What is Uniswap?
Uniswap is a decentralized exchange or DEX that is based on the Ethereum blockchain. This blockchain network allows investors to trade many digital currencies using an Automated Market Maker or AMM model. It means that the DEX does not need to maintain an order book. The product was launched in 2018 and has since become one of the top decentralized exchange platforms.
The platform boasts one of the highest trading volume and deeper liquidity in comparison to other DEXs. At the same time, Uniswap was ranked as the top DEX platform based on metrics such as trading volume, liquidity and number of active users.
During this time, Uniswap has also launched various new versions and upgrades. The devs introduced V2 in 2020 and V3 in 2021. Uniswap recently published the first draft of V4 that has listed various new features.
Introduction to Uniswap V1
Uniswap V1 was launched in November 2018 as proof-of-concept platform. The primary focus of this product was Constant Product Market Maker or CPMM model.
Rather than using traditional order books, Uniswap allow individual investors to pool their token reserves in a specific trading pair. In return, the investors earned a share of trading fees collected from investors that were trading against the liquidity pool.
Uniswap V1 also facilitated ERC-20 tokens and ETH swaps. It allowed investors to exchange different types of tokens that were based on ERC-20 standard using ETH. The first version of the DEX also reported some limitations such as pricing algorithm that was altered by arbitrageurs and high-slippage for large-scale transactions.
Introduction to Uniswap V2
Uniswap V2 was launched in May, 2020 with added features. This version recalibrated the AMM model and included token-to-token swaps. In this manner, the DEX lowered slippage and enhanced capital efficiency.
At the same time, Uniswap V2 introduced flash swaps that allowed investors to make considerable withdrawals from liquidity pools as loans and return the withdrawn amount with a levied percentage of fees within the same transaction cycle.
In this manner, the product introduced arbitrage and yield farming options without needing upfront capital. Uniswap V2 also introduced the concept of Time Weighted Average Price or TWAP. This allowed other decentralized applications to access prices from Uniswap.
Introduction to Uniswap V3
The third iteration of Uniswap was introduced in 2021. It improved capital efficiency and centralized liquidity. At the same time, V3 assigned price-ranges for liquidity pools that allowed investors to earn higher fees by improving capital utilization. This version set three distinct fee tiers namely 0.5%, 0.3%, and 1.00% to account for different risk thresholds and trading volumes.
NFTs allowed investors to receive NFTs reflecting their share in an LP. These NFTs also allowed investors to conduct trades, or transfer propriety without affecting underlying assets. Uniswap V3 integrated with Layer-2 Ethereum solution Optimism to reduce transaction fees and add scalability to the network.
Features of Uniswap V4
Hooks and Custom Pools
Hooks are customization options for Uniswap V4 that are contracts running at various points of liquidity lifecycle. The lifecycle of an LP has phases such as adding, removing, adjusting liquidity. Hooks are code points to add required action at any point during the LP lifecycle.
One example is adding support for dynamic fees locally, on-chain limit orders, or time-weighted average market maker to disperse large orders over bigger time spread to prevent sudden price changes.
Uniswap V3 allowed deployment of new contract for each new LP. In this manner, the investors were able to create pools and perform multi-pool swaps become more costly. At the same time, Uniswap V4 LPs are stored in one contract. This saves gas fees by removing token transfers between pools that are placed in different contracts. As per estimates, V4 can decrease transfer fees by 99%.
Flash accounting is an architectural additional in Uniswap V4 code. It removes the need for transfer tokens to make token swaps or adding liquidity. Uniswap V4 enables external transfers to simplify pool operations and decrease fees.
Native ETH Trading Pairs
Uniswap V4 adds ETH as a native trading pair. Uniswap V1 only had ETH/ERC-20 token pairs. V2 removed ETH as native pairs on account of issues with implementation and liquidity fragmentation using WETH and ETH pairs.
V2 and V3 used WETH to trade on Uniswap protocol and adding added transfer fees. At the same time, V4 has introduced features such as singleton and flash accounting that reduce transfer fees by half for ERC-20 tokens.
Some advantages of Uniswap V4 include customization using hooks, efficiency from singleton and flash accounting, transfer fee decline, additional yield from LPs, and advanced trading strategies. At the same time, there are some risks such as separate fee collection systems and licensed source code that is not open-sourced.