The wait is over. Bankless has the details on what’s next for Uniswap with the announcement of Uniswap V4 – the fourth iteration of the decentralized exchange.
Uniswap V3, which was released back in May 2021, was a game-changer, as it introduced concentrated liquidity, (where liquidity can be provisioned over a specific price-range) leading to a massive improvement to the DEX's capital efficiency.
This helped Uniswap maintain its spot as DeFi’s largest DEX, with the protocol currently having a 57.4% share of on-chain trading volumes, more than 3x that of its next largest competitor.
Will V4 have a similar impact? We had Uniswap founder Hayden Adams on the podcast to try to answer this question and talk us through all things V4.
A Breakdown Of Uniswap V4
The defining feature of Uniswap V4 is hooks. Hooks are pieces of code that run at a certain point in the life cycle of a pool – whether it be upon its creation, after LPs add/remove their liquidity to a pool, or before/after a swap. Hooks are significant because they enable a far greater degree of pool customization than the previous iterations of Uniswap.
For instance, hooks can be used to create pools with dynamic swap fees that change based on market-conditions, rather than one that is pre-set and static.
Hooks also enable traders to place more complex orders such as limit orders, or TWAP (Time-weighted average price) orders which buy/sell a quantity of a token over a given period of time.
Furthermore, hooks can allow Uniswap liquidity to be used in different ways. Similar to Balancer’s boosted pools, a pool’s out-of-range liquidity can be deposited into other protocols, such as lenders, in order to earn additional yield.
These examples are only the ones thought up by the Uniswap team. Anyone can build and deploy their own hooks without permission.
The second big change brought about by Uniswap V4 is the introduction of the singleton. As its name suggests, the singleton is a single contract that contains all of the different pools within Uniswap V4. This is different from the previous iterations of Uniswap, where each pool was held within its own, isolated contracts.
This model significantly improves V4’s gas efficiency, as complex swaps will be routed through a single contract, rather than multiple different ones, which is highly gas intensive. The use of the singleton is also estimated to reduce the cost of deploying a new pool (i.e. a new trading pair) by as much as 99%.
The singleton also utilizes what Uniswap Labs calls a “flash accounting system.” This will further reduce gas cost when trading on the DEX by only transferring the net balance of tokens out of a pool upon completion of a swap. This is different from Uniswap V3, where all of the assets involved in a trade are transferred in/out of a pool during the swap process.
Governance, Release, and Distribution
Uniswap V4 will be governed by the Uniswap DAO and UNI holders.
Like V3 and V2 before it, the protocol will include a fee-switch, which Uniswap governance can activate on a pool-by-pool basis to take a cut of the fees generated by liquidity providers.
V4 will be released under a Business Source License 1.1, which will last for four years and will limit the use of the protocol to governance-approved entities.
Finally, it’s also worth noting that the release of Uniswap V4 is not imminent. Per Hayden on the podcast, the V4 code is not yet finalized and audited, so it should be sometime before the protocol is released out into the wild.
What This Means for DeFi
V4 will have widespread implications for Uniswap itself, and DeFi as a whole.
For starters, the upgrade should help Uniswap retain its place as the largest decentralized exchange by trading volumes, as hooks can improve the protocol's capital efficiency relative to V3 while being far more customizable and gas efficient. These latter two qualities should help Uniswap capture more order flow from DEX aggregators and longer-tail exotic trading pairs while maintaining its dominance among higher volume ones such as ETH/USDC, ETH/USDT, ETH/DAI and others.
In addition, the ability to create more order types, such as TWAPs and limit orders, should help Uniswap become more competitive with centralized exchanges by attracting more sophisticated traders to the DEX. This, coupled with the broader structural tailwinds for trading activity moving on-chain following the collapse of FTX and the recent regulatory pressure being applied to CEXs like Binance and Coinbase could help Uniswap more seriously challenge these competitors.
The DEX/CEX volume ratio reached an all-time high in May before coming down. At maturity, Uniswap V4 appears to have a good shot at pushing that ratio to new heights.
Finally, V4 should help make Uniswap a more composable protocol. Uniswap V3 was notoriously difficult to build on top of due to its lack of expressivity and the challenges of managing concentrated liquidity positions. Between hooks and the singleton, it seems that it will be easier to build on and utilize V4 liquidity relative to V3. This could usher in a flood of new, interesting applications and spur a wave of creativity in DeFi at a time when the industry desperately needs it.
All in all, Uniswap V4 should help push the space forward and is an exciting new level-up for DeFi. Yes, it won’t ship for some time. But DeFi is nonetheless about to get fun again.