Uniswap V4: The Innovative Flywheel Leading a New Era in Decentralized Finance

On June 13, a well-known decentralized trading platform released a draft of its V4 version code, causing a strong ripple in the industry and becoming a hot topic recently. As the largest decentralized trading platform by scale, this platform has long held over 50% of the on-chain trading share, with a trading volume more than three times that of its second-largest competitor. The launch of the V4 version will further consolidate its leading position in the Decentralized Finance space.

In the published vision document and white paper, the platform details the customizable Hooks for AMM, the Singleton that changes the account framework and order logic, and the Flash accounting and Native ETH that can significantly reduce Gas fees. These innovative features will bring greater freedom, better liquidity, lower fees, and more choices to decentralized trading. At the same time, these advancements inject new vitality into the long-weak decentralized trading, accelerating its pace to catch up with centralized trading, which will have a profound impact on the future development of Decentralized Finance.

Innovation Leading the Development of Decentralized Finance Industry

The reason why this V4 upgrade has attracted widespread attention is partly due to the recent lawsuit against a large centralized exchange by regulatory authorities, which has raised concerns within the industry about the future of centralized trading. The characteristics of decentralized trading have undoubtedly gained more favor. On the other hand, as a leader in the industry, the launch of each version of this platform has guided the development direction of decentralized trading, which has been eagerly imitated by followers, and has also promoted the prosperous development of the entire Decentralized Finance ecosystem.

The V1 version was launched in November 2018, introducing the automated market maker model for the first time, which inspired many later decentralized exchanges and laid the foundation for the development of the entire DeFi ecosystem. The V2 version was launched in May 2020 and introduced a liquidity mining mechanism. The V3 version was launched in May 2021 and introduced centralized liquidity and price limit order functions.

The upcoming V4 version will undergo comprehensive innovation on the Decentralized Finance infrastructure. For example, V4 will offer token pools that can be created and managed autonomously, an AMM with new features added through "hooking", and the adoption of a large contract framework to replace the previous Factory/Pool model. These innovations will further strengthen the characteristics of decentralized trading and bring new transformations and opportunities to the entire DeFi ecosystem.

Four Major Innovative Mechanisms of V4

Hooks

One of the key innovations of V4 is the introduction of "hooks," which are external contracts created and defined by developers to implement trading logic. Through Hooks, developers can call external contracts at specific points in the liquidity pool's lifecycle to perform designated actions, such as creating limit orders before a trade, adjusting trading fee levels after a change in the liquidity pool position, and more.

This customizable feature makes V4 a flexible liquidity pool platform, allowing developers to innovate freely to meet various trading scenarios, deeply binding liquidity with project development. The several sample hooks currently showcased include time-weighted average market makers, dynamic fees, on-chain limit orders, lending of idle liquidity, customized on-chain oracles, and internalized MEV profit distribution, among others.

Singleton

Singleton is a new contract architecture of V4. In this architecture, all liquidity pools are stored in a single contract, significantly reducing the cost and Gas fees of creating liquidity pools and improving trading efficiency.

The advantages of the Singleton architecture include reducing costs, improving efficiency, enhancing scalability, and simplifying liquidity position management. This design leaves more possibilities for future innovations, giving V4 greater flexibility.

Flash Accounting

Flash Accounting is a new accounting method introduced on top of the singleton contract architecture. It can calculate transaction fees based solely on the net balance, thereby reducing gas consumption. This system not only reduces gas consumption but also improves cross-pool routing efficiency, further lowering the trading costs when traversing multiple pools.

Native ETH

Native ETH in V4 refers to the direct trading between Ethereum's native token (ETH) and other tokens during the trading process. This allows for direct transactions between ETH and other tokens without the need to first convert to WETH, significantly reducing transaction costs and time.

The introduction of native ETH makes V4 more convenient and efficient, providing users with a better trading experience and further enhancing the platform's liquidity and competitiveness.

Opportunity to Solve the DEX Dilemma

The release of V4 may become an opportunity to solve the dilemmas of decentralized exchanges. Through innovative solutions, V4 plans to improve the situation of decentralized trading from four aspects: enhancing liquidity, improving user experience, reducing transaction fees, and increasing cost efficiency.

In terms of improving liquidity, V4 enhances customizability and liquidity through mechanisms such as the Hook function and internalized MEV profit distribution. To improve user experience, the TWAMM algorithm and limit order trading functionality have been introduced, enhancing price discovery efficiency and trading experience. In terms of reducing trading fees, mechanisms like internalized MEV profit distribution and flash accounting have lowered trading costs. To improve cost efficiency, the Singleton architecture and flash accounting help users achieve maximum benefits at minimized costs.

Summary

As a significant innovation in the DeFi industry, V4 grants users greater freedom, higher liquidity, lower fees, and more comprehensive and convenient services. Although there are still gaps between decentralized and centralized trading in terms of user experience, fees, and security, this gap is gradually narrowing with continuous updates and improvements. It is believed that in the near future, V4 will occupy a more important position in the competition between decentralized and centralized trading, becoming a liquidity growth flywheel for the DeFi industry and leading the direction of development for the entire industry.