Uniswap V4: Four Innovative Mechanisms Leading the Development of Decentralized Finance

On June 13, Uniswap released a draft of its V4 version code, causing a strong reaction in the industry and becoming a hot topic recently. As the largest decentralized trading platform by scale, Uniswap 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 V4 will further consolidate its leading position in the Decentralized Finance field.

Uniswap Labs detailed the main innovative features of V4 in the released documentation, including Hooks that allow for AMM customization, Singleton that changes account frameworks and order logic, as well as Flash accounting and Native ETH that can significantly reduce Gas fees. These innovations will bring greater flexibility, higher quality liquidity, lower fees, and more choices to DEXs. At the same time, these improvements also inject new momentum into the competition between DEXs and CEXs, accelerating the pace of DEXs catching up to CEXs, which will have a profound impact on the future development of Decentralized Finance.

Uniswap Leads Innovation in the Decentralized Finance Industry

The upgrade of Uniswap V4 has drawn significant attention, partly because regulatory agencies are investigating certain centralized exchanges, leading industry institutions to worry about the development prospects of CEX, while decentralized and censorship-resistant DEX has gained more favor. On the other hand, as a leader in the industry, each version of Uniswap sets the development direction for DEX, inspiring imitators and promoting the prosperity of the entire Decentralized Finance ecosystem. Let's take a look back at the historical evolution of Uniswap's versions.

Uniswap V1 was launched in November 2018, introducing the automated market maker model for trading between ERC-20 tokens and ETH. This innovation inspired subsequent decentralized exchanges and laid the foundation for the development of the Decentralized Finance ecosystem.

The V2 version was released in May 2020, supporting direct trading between ERC-20 tokens and introducing a liquidity mining mechanism that increases the liquidity of trading pairs by rewarding liquidity providers. This version's liquidity empowerment has driven the rise of multiple Decentralized Finance projects.

The V3 version launched in May 2021 introduced centralized liquidity and price limit order functions. These innovations significantly improved capital utilization efficiency and trading flexibility, providing users with finer trading control.

The upcoming V4 version will bring comprehensive innovation at the infrastructure layer of Decentralized Finance. It will offer token pools that can be created and managed autonomously, new features added to the AMM through "hooking", and innovative characteristics such as the adoption of a large contract framework. These improvements will further strengthen Uniswap's decentralized features, bringing new changes and opportunities to the DeFi ecosystem.

Uniswap V4: Four Major Innovative Mechanisms

Uniswap V4 introduces innovative mechanisms such as Hooks, Singleton, and Flash accounting, creating an efficient, flexible, and low-cost Decentralized Finance infrastructure that provides users with a better trading experience and more opportunities. Here are the main innovative features of V4:

Hooks

Hooks is one of the core innovations of V4, essentially an external contract created and defined by developers to execute trading logic. It allows for the invocation of external contracts at specific nodes in the liquidity pool lifecycle to perform designated actions, such as creating limit orders before a trade or adjusting transaction fee levels after changes in liquidity pool positions.

This customizable feature makes Uniswap V4 a flexible liquidity pool platform. Developers can freely design various new functions to meet different trading scenarios, deeply binding liquidity with project development. This not only stimulates the creativity of developers and the community but also enhances the network effect of Uniswap V4, making it the infrastructure of the Decentralized Finance ecosystem.

Currently, Uniswap V4 showcases several Hooks examples, including time-weighted average market maker (TWAMM), dynamic fees, on-chain limit orders, idle liquidity lending, custom on-chain oracles, and internalized MEV profit distribution, among others.

Singleton

Singleton is the new contract architecture adopted in V4. Unlike previous versions where each liquidity pool corresponds to a separate contract, Singleton stores all liquidity pools in a single contract. This design significantly reduces the cost and Gas fees for creating liquidity pools, enhancing trading efficiency.

The main advantages of the Singleton architecture include:

• Reduce costs: No need to deploy separate contracts for each liquidity pool.
• Improve efficiency: Achieve multi-hop trading, users only need to call the contract once to complete all swaps.
• Scalability: Facilitates the addition of new features and functionalities, enhancing system flexibility.
• Simplified liquidity position management: Use addresses for position management to manage liquidity position data more efficiently.

Flash Accounting

Flash Accounting is a new accounting method introduced based on a singleton contract architecture. It calculates transaction fees solely based on the change in net balance, rather than calculating the balance of all related positions, thereby significantly reducing Gas consumption.

This system leverages the advantage of all liquidity pools being managed by a single contract in V4. During transactions, the system only queries the net balance of the current pool and calculates the transaction fees based on the user's net balance, avoiding the complex process of calculating the balances of all related positions.

In addition to reducing Gas consumption, Flash Accounting can also improve cross-pool routing efficiency and lower multi-pool transaction costs. After integrating with pegged contracts, it supports more complex integrations and innovations, which is expected to significantly increase the number of pools.

Native ETH

Native ETH in V4 supports direct trading between ETH and other tokens without the need to convert ETH to WETH first. This feature significantly reduces trading costs and time, while also enhancing liquidity and attracting more liquidity providers into the ecosystem.

In implementation, the V4 core contract adds an ETH pool specifically for direct trading between ETH and other tokens. During a transaction, the system automatically compares the trading volume with the amount of ETH in the pool and calculates the corresponding amount of other tokens. This allows users to directly trade between ETH and other tokens in V4 without the cumbersome conversion process.

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

Uniswap V4 is expected to solve the development dilemma of DEX.

In the digital asset trading market, CEX has long dominated, while DEX has been restricted due to issues such as insufficient liquidity, poor user experience, and high transaction costs. The launch of Uniswap V4 may become a turning point in addressing these problems. Through innovative solutions, V4 plans to improve the DEX situation from four aspects:

1. Improve liquidity: Enhance the customizability and liquidity of DEX through mechanisms such as the Hook feature and MEV profit distribution.

2. Optimize user experience: Introduce the TWAMM algorithm and limit order trading features to improve price discovery efficiency and trading experience.

3. Reduce transaction costs: Lower transaction costs through mechanisms such as MEV profit distribution and flash accounting.

4. Improve cost efficiency: Adopt Singleton architecture to reduce Gas fees and enhance contract deployment efficiency.

Although there are still gaps in user experience, fees, and security between DEX and CEX, this gap is gradually narrowing as Uniswap continues to update and improve. In the future, Uniswap V4 is expected to play a more important role in the competition between DEX and CEX, becoming a liquidity growth engine for the Decentralized Finance industry and leading the development direction of the entire industry.