A Quick Look at Uniswap V4: Launch Hook Plug-in to Improve Capital Efficiency, Improve Architecture and Save Gas

v4 will allow for new features such as customizing liquidity pools via "hooks", natively supporting dynamic fees, adding on-chain cap orders, or spreading out large orders via time-weighted average market makers (TWAMM).

Original: "Our Vision for Uniswap v4"

Compilation: Frank, Foresight News

Two years ago, we released Uniswap v3, which was a watershed moment for on-chain liquidity and DeFi. Today, the Uniswap protocol is the largest decentralized exchange protocol, handling more than $1.5 trillion in transactions, not only as a public infrastructure, but also as an important part of the crypto ecosystem.

As the technology and market evolve, the Uniswap protocol must also evolve, which is why we introduce the vision for Uniswap v4 here, which we believe will open up endless possibilities for liquidity creation and on-chain transactions.

We are releasing code drafts now so that v4 can be built publicly, with open feedback and meaningful community contributions. We expect this to be a months-long process, you can read an open-source early release of the Uniswap v4 core and other repositories, read the draft technical white paper, and learn more about how to contribute here information.

Uniswap v3 takes a robust and innovative approach to liquidity, balancing an extremely complex space where new features come at the cost of higher fees and code complexity. For example, v3 establishes an oracle that allows developers to integrate real-time on-chain pricing data, but at the expense of increased transaction costs for traders.

Our vision for Uniswap v4 is to allow anyone to make these trade-off decisions by introducing "hooks". "Hooks" are contracts that run at various stages in the lifecycle of a liquidity pool operation. Liquidity pools can make the same tradeoffs as v3, or they can add entirely new features.

For example v4 will allow native support for dynamic fees, add on-chain cap orders, or act as a Time Weighted Average Market Maker (TWAMM) to spread out large orders over time.

Beyond this customization, Uniswap v4's architecture reduces costs and ensures efficiency. It introduces a new "singleton" contract where all liquidity pools reside in one smart contract. We believe the combination of hooks and singleton architecture creates a very powerful platform - fast and safe custom liquidity pool customization and efficient routing across multiple pools.

Uniswap v4 brings fast, expressive AMM innovation in a robust ecosystem.

What is Uniswap v4? "Hook" and custom liquidity pool

Each Uniswap liquidity pool has a life cycle. During the lifecycle of a liquidity pool, several things happen, including users creating a liquidity pool with default fee tiers; liquidity being added, removed, or rebalanced; and users trading tokens.

In Uniswap v3, these lifecycle events are tightly coupled and executed in a very strict order.

To create room for customizable liquidity in Uniswap v4, we wanted to create a way for liquidity pool deployers to introduce code to perform specified actions at key points throughout the lifecycle of a liquidity pool— — such as before or after trading tokens, or before or after LP position changes.

Enter "hooks," plugins that customize how liquidity pools, exchanges, fees, and LP positions interact. Developers can innovate on top of the liquidity and security of the Uniswap protocol, creating custom AMM pools through "hooks" integrated with v4 smart contracts.

Some experiments we are interested in include:

• Time Weighted Average Market Maker (TWAMM);
• Dynamic fees based on volatility or other inputs;
• Chain limit order;
• Deposit excess liquidity into the lending agreement;
• Customized on-chain oracles, such as geometric mean oracles;
• Automatically compound interest LP handling fee to LP positions;
• Internalized MEV profits distributed to LP;

But in reality, imagination has no limits. Since each liquidity pool is now defined by more than just tokens and fee tiers, we will see liquidity pools of all colors, shapes, and sizes. The core logic of Uniswap v4 is the same as that of v3, which is not upgradeable. While each liquidity pool can use its own "hook" smart contract, the "hooks" can only be restricted to specific permissions determined when the liquidity pool was created.

We created example "hook" contracts to get started with the current framework. We want developers to come up with new and interesting ways to build features we haven't even thought of yet.

Improve architecture and save Gas

In Uniswap v3, we deploy a new contract for each liquidity pool, which makes creating liquidity pools and performing multi-pool swaps more expensive.

In v4, we keep all liquidity pools in a "singleton" contract, which will greatly save Gas, because token transactions will no longer need to transfer tokens between liquidity pools held in different contracts currency.

Preliminary estimates v4 will reduce the gas cost of creating a liquidity pool by 99%, "hooks" introduce a world with endless choices, and "singletons" allow users to efficiently route to all options.

This "singleton" architecture is complemented by a new "flash accounting" system. In v3, instead of transferring assets in and out of the liquidity pool at the end of each swap, the system only makes transfers on the net balance - meaning a more efficient system that can be provided in Uniswap v4 Additional Gas savings.

We think the best "fast accounting" design is to use "transient storage", a feature that will be enabled by EIP-1153. This EIP is regarded as part of the Ethereum Cancun hard fork, and will bring large-scale Gas improvements and simpler contract designs in various applications.

With "singleton" and "fast billing", there is no need to limit the fee level. Liquidity pool creators can set them to the most competitive level or customize them using dynamic fee "hooks". v4 also restores support for native ETH, which saves additional Gas.

Permissions and Governance

As always, we firmly believe that core financial infrastructure should be open and transparent. We also believe that the Uniswap community (the people and teams that support, use, and build the protocol) should govern the v4 protocol just as they governed previous versions.

The code will be released under the Business Source License 1.1, which limits the use of the v4 source code in commercial or production environments to four years, at which point it will transition to the perpetual GPL license. As with v3, Uniswap Governance and Uniswap Labs can grant exceptions to the license.

The protocol fee mechanism will also be modeled on v3, and governance will be able to vote to add protocol fees to any liquidity pool, up to a capped amount. For more details on the fee mechanism, please refer to the white paper.

In addition, according to a Bankless interview, the release of Uniswap v4 is not imminent. Uniswap founder Hayden Adams said on a podcast that the v4 code has not yet been finalized and reviewed, so it should take some time before the protocol is released publicly.

What does this mean for DeFi?

v4 may have a broad impact on Uniswap itself and DeFi as a whole.

For starters, the upgrade should help Uniswap maintain its position as the largest decentralized exchange by volume, as the "hooks" improve the protocol's capital efficiency relative to v3 while being more customizable and And save Gas. The latter two features should help Uniswap capture more order flow from DEX aggregators and long-tail asset trading pairs, while maintaining its presence in high-volume trading pairs such as ETH/USDC, ETH/USDT, ETH/DAI, etc. dominant position.

Additionally, the ability to create more order types such as TWAP and limit orders should help Uniswap become more competitive with centralized exchanges by attracting more sophisticated traders to the DEX. This, combined with the broader structural tailwind trend of trading activity moving on-chain after the FTX crash, and the recent regulatory pressure on CEXs like Binance and Coinbase, could help Uniswap take on these competitors more forcefully .

The DEX/CEX volume ratio hit an all-time high in May before falling back, and Uniswap v4 seems likely to push this ratio to new heights when it matures.

In the end, v4 should help make Uniswap a more composable protocol, Uniswap v3 has a reputation for being difficult to build on due to lack of expressiveness and the challenges of managing centralized liquidity positions. In the "hook" and "singleton" mode, it seems easier for users to build and utilize the liquidity of v4 than v3, which may lead to a large number of new and interesting applications, and at a time when the industry desperately needs it Inspire a wave of innovation in DeFi.

All in all, Uniswap v4 should help move the industry forward, and while it won’t be live immediately, DeFi will still be interesting again.