A Brief Discussion on Uniswap V4: The Culmination of DeFi Innovation

Uniswap V4 injects a catalyst into the cold cryptocurrency industry in the bear market, and everyone can’t help but feel the paradigmatic power of Uniswap’s framework innovation, and is more confident in the future DEX’s snatching liquidity from CEX.

In fact, all of this started with those 500 lines of code. As the gene and origin of DeFi, the AMM algorithm of X*Y=K opened the “Cambrian moment” of the DeFi industry. This algorithm realizes the automation of asset pricing and exchange, risk hedging and arbitrage mechanisms, open and anti-censorship finance, and most importantly, modular reorganization of financial transactions, allowing finance to be combined and reconstructed like building blocks, laying the seeds for various gameplay in the future.

So what improvements does Uniswap V4 have over V3?

Some major changes that Uniswap V4 has made to V3

Just like the AMM of Uniswap was re-architected into a single contract, Uniswap V4 is called the “singleton” design pattern, which can save gas to a large extent. In V3, each pool is a separate smart contract. In V4, all pools will be stored in a single contract.

All pools using a contract means less gas. Exchangers no longer need to transfer tokens between pools in different contracts, which can also accumulate multi-trillion routes! Some earlier estimates showed that creating a new pool this way costs about 99% less than before.

By completing all the mathematical operations we need in one contract, “lightning bookkeeping” saves gas by transferring tokens only on the net balance. This way, efficiency is higher and gas costs are lower.

The singleton architecture and flash bookkeeping also eliminate fee level restrictions. V3 has a limited fee level to avoid scattered liquidity. Now any swap fee can be set, and even the fee can be dynamically changed!

Uniswap V4’s Hooks can add new features and capabilities to AMM pools, and the Singleton contract changes the account framework and order logic, which is a framework innovation, based on which countless possibilities can be imagined.

(Hooks are the core mechanism of Uniswap V4, referring to code snippets that run at a specific moment in the lifecycle of a liquidity pool. Compared with previous versions of Uniswap, the new version of the liquidity pool is more customizable, so the role of Hooks is very important whether creating pools, adding/removing liquidity as an LP, or before/after swapping.)

However, no matter how impressive Uniswap is, it is the culmination of innovation in the DeFi industry over the past 5 years, and many innovative moments on various DeFi protocols are also worth sharing and praising.

Uniswap V4 is the power of DeFi’s culmination

We will use the new features introduced in Uniswap V4 as an example to review the innovative forces that really exist in the DeFi world, which began with Uniswap, but are not limited to Uniswap: 1) “Limit Orders”: At the end of 2020, dYdX implemented limit orders based on the “private order book” feature of its underlying StarkEx L2 expansion protocol (by matching exchanges in L2’s hidden state and then presenting the results on the chain). This is very different from implementing limit order logic under the V3 Concentrated Liquidity model, but the concept of limit orders can reduce the risk of AMM orders and improve efficiency, which is particularly important in the development process of DeFi innovation; 2) “TW AMM”: In July 2021, perpprotocol introduced a time-weighted AMM model, which can adjust the token ratio and price in the asset pool based on recent order records, making AMM able to quickly and accurately respond to market price changes. Overall, the introduction of time-weighting not only improves price discovery efficiency, but also enhances anti-manipulation capabilities, making it difficult to manipulate AMM pricing through large orders. This is of great significance for the evolution of DeFi mechanisms. 3) “Dynamic Fees”: In May 2021, GMX implemented a mechanism for dynamically adjusting order fees based on market conditions, which greatly improved the competitiveness and pricing efficiency of AMM products. GMX can achieve dynamic adjustment of order fees driven by algorithms, which is more sensitive and stable than the user’s dynamic fee rate provided by Curve. Uniswap V4 effectively combines algorithm-driven and manual selection to further improve the efficiency of liquidity utilization; 4) “NFT injection into AMM”: In December 2020, NFTX achieved deep integration of NFT and AMM, allowing NFT to conduct highly liquid orders and pricing in AMM pools like ERC20 tokens, thereby solving the problem of low liquidity of NFT. But NFTX actually converts NFT into ERC20 tokens and mortgages to achieve liquidity, while Uniswap V4 directly allows NFT to participate in liquidity; 5) “Funds beyond liquidity range can be borrowed to generate interest”: In March 2021, Aave V2 realized that the liquidity assets of AMM can be deposited into the Aave lending pool for borrowing, in order to earn additional interest income, which undoubtedly improves the efficiency of fund utilization. The key is that it realizes the combination of cross-protocol and cross-mechanism applications in DeFi, which gives ideas for deep collaboration between DeFi protocols in the future; 6) “LP handling fee automatic reinvestment”: In October 2020, Curvefinance added an auto-compounding mechanism to the V2 version, which can automatically convert the income from LP into LP tokens and add them to the LP position. However, this mechanism will lead to a loss of LP tokens when facing price fluctuations, even Uniswap V4 will inevitably face such challenges; 7) “Micro-contract management and subdivision of liquidity pool”: In 2020, balancer realized the function of managing subdivided liquidity pools through Vault contracts. This reduces the high cost of deploying a large number of single-token pools, and the Vault contract can avoid gas fees generated by duplicate reads and transfers. Uniswap V4 is based on the concept of Singleton Vault, but does not need to predefine all combinations, which is more flexible; 8) “Introduction of Donate function”: In September 2020, Sushiswap first launched the donation function in the V2 version, allowing users to donate tokens to specific liquidity providers as incentives. This is beneficial to attracting and retaining more liquidity providers. Although such mechanisms have some commercial manipulation risks, they will be a new paradigm for DeFi community construction under community-driven conditions. In addition, perpprotocol can provide a no-loss order mechanism throughout the process, relying on algorithms and complete pricing to reduce liquidity losses; mstable provides a mechanism for merging cross-chain assets into liquidity, and users’ assets on different chains can be combined into one liquidity; mavprotocol can define the annualized interest rate based on the lock-up period of the user’s token; and many similar innovations are quietly happening, and Uniswap may adopt them in the future.

Summary

Uniswap has achieved the prosperity of DeFi, but the combinatorial innovation of DeFi is also gradually achieving Uniswap , precisely because of the successful or failed exploration of these mechanisms or concepts, the V4 era of Uniswap is so brilliant.

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