Uniswap V4: Four Innovative Mechanisms Driving Decentralized Finance Development

On June 13th, a certain DEX released its V4 version code draft, causing a strong reaction in the industry and becoming a hot topic recently. As the current largest decentralized trading platform, this DEX has long held over 50% of 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 solidify its position as the largest DEX in Decentralized Finance.

The DEX detailed in its vision and white paper the customizable Hooks for AMM, the Singleton that changes account frameworks 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 the DEX. At the same time, this injects a catalyst into the long-weak DEX, accelerating its pace to catch up with CEX, which will have a profound impact on the future development of Decentralized Finance.

Leading the Development of the DeFi Industry with Innovation

The V4 upgrade has attracted the attention of many institutions. On one hand, the lawsuit against a major CEX by the U.S. Securities and Exchange Commission has raised concerns among industry institutions regarding the future development of CEXs, while DEXs, which possess decentralization and censorship resistance, have gained more favor. On the other hand, as a leader in the industry, this DEX has set the development direction for DEXs with each version, leading to imitation by successors and driving the overall prosperity of Decentralized Finance.

A historical review of this DEX:

V1 was launched in November 2018, offering trading between ERC-20 tokens and ETH, and first introduced an automated market maker model.

V2 was launched in May 2020, providing support for trading between ERC-20 tokens and introducing a liquidity mining mechanism.

V3 was launched in May 2021, introducing centralized liquidity and price limit order features.

The upcoming V4 version will fully disrupt the DeFi infrastructure. For example, it will provide token pools that can be created and managed independently, add new features to the AMM through "hooking," and replace the traditional Factory/Pool model with a large contract framework. These innovations will further strengthen its decentralized trading platform characteristics, bringing new changes and opportunities to the DeFi ecosystem.

Four Major Innovative Mechanisms to Build the True Infrastructure of Decentralized Finance

V4 has created a truly efficient, flexible, and low-cost infrastructure suitable for Decentralized Finance by introducing innovative mechanisms such as Hooks, Singleton, and Flash accounting, providing users with a better trading experience and more opportunities.

Hooks

One of the key innovations of V4 is the introduction of "hooks", which are essentially external contracts created and defined by developers for trading logic. Developers can call external contracts at specific points in the lifecycle of a liquidity pool to execute designated operations, such as creating limit orders before a trade and adjusting trading fee tiers after changes in liquidity pool positions.

By adding plugin features through Hooks, V4 has become a customizable liquidity pool platform. This feature allows developers to freely create new functionalities to meet various trading scenarios, deepening the liquidity binding to project development. It also stimulates the creativity of developers and the community, enhancing network effects, making it a foundational infrastructure of the Decentralized Finance ecosystem.

The current displayed hook samples include:

• Time-Weighted Average Market Maker ( TWAMM )
• Dynamic Fees
• On-chain Limit Order
• Lending of idle liquidity
• Customized On-Chain Oracle
• Internalized MEV profit distribution back to LP

Singleton

Singleton is the new contract architecture of V4. Previously, each liquidity pool corresponded to a separate contract, and adding a new pool required deploying a new contract, which increased development costs and Gas fees. In the Singleton architecture, all liquidity pools are stored in a single contract, significantly reducing creation costs and Gas fees, and improving transaction efficiency.

Advantages of Singleton Architecture:

• Reduce costs: No need to deploy separate contracts for each pool.
• Improve efficiency: achieve multi-hop trading, completing all swaps in one call.
• Scalability: Easy to add new features and functionalities
• Simplified liquidity position management: Manage positions using addresses

Flash Accounting

Flash Accounting is a new accounting method introduced on the singleton contract architecture. Previously, each transaction required calculating all related position balances, consuming a large amount of Gas. Flash Accounting calculates transaction fees based only on the net balance, reducing Gas consumption.

The system takes advantage of having all pools managed by a single contract, querying the current net balance of the pool during transactions and calculating transaction fees based on the user's net balance. This avoids calculating all relevant position balances, reducing the Gas required for calculations.

This system can also improve cross-pool routing efficiency and reduce the cost of transactions that traverse multiple pools. After integrating with hooked contracts, it supports more complex integrations and innovations, which can significantly increase the number of pools.

Native ETH

In V4, Native ETH refers to the direct trading of ETH with other tokens. Previous versions required converting ETH to WETH first, resulting in high costs and low efficiency. V4 introduces the concept of Native ETH, allowing ETH to be traded directly with other tokens without the need to convert to WETH, significantly reducing transaction costs and time.

In implementation, the V4 core contract adds an ETH pool, which is only used for direct trading between ETH and other tokens. During the transaction, it automatically compares the trading volume with the amount of ETH in the pool and calculates the corresponding amount of other tokens. Users can directly trade ETH with other tokens in V4 without the cumbersome conversion process.

Native ETH makes V4 more convenient and efficient, providing a better trading experience and enhancing liquidity and competitiveness.

V4 may become an opportunity to solve the DEX dilemma

In the digital asset trading market, CEX has long dominated. DEX is plagued by issues such as insufficient liquidity, poor user experience, and high trading fees and costs. The release of V4 may become an opportunity to resolve the DEX dilemma by improving the DEX situation from four aspects:

Improve liquidity: Enhance DEX customizability and liquidity through the Hook feature and internal MEV profit distribution back to LPs.

Improve user experience: Introduce the TWAMM algorithm and limit order trading functionality to enhance price discovery efficiency and trading experience.

Reduce transaction fees: Lower costs through mechanisms such as internalizing MEV profit distribution back to LP and flash accounting.

Improve cost efficiency: The Singleton architecture reduces the Gas fees for creating LP and cross-pool routing transactions, enhancing deployment efficiency.

Summary

As a culmination, V4 represents a significant innovation in the DeFi industry and the entire cryptocurrency sector. It provides users with greater freedom, higher liquidity, lower fees, and more comprehensive and convenient services, driving the progress and improvement of the entire DEX industry.

Although there are still gaps between DEX and CEX in terms of user experience, fees, and security, this gap is gradually narrowing as versions continue to be updated and improved. It is believed that in the near future, V4 will occupy a more important position in the competition between DEX and CEX, becoming a growth engine for liquidity in the DeFi industry and leading the development direction of the entire industry.