A Brief Discussion on Uniswap v4: The Culmination of DeFi Innovation

Author: Haotian

The new version of Uniswap V4 injects a catalyst into the cold and quiet Crypto industry during the bear market. Everyone is expressing their admiration for the paradigm power of Uniswap's framework innovation and is full of confidence in the future of DEX seizing liquidity from CEX.

However impressive Uniswap may be, it is merely the culmination of innovations in the DeFi industry over the past five years. The many innovative moments in previous DeFi protocols are equally worthy of sharing and praise.

It all started with those 500 lines of code. As the gene and origin of DeFi, the AMM algorithm X*Y=K opened the "Cambrian moment" of the DeFi industry.

This algorithm achieved the automation of asset pricing and exchange, realized risk hedging and arbitrage mechanisms, and enabled open and censorship-resistant finance. Most importantly, it achieved the modular reorganization of financial services, allowing finance to be combined and reconstructed like building blocks, laying the seeds for various future plays.

Uniswap V4's Hooks can add new functions and features to the AMM pool, while the Singleton contract changes the account framework and trading logic, representing a framework innovation that opens up countless possibilities.

Let's take the new features introduced in Uniswap V4 as an example to review the real innovative forces that exist in the DeFi world, starting with Uniswap but not limited to it:

1. Limit Orders: At the end of 2020, @dYdX implemented limit orders based on its underlying StarkEx L2 expansion protocol's "private order book" feature (matching trades in a hidden state on L2 and presenting the results on-chain). This is quite different from the limit order logic implemented under the V3 Concentrated Liquidity model, but the idea of limit orders can reduce AMM trading risks and improve efficiency, making it a particularly important innovation in the development of DeFi.
2. TWAMM: In July 2021, @perpprotocol launched the time-weighted AMM model, which adjusts the token ratios and prices in the asset pool based on recent trading records, allowing AMMs to respond quickly and accurately to market price changes. Overall, the introduction of time weighting not only improved price discovery efficiency but also enhanced resistance to manipulation, making it difficult to manipulate AMM pricing through large orders. This is significant for the evolution of DeFi mechanisms.
3. Dynamic Fees: In May 2021, @GMX implemented a mechanism for dynamically adjusting trading fees based on market conditions, greatly enhancing the competitiveness and pricing efficiency of AMM products. GMX's algorithm-driven dynamic fee adjustments are more responsive and stable compared to the user-selected dynamic fees offered by Curve. Uniswap V4 effectively combines algorithm-driven and manual selection, further improving liquidity utilization efficiency.
4. NFT Integration into AMM: In December 2020, @NFTX achieved deep integration of NFTs and AMMs, allowing NFTs to be traded and priced in AMM pools with high liquidity like ERC20 tokens, thus addressing the low liquidity issue of NFTs. However, NFTX essentially converts NFTs into ERC20 tokens and uses them as collateral for liquidity, while Uniswap V4 directly allows NFTs to participate in liquidity.
5. Lending and Earning Interest on Out-of-Range Liquidity: In March 2021, @Aave V2 implemented the ability to deposit AMM liquidity assets into Aave's lending pool for borrowing, earning additional interest income, which undoubtedly improved capital efficiency. Crucially, it realized the cross-protocol and cross-mechanism combinatorial application of DeFi, opening up ideas for deeper collaboration between future DeFi protocols.
6. Automatic Reinvestment of LP Fees: In October 2020, @Curvefinance added an auto-compounding mechanism in its V2 version, allowing LPs to automatically convert their trading fee income into LP tokens and add them to their positions. However, this mechanism can lead to a loss in the amount of LP tokens exchanged during price fluctuations, and even Uniswap V4 is not immune to such challenges.
7. Macro Contract Management of Segmented Liquidity Pools: In 2020, @balancer implemented the function of managing segmented liquidity pools through Vault contracts. This reduced the high costs associated with deploying a large number of single-token pools, as Vault contracts can avoid gas fees from redundant reads and transfers. Uniswap V4's Singleton is based on the concept of Vault but does not require pre-defining all combinations, making it more flexible.
8. Introduction of Donate Functionality: In September 2020, @Sushiswap first introduced a donation feature in its V2 version, allowing users to donate tokens to specific liquidity providers as incentives. This helps attract and retain more liquidity providers. Although such mechanisms carry certain risks of commercial manipulation, they could represent a new paradigm for DeFi community building under community-driven initiatives.

Additionally, @perpprotocol offers a lossless trading mechanism that relies on algorithms and comprehensive pricing to reduce liquidity loss; @mstable_ provides a mechanism for cross-chain asset integration for liquidity, allowing users' assets on different chains to be merged into a single liquidity pool; @mavprotocol can define annualized returns based on the duration of locked tokens; and many similar innovations are quietly occurring, which may also be adopted by Uniswap in the future.

Uniswap has achieved the prosperity of DeFi, but in fact, the combinatorial innovation micro-forces of DeFi are also gradually contributing to Uniswap. It is precisely because of the repeated successful or failed explorations of these mechanisms or ideas that the era of Uniswap V4 shines so brightly. During my recent business trip to Hong Kong, amidst the complex and bustling streets filled with international people, I wondered what significance Hong Kong holds for web3, hoping it would be as impactful as Uniswap is for DeFi.