Under the DEX dilemma, what problems does Uniswap V4 solve?

Original Author: Sleeping in the Rain

The release of the Uni v4 draft is a very exciting thing. Although it has nothing to do with its token empowerment, and the specific release date has not yet been announced, it proposes two core innovations, one is Hook, and the other is The Singleton. Before breaking down these two core upgrades, let’s talk about the current bottlenecks encountered by DEX⬇️

The industry's attitude towards DEX is as optimistic as ever, because what they are doing is to decentralize trading and custody. Traders don't need to worry about the opacity of fees, prices, and settlements, all of which can be checked on the chain. Uniswap sparked a wave of DEXs, allowing everyone to conduct permissionless transactions and provide liquidity to participate in market making.

But even with such a beautiful vision, DEX still cannot directly compete with CEX. The reasons are well known, such as MEV, no price advantage, gas fees, LPs cannot make money, and so on. It can also be seen from the diagram produced by Coingecko that CEX still has a rolling advantage. (Maybe the DEX data in Q2 will be better, because the chain has experienced a wave of meme boom, and the transaction volume has skyrocketed)

So, what kind of story does Uni v4 tell?

Customizability (Hook) and extreme cost reduction (The Singleton and Bookkeeping).

Extreme Customization: The Hook function allows anyone to use custom contracts to deploy liquidity pools. This sentence is actually a bit abstract. On the basis of the examples mentioned by the officials (execution of TWAMM orders, limit orders, dynamic fees, internal MEV allocation mechanism, custom oracle), I will expand a few more examples - Hook is How to support custom execution logic required by different developers:

1. Functions realized by Camelot products: variable fees in the liquidity pool and additional rewards for LP. After v4 is launched, deployers can deploy such pools directly on Uniswap. Including, you can set various transaction taxes directly through Uniswap v4 for posting memes in the future. The example that can be referred to before is $AIDOGE, including transaction tax, using $ARB to motivate $AIDOGE liquidity, etc. But the advantage of Hook is that while it meets these requirements, it also has room for other constructions.

2. More protocols can implement some functions based on the Hook function of Uniswap v4, such as order book transactions, and the price will be more friendly to traders. So, can Perp DEX also build products based on v4 LP? I think it is a good imagination, and I believe that there will be a huge Uniswap ecology in the future, and this will also constitute the moat of Uniswap. In short, Hook greatly increases the composability and scalability of Uniswap liquidity.

However, as @WinterSoldierxz mentioned, Hook, being a simple Java function, comes with its own shortcomings (ie dependancy array), Hook still has some shortcomings, but in terms of programming difficulty, Java has a lower threshold, Developers can quickly build liquidity pools and products based on it.

Extreme cost reduction: The Singleton sets all LP contracts into a single contract to reduce the gas cost of creating LP and multi-hop trade (cross-pool routing transactions).

It is also worth mentioning that the bookkeeping function of v4, while reducing the cost of frequent transactions, also introduces market makers into the DEX field.

So, we are going back to the current dilemma of DEX mentioned at the beginning, what problems does v4 solve?

1. MEV: The internalized MEV allocation mechanism of the v4 liquidity provider will have the opportunity to alleviate the current MEV problem.

2. Price: The introduction of market makers and price limit transactions will alleviate this problem.

3. Gas cost: This is a problem that v4 strives to solve. If it is counted on Layer;2, the cost will be lower.

4. LP income: Insufficient LP income comes from three aspects: 1; ⃣️ Insufficient trading volume; 2; ⃣️Gas fees; 3; ⃣️ Impermanent loss. The essential reason for the lack of trading volume is that DEX is not as good as CEX in terms of product power. V4 is working on solving this problem, and the reduction of Gas fees is a problem that v4 mainly solves. The impermanent loss needs to be solved through order book market making - in the future, developers may build a price limit exchange based on Uniswap v4.

Are there other things that need our attention?

In a paragraph of the Blog, Uniswap mentioned, "Depositing out-of-range liquidity into lending protocols", which means that Uniswap's idle liquidity will be able to provide liquidity for the lending agreement.

I personally think that Uniswap has huge ambitions. While allowing developers to build on v4, the official team may also use Hooks to build new products, such as lending agreements and stable currency agreements. Nowadays, the former DeFi giants have all started to expand in related areas, such as MakerDAO launching lending agreements, Curve and AAVE launching stablecoins, and v4 may become an opportunity for Uniswap to move forward.

Additionally, Uniswap v4 brings native ETH back into trading pairs. This is also an attempt to reduce gas costs for users.

For other DEXs, future DEX forks will basically not be competitive, and some innovative DEXs, such as iZumi, will have more competitiveness in products. For Uniswap v4, they wrote an article "iZUMi: How to use the limit order function of Uni V4 to realize the next generation of "On-Chain Binance"", which I personally think is very well written.

And, suzhu's new CEX OPNX is also worth mentioning. Strictly speaking, OPNX is a CEX, but its products and Uniswap v4 also adopt a bookkeeping model (just a model), and the transaction collateral is separated from the matching engine. Traders deposit money into OPNX for collateral, and then trade in the product.

My point of view is that now Uniswap has brought the market's vision back to the DEX track. This is a good thing, and it also provides some better ideas for latecomers. But we can't ignore the existing competitors on the DEX track, such as Curve, TraderJoe, iZumi, etc.