4’s draft code, featuring significant new functionalities, was released by Uniswap in June 2023.
Before discussing Uniswap V4’s new features, it is essential to reflect on previous versions of Uniswap to gain a comprehensive understanding of its development.
Uniswap V1: A Brief Overview
The inaugural version, Uniswap V1, was introduced in November 2018 as a proof-of-concept platform. The primary innovation of the system under discussion pertained to the introduction of the Constant Product Market Maker (CPMM) model.
In contrast to the conventional order book-based system, Uniswap introduced a novel approach wherein individuals possessing surplus tokens could contribute them to a designated trading pair (e.g., ETH/DAI) and, in turn, receive a proportionate allocation of the fees accrued from users engaging in trades against the liquidity pool.
Uniswap V1 was a platform for exchanging ERC-20 tokens and ether (ETH) through token swaps. Furthermore, it facilitated the sale of two ERC-20 tokens. The procedure for interchanging two ERC-20 tokens entails a two-fold sequential operation:
Exchange ERC-20 Token 1 for ether (ETH).
Exchange of ether (ETH) for ERC-20 Token 2.
Implementing this procedure was deemed imperative due to the inherent limitations of the Uniswap V1 intelligent contracts, which exclusively facilitated direct liquidity pools involving ERC-20 tokens and ether (ETH).
Uniswap V1, despite its groundbreaking nature, exhibited certain limitations that warrant attention. These limitations encompassed inefficiencies within its pricing algorithm, which could be susceptible to exploitation by arbitrageurs and the presence of high slippage when executing transactions involving substantial volumes.
Uniswap V2: A Short Introduction
The launch of Uniswap V2 in May 2020 was a direct response to the challenges encountered by Uniswap V1. This updated version introduced a range of significant enhancements to address these issues effectively. Uniswap V2 has modified its automated market maker (AMM) model by incorporating direct token-to-token swap functionality. This enhancement has reduced slippage and enhanced capital efficiency within the platform.
Furthermore, the introduction of V2 brought forth the implementation of flash swaps, enabling users to extract an unrestricted amount of funds from a liquidity pool and utilize said funds for any purpose on the condition that the withdrawn amount (along with an associated fee) is promptly returned within the same transaction. The framework above enabled the exploration of arbitrage and yield farming prospects, devoid of the necessity for initial capital investment.
Uniswap V2 has notably introduced the concept of Time Weighted Average Prices (TWAP), facilitating decentralized applications’ secure utilization of Uniswap prices.
A Brief Look at Uniswap V3
Uniswap V3, introduced in May 2021, placed its primary emphasis on resolving concerns about capital efficiency and concentrated liquidity. Uniswap V3 facilitates the ability for liquidity providers to exercise discretion in selecting precise price ranges wherein their assets shall be employed, thereby enabling them to accrue elevated fees through enhanced capital utilization.
Uniswap V3 has implemented a system of multiple fee tiers (0.05%, 0.30%, and 1.00%) to cater to varying risk levels and trading volumes effectively.
The Non-Fungible Liquidity (NFL) feature facilitates the acquisition of NFTs by liquidity providers, which symbolize their ownership stake in liquidity pools. This enables users to trade, sell, or transfer their liquidity positions while ensuring the integrity of the underlying assets within the collection remains unaffected.
An additional salient characteristic of Uniswap V3 pertains to its seamless incorporation with Optimism, Ethereum’s Layer 2 solution. This integration endeavors to mitigate transaction costs and enhance the platform’s scalability.
What’s Different About Uniswap V4?
The forthcoming official release of Uniswap V4 has yet to be made available. However, the draft code and whitepaper have been published, outlining the potential features and improvements that may be incorporated. The following items are encompassed within the scope of consideration:
1. “Hooks” and custom pools
Uniswap V4 facilitates customization implementation using “hooks,” contractual entities designed to execute at different stages of a liquidity pool’s lifespan.
To comprehensively comprehend “hooks,” it is imperative to acknowledge that every liquidity pool undergoes a distinct lifecycle encompassing its inception, subsequent addition, removal, or adjustment of liquidity. Hooks allow developers to incorporate code that executes specified actions at critical junctures throughout the lifecycle of the pool.
In enhancing liquidity pools, incorporating “hooks” presents an opportunity to facilitate various functionalities. These include the seamless integration of dynamic fees, the implementation of on-chain limit orders, and the ability to operate as a time-weighted average market maker (TWAMM). The latter enables the gradual execution of substantial orders over a specified duration, mitigating adverse price fluctuations.
The potential for customization of liquidity pools by utilizing “hooks” is extensive, encompassing many possibilities. These possibilities include leveraging diverse on-chain oracles and allocating unused liquidity to lending protocols. Incorporating “hooks” would provide developers with a notable degree of adaptability in crafting liquidity pools tailored to meet precise requirements.
2. Singleton
In the context of Uniswap V3, it is worth noting that deploying a distinct contract for each liquidity pool has resulted in increased costs associated with pool creation and the execution of multi-pool swaps.
One notable modification in Uniswap V4 entails consolidating all pools within a singular contract. The proposed solution offers significant potential for optimizing gas consumption by eliminating the necessity of token transfers between pools residing in distinct agreements. According to estimates provided by Uniswap, implementing Uniswap V4 can significantly mitigate pool creation gas costs, potentially reducing up to 99%.
3. Flash accounting
The singleton design pattern is a complementary architectural modification in Uniswap V4, known as flash accounting.
In earlier iterations of Uniswap, the conclusion of various operations, including token swaps or the provision of liquidity to a pool, entailed the transfer of tokens. In Uniswap V4, the process of external transfers is exclusively executed upon completion, streamlining pool operations and yielding cost reductions.
The utilization of singleton and flash accounting methodologies facilitates enhanced efficiency and cost-effectiveness in the process of routing across diverse pools. The potential incorporation of “hooks” into the system can augment the quantity of liquidity pools, thereby rendering this advantage particularly valuable.
Including native ETH trading pairs within a cryptocurrency exchange platform is a significant feature that enhances the overall trading experience for users. By offering trading pairs denominated in ETH, users are provided with a seamless and efficient means of exchanging their Ethereum holdings for other cryptocurrencies directly without
4. Native ETH trading pairs
As previously elucidated, Uniswap V1 was constrained to facilitating trading exclusively between ETH and ERC-20 token pairs. In Uniswap V2, the decision was made to remove native ETH pairs due to the intricate implementation challenges and the apprehension surrounding the potential liquidity fragmentation between WETH and ETH pairs.
Both Uniswap V2 and Uniswap V3 necessitate the majority of users to engage in the process of wrapping their Ethereum (ETH) into Wrapped Ethereum (WETH) before engaging in trading activities on the Uniswap Protocol. This requirement imposes an additional gas cost on users.
Uniswap V4 facilitates trading both WETH and ETH pairs by implementing singleton and flash accounting mechanisms. The potential advantage for users is that native ETH transfers, with a gas cost of 21k, exhibit a gas expenditure approximately 50% lower than that of ERC-20 transfers, which require 40k gas.
What Are the Benefits of Uniswap V4?
Uniswap V4 has been meticulously engineered to expand the realm of possibilities about the generation of liquidity and the execution of token transactions on the blockchain. The benefits encompassed within this particular context are as follows:
1. Customization
Utilizing “hooks” enables developers to seamlessly incorporate additional functionalities into liquidity pools, enhancing their flexibility and adaptability. This will catalyze the development of novel liquidity pools that offer tailored trading functionalities.
2. Efficiency
The implementation of “hooks,” the integration of singleton contracts, and the adoption of flash accounting have the potential to enhance transaction routing efficiency.
3. Gas Reduction
Introducing new features in Uniswap V4 is anticipated to yield a reduction in gas costs. The potential for increased user engagement with the protocol is evident.
4. Potential for increased earnings for LPs
The potential for enhanced earnings and increased control may be facilitated by implementing dynamic fee structures, which can cater to liquidity providers’ (LPs) needs.
5. Advanced trading strategies
Incorporating novel functionalities such as the time-weighted average market maker (TWAMM), limit orders, and dynamic fees has facilitated the implementation of sophisticated trading strategies that were hitherto unattainable in preceding iterations. These offerings may be appealing to traders with a refined level of expertise.
