Uniswap V4: Great Improvements Helps Reduce Costs While Ensuring Efficiency

Uniswap, is the leader in AMM and dominates the Dex market. Uniswap has been very successful with version V3, the birthplace of CLMM that reduces slippage in a range, reduces Impermanent Loss, and uses liquidity effectively. But not stopping there, Uniswap has just announced the V4 version will be released in the near future right on Uniswap Labs’ Twitter account.

About Uniswap V4

According to the announcement from the Uniswap team, this V4 version was developed by the Uniswap team, in addition to the contributions of some members of Paradigm. The core of Uniswap V4 is to reduce transaction fees, optimize liquidity and increase profitability for liquidity providers.

With version V4, Uniswap still uses the centralized liquidity model (CLMM). And Uniswap v4’s vision is to allow people to develop ideas and create products through “Hooks”. Hooks are contracts that run at different points in the operation life of a transaction in the pool. The team could make the same trade-offs as v3 or add entirely new functionality.

The new products being tested by the team are as follows:

• A time-weighted average market maker (TWAMM)
• Dynamic fees based on volatility or other inputs
• Onchain limit orders
• Depositing out-of-range liquidity into lending protocols
• Customized on-chain oracles, such as geomean oracles
• Autocompounded LP fees back into the LP positions
• Internalized MEV profits are distributed back to LPs

Hub of Uniswap V4 – Hooks

The outstanding feature of Uniswap V4 is Hooks. Hooks are pieces of code that run at a certain point in the life of a pool – whether that’s when created after LPs add/remove their liquidity to the pool or before/after a swap. Hooks are important because they allow for a much greater degree of team customization than previous iterations of Uniswap.

For instance, hooks can be used to create pools with a dynamic swap fee that changes based on market conditions instead of a fixed and preset fee.

Hooks also allow traders to place more complex orders like limit orders or TWAP (Time-Weighted Average Price) orders to buy/sell a set amount of tokens within a certain period of time.

Furthermore, the hook can allow Uniswap liquidity to be used in a variety of ways. Similar to Balancer’s booster pool, liquidity outside of the pool’s scope can be deposited into other protocols, such as lenders, for additional profit.

These examples are just examples devised by the Uniswap team. Anyone can build and deploy their own hooks without permission.

Uniswap V4 hooks allow aggregators to create more flexible and customizable centralized liquidity pools. Hooks can modify pool parameters or add new functions and features, including a time-weighted average market maker (TWAMM), limit orders, dynamic fees, internal MEV mechanism, and bar deposit redundancy to the loan agreement, Custom Functions, including oracle, can be flexibly managed by the contract hook.

Developers can build different DApps based on Uniswap hooks, which will enrich Uniswap V4 functionalities, and hook contracts can also allocate a portion of the transaction fees to themselves. But users should also be more careful when using it, which can bring new challenges and risk management needs.

The Singleton

Uniswap V4 made significant changes in architectural design, replacing Factory/Pool mode with Singleton mode. In the original version, each liquidity pool is deployed independently through the Factory contract, so in a multi-step transaction, many contracts will be passed (such as transferring ETH to DAI, it can be through ETH-USDC, USDC- contracts- DAI of two liquidity pools).

In the new Singleton contract, all liquidity pools are included in a single contract, and the multi-step transaction mentioned above can be completed through a contract interaction, reducing the gas fees required for the transaction.

This will result in significant gas savings as swaps will no longer need to transfer tokens between pools held in different contracts. Initial estimates suggest that v4 reduces pooling gas costs by 99%. Hooks introduce a world of endless options, and the singleton allows you to route across all of them efficiently.

This singleton is complemented by a new “rapid accounting” system. Instead of moving assets in and out of the pool at the end of each swap in v3, this system only transfers on the net balance – meaning a much more efficient system that saves additional gas in Uniswap v4.

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.

In Uniswap V4, each operation updates only one “internal net balance” and does not make external transfers until the end, thus simplifying multi-step transactions and adding liquidity and complexity of atomic transactions while reducing gas fees.

The next Ethereum upgrade in Cancun has been confirmed to include EIP-1153, which will introduce “temporary” storage, which doesn’t require the account to temporarily update its memory every time the balance changes, further reducing its Gas fee.

Added admin mechanism

Uniswap V4 adds a new governance mechanism that allows for transaction fees and withdrawals (withdrawals from the liquidity pool) and allows the governance system to distribute these fees to reward users and developers who contribute to Uniswap.

This functionality can be useful in hook contracts, such as allowing the hook contract developer to charge a certain fee for LPs. However, referring to Uniswap’s current slow progress in charging transaction fees, if the agreement charges fees from it, it could also calculate developer income first, and this part of the fee is relatively low compared to the value of the UNI token held by the user.

Meaning with Defi

The Uniswap V4 update can significantly improve the competitiveness of Uniswap, which can perform functions such as TWAMM, order limits, dynamic fees, deposit liquidity into loan contracts, and automatic rollover processing fees. V4 will have broad implications for Uniswap itself and DeFi in general. For liquidity providers and traders, the required gas fees can also be significantly reduced due to the new architecture.

Ultimately, V4 will help make Uniswap a more straightforward protocol to incorporate. Uniswap V3 is notoriously tricky to build due to its lack of expressiveness and the challenges of managing centralized liquidity positions. Between hooks and singletons, it’s easier to develop and use liquidity in V4 than it is in V3. This could open up a host of new, exciting applications and spur a wave of innovation in DeFi at a time when the industry desperately needs it.

All in all, Uniswap V4 will help accelerate the development space and be an exciting new upgrade for DeFi. Yes, it will not ship for a while. But DeFi is still about to be happy again.

DISCLAIMER: The information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your research before investing.

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