What is Uniswap V4, and How it Will Revolutionize DeFi

Uniswap V4 DeFi DEX hooks singleton contract explained guide

Everything you need to know about the next iteration of the leading DeFi protocol

Uniswap V2 introduced liquidity pools, V3 brought us concentrated liquidity, and now Uniswap V4 will bring DeFi lots of customization thanks to hooks. In this guide we will take a look at how users and developers can leverage Uniswap V4 when it hits the market towards the second half of 2024. 

With billions of dollars in value locked, Uniswap is one of the most prominent decentralized exchanges on the market. For now, Uniswap will have exclusivity on the use of their V4 innovations for 4 years. However, at some point every piece of code will become open-source. 

Uniswap V4 explained

Uniswap Labs has designed Uniswap V4 to enhance the way liquidity works in DeFi, and the way people trade tokens on the blockchain. This new protocol design aims to broaden the scope of decentralized trading. It will allow community members and developers to contribute and customize, providing them with more freedom to innovate. The team wants to make Uniswap V4 more powerful and versatile, while also ensuring that it’s fast, secure and customizable. 

What are the key benefits and innovations?

  1. Improved architecture and gas savings
  2. One contract to rule them all, instead of a contract for every liquidity pool
  3. Hooks and customized pools
  4. Time-weighted average market maker functionality
  5. Flash accounting
  6. Built-in oracles

Who governs Uniswap V4?

Uniswap Labs is working on V4, alongside the Uniswap DAO. At the some time UNI token holders can influence the development. They will release Uniswap V4 under the Business Source License 1.1, limiting the usage to governance-approved entities.

Pool Manager as the biggest innovation

While Uniswap V3 gives each pool its own contract, in Uniswap V4 all DeFi pools go into a single contract. This should make the creation of a new pool 99% cheaper. Crucial is the role of the Pool Manager, a piece of software that maintains and maps all different pools. Pool Manager then also performs the swaps, and updates the pools. All operations will go through the Pool Manager. 

The Pool Manager is also referred to as the Singleton Contract. Instead of moving assets in and out of different pools to perform a swap, this contract only moves net balances. This makes the entire system highly efficient, saving users a lot more gas fees in Uniswap V4.

How does the Singleton Contract or Pool Manager improve the user experience?

Because every liquidity pool is now stored in an existing smart contract, developers don’t need to deploy new pools all the time. This means less expenses for developers, but also for end users. Because end users no longer need to approve a contract before using it.

Furthermore, one swap can require exchanges across various pools. However, thanks to the Singleton Contract this all happens within the same contract. As a result, the entire proposition is much more gas efficient.

Flash accounting combines multiple actions

Another innovative feature has been dubbed Flash Accounting. This system allows users to efficiently chain together multiple actions, for example swapping and adding liquidity. The system tracks the net balances of inbound and outbound tokens, and in the end the contract verifies that all debts have been settled by the user. The entire string of actions can only happen when the user has the gas fees and the necessary tokens. If not, the system will revert the transaction. Uniswap hopes to reduce gas costs and enhance efficiency on the platform.

Hooks allow for more customization

Uniswap V4 introduces hooks, allowing developers to customize liquidity pools by attaching smart contracts to it. These hooks offer a high degree of customization, not seen in previous iterations of Uniswap liquidity pools. For example, hooks can enable different types of orders, like limit orders. In addition, hooks can allow for tailored oracles, or custom market maker functionalities.

Make DeFi feel more like a CEX

In the past Uniswap only allowed for transactions to happens then and now, but Uniswap V4 will introduce time-weighted average market maker functionality. This means that users can set a command to for example purchase $100 worth of ETH every 2 hours for a total of 24 hours.

Time-weighted average market maker, or TWAMM, is an example of a hook. TWAMM gets traders better prices by splitting a large order into smaller swaps that steadily execute over time. These types of swaps are less likely to impact the token price. Uniswap V4 will always process TWAMM orders before any other trades or LP transactions. This protects users from frontrunning bots, or simply MEVs.

Uniswap V4 no longer relies on external oracles

Uniswap V4 will use hooks to implement oracles natively into the platform. For example, the truncated price oracle – an optional V4 hook – reduces the price impact of large trades. This makes the pool more resistance to oracle manipulation techniques, and therefore safer for DeFi.

A price oracle provides a trustless feed of crypto prices on the blockchain. Truncation helps lessen the impact of big trades on prices over time, whether they’re honest or not. If someone tries to mess with prices, they’ll have to keep doing it for a while, which makes it much harder and costlier to manipulate the truncated oracle.

Will liquidity providers earn more?

Through hooks, users and developers can expect a lot more interoperability with other Ethereum protocols and standards. This would enable complex interactions between different DeFi protocols, but also actions with SocialFi or games. This will generate more fees, which benefit liquidity providers.

In addition, the dynamic fees introduced in V4 can give liquidity providers more control, and with that comes a potential for increased earnings. For example, they could implement withdrawal fees to discourage selling tokens or LP positions. So in short, will liquidity providers earn more? It seems like there’s plenty of opportunity.

Uniswap V4 launch date

Uniswap Labs expects to launch Uniswap V4 in Q3 2024.

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