We’ve had like 12 hours to sit on the Uniswap v4 core whitepaper and what it entails. Jordan gave us a fantastic overview of the high-level functionality v4 brings to the table.
From Twitter, it seems like some people found v4 underwhelming, others think it’s a great way to for Uniswap to further expand its DEX market share. I have my own ideas for what v4 could entail, a lot of which is probably wayward but I wanted to share it anyway.
Hooks
I think this definitely caught the most attention. The door to build on top of Uniswap has just been flung wide open. Developers and strategists alike can build their own pools, and/or “mini-DEXs”, on top of Uniswap v4 with this. It’s essentially a means of creating your own app on the Uniswap protocol. Liquidity pools can be customized in a variety of ways. The most obvious of which is a pool that has vol tracking and increases/decreases fees as spot volatility levels increase/decrease respectively.
This strikes me as a huge win for AMMs over orderbooks. Think about a scenario where a tail-event occurs i.e. every 2 quarters in crypto.
Even with this new Binance – SEC debacle, we saw the bid-ask spread on CEXs for BTC-USD crumble. Orderbook spreads widen up as carnage spreads, and MMs essentially pull liquidity because they do not feel their rake is sufficient. Scenario change to an AMM pool for WBTC-USDC that has $300M of liquidity and a variable fee range of 0.2% – 1.2%.
When things are well and BTC is ranging, the fee is at its minimum. As an event like this unfolds and volatility levels spike, the fee commensurately increases towards its ceiling. Now, AMM LPs used to be trapped in these situations and were prone to get eaten up. But with dynamic fees based on volatility levels, there’s an incentive for them to not run for the gates at the first sign of trouble. Rather, they can stay and be compensated for taking this heightened risk. All while keep the market’s liquidity base stable.
Pretty damn cool.
This is just one example of something that hooks enable. You can also implement TWAP orders (TWAMM), on-chain limit orders at a specific tick (technically already possible through a single tick v3 LP position), and a way for developers/protocols to capture MEV and give it back to LPs.
A separate thought on this: in a way, I feel like hooks are Uniswap’s way of telling us they want to build their own apps on top of the core protocol for them to monetize. I have no idea what it looks like, but given the trajectory they are moving in, something tells me they want to move in a similar direction to Robinhood. But it’s imperative they do so without imposing this on the protocol. It’s critical that Uniswap remains permissionless and accessible.
Singleton and Flash Accounting
The most obvious benefit here, as outlined by Jordan, is the ability to do much more efficient multi-hop trades i.e. swap through pools to a desired asset output. It takes advantage of a recent EIP (1153) that introduces transient storage, or storage that is only required for a transaction and is discarded (no longer stored) at the end of it. While this isn’t the most appealing thing, it does promise to bring a lot more efficiency to asset swaps — a more than welcome step.
Singleton kills the factory pool model where each pool is its own contract. Instead, all pools will essentially live inside a single Uniswap smart contract (I think).
This alongside the re-introduction of native ETH (rather than WETH) promises a fair degree of gas savings for users. Combine that with the current environment of L2s and it seems like the cost of the average swap has the potential to reduce immensely.
Another possible unlock from here is the ability to borrow funds that are not being utilized / out of range in the liquidity chart. It seems like v4 may enable funds that are not in-range to be lent out. I can’t really figure out how this works from the whitepaper, so forgive my pea brain, but ensuring repayment in enforced/guaranteed would be vital to such a mechanism.
TLDR
This post doesn’t really encompass all of things v4 can do, or even all of things I’m excited about — just some notable examples. v4 is not the impermanent loss silver bullet many were hoping for. But it does make Uniswap pools more customizable in order to cater to different protocols and communities. It’s going to be exciting to see all the innovation that comes out of here from third party developers!