The big ship guides the small ship, UniswapX creates a new paradigm for AMM protocols

Author: Daniel Li, CoinVoice

As a leader and innovator in the decentralized trading industry, Uniswap has been continuously seeking technological breakthroughs to improve and innovate the entire DEX ecosystem. Last month, Uniswap announced the upcoming release of version V4, which has garnered widespread attention and anticipation in the industry. However, while everyone was still discussing and studying the various disruptive features and technologies of version V4, Uniswap has once again made a move, announcing the launch of a trading protocol based on non-custodial Dutch auctions—UniswapX.

UniswapX has created a new paradigm for AMM protocols. It provides traders with the best market prices by aggregating on-chain and off-chain liquidity sources while effectively preventing MEV attacks and offering gasless trading, even extending to support cross-chain gasless transactions, which points the way for the future development of DEX. Currently, UniswapX has been launched as an optional beta feature on the Ethereum frontend platform of Uniswap Labs and will soon expand to other chains and the Uniswap wallet.

What Changes Will UniswapX Bring

UniswapX is a non-custodial, permissionless, competitive trading protocol created using Dutch auctions, aimed at providing users with a better trading experience by utilizing a combination of on-chain and off-chain liquidity. According to the white paper recently released by UniswapX, it will bring the following changes to on-chain trading:

Aggregating On-Chain and Off-Chain Liquidity for Better Prices

The first advantage of UniswapX is its use of third-party fillers to aggregate assets from different liquidity sources on-chain and off-chain to achieve better prices. These fillers are participants willing to provide liquidity, and anyone can become a third-party filler for UniswapX Swap. Fillers can come from on-chain liquidity sources, such as the decentralized exchange Uniswap, or from off-chain liquidity sources, such as traders.

In the trading process of UniswapX, when a swapper initiates a trade on UniswapX, the system searches for the optimal trading route, attempting to find the best trading price across different liquidity pools on-chain and off-chain. If on-chain liquidity is insufficient, UniswapX will automatically turn to off-chain liquidity pools to obtain more liquidity and find the best price for traders. Fillers play an important role in this process, as they place their assets in the UniswapX protocol as initial assets for trading pairs, allowing others to trade between these assets. Additionally, fillers can use their own algorithms and strategies to help traders find the best price paths and optimal trading pairs. This way, the swapper does not have to worry about whether they can obtain the best price; with the on-chain and off-chain liquidity pools provided by UniswapX and the competition among fillers, the swapper can easily obtain the best market price. Furthermore, all transactions will be transparently recorded and settled on-chain, ensuring the fairness of the trades.

No Gas Fees and No Costs for Failed Transactions

UniswapX adopts the Permit2 executable off-chain signed order structure, providing traders with a trading experience that does not require paying high gas fees.

When using the Permit2 executable off-chain signed order structure, traders only need to digitally sign the order on their local device and then send the signed order to the trading pair contract.

Specifically, traders first generate a unique off-chain order through the UniswapX interface, then digitally sign the order using their local device. After that, traders send the signed order to a filler that represents them to pay the gas fees, and the filler will submit the order on-chain for execution. Since traders do not need to pay gas fees, they do not need to hold the native network tokens of the chain (such as ETH, MATIC) to trade, and if the transaction fails, traders also do not incur any costs.

In actual trading, fillers will factor the gas fees they pay into the swap price and reduce trading costs by batching multiple orders. Additionally, in certain cases, traders may still need to pay gas fees, such as for the initial token approval of Permit2. Furthermore, selling native network tokens requires packaging, which will also consume some gas fees.

Multiple Measures to Prevent MEV

UniswapX employs various mechanisms to prevent MEV, which can provide a better trading experience for swappers. First, during the off-chain order matching phase, UniswapX introduces features that can regulate the order of trades, making it impossible for MEV to gain arbitrage opportunities, thus reducing the adverse effects of MEV on swappers. These features include not fully sorting by price, executing limit orders, and local ledger digestion of price differences. This makes the transactions presented in the Mempool difficult to predict, thereby squeezing out the arbitrage space for MEV.

Secondly, UniswapX eliminates the adverse effects of MEV on swappers by raising trading prices. Generally, arbitrage traders can capture MEV by exploiting price differences, but in UniswapX, these arbitrage opportunities are eliminated. The MEV that could have been captured through arbitrage trading is returned to the swappers by raising prices, thus eliminating the adverse effects of MEV on swappers. Additionally, UniswapX can help users avoid more explicit forms of MEV extraction. For example, when orders executed using filler inventory, fillers are incentivized to use private transaction relays. This can prevent orders from being sandwiched, thereby avoiding MEV attacks. In summary, UniswapX's MEV prevention mechanisms can provide swappers with a better trading experience, making transactions fairer and more transparent.

Support for Cross-Chain Swaps

The UniswapX protocol supports cross-chain trading, allowing swappers to seamlessly trade assets on the target chain from the source chain. This means that swappers can exchange assets across different chains without worrying about compatibility and trading difficulties between different chains. This support for cross-chain trading enables traders to conduct asset transactions more conveniently while improving trading efficiency and reducing costs.

It is reported that the cross-chain version of UniswapX will be launched later in 2023. At that time, swappers can achieve inter-chain asset exchanges within seconds through cross-chain UniswapX. Moreover, swappers can choose which assets to receive on the target chain, rather than being limited to tokens specific to the bridge.

UniswapX: Changing the Rules of the DEX Game

With the launch of UniswapX and the recent announcement of the upcoming upgrade to version V4, Uniswap is painting a picture of a DEX application scenario that is completely on par with CEX in terms of user experience through these innovative technological means and features. Although the vast majority of people still hold the view that DEX cannot surpass CEX, with a series of innovative measures from Uniswap this year, more and more people are beginning to waver on this viewpoint.

In fact, the DeFi market has always been one of the largest activities in the Web3 ecosystem. As early as the peak of the bull market in 2021, the total value locked (TVL) in DeFi exceeded $175 billion. Despite the market experiencing a crisis in 2022, DeFi's TVL still remained above $39 billion. As an indispensable part of DeFi, the trading volume share of DEX has significantly increased relative to CEX since September 2022, rising from a low of 8% to a peak of 22%.

In July this year, in a blog post celebrating Binance's sixth anniversary, Binance founder Changpeng Zhao directly predicted that in the next six years or so, the market size of DeFi will definitely surpass that of CeFi. The optimism of leading enterprises and the promising development prospects of DeFi have also brought more attention and investment to DEX. The launch of UniswapX at this time is perfectly timed to attract more users and investors to join the DEX industry.

Compared to centralized exchanges, decentralized exchanges still have certain shortcomings in user experience and trading speed, which is a major challenge currently faced by decentralized exchanges. The launch of UniswapX provides a more comprehensive solution. UniswapX opens up a broader design space for DEX. By introducing third-party fillers to aggregate on-chain and off-chain liquidity, UniswapX allows traders to quickly obtain the best trading prices. Additionally, the adoption of the Permit2 executable off-chain signed order structure enables gasless trading for traders, significantly reducing their trading costs on DEX. Most importantly, UniswapX supports seamless cross-chain swaps, establishing the correct design for cross-chain exchanges, allowing users to move between different chains cheaply, quickly, and easily. This will be a revolutionary change for DeFi.

In the future, once UniswapX successfully implements gasless transactions and seamless cross-chain trading, DEX will have an overwhelming advantage over CEX in terms of user fees and asset cross-chain transfers. Furthermore, the new off-chain provider mechanism of UniswapX and Uniswap V4 will provide greater space for market makers, attracting more traditional market makers into the DEX industry, further enhancing DEX's competitiveness in liquidity against CEX. Coupled with the disruptive features brought by the upcoming Uniswap V4 version, it may only be a matter of time before DEX replaces CEX.

The Impact and Controversy of UniswapX on the Industry

The launch of UniswapX may not be as grand and attention-grabbing as Uniswap V4, but its impact cannot be ignored. First, the launch of UniswapX further validates the potential of the aggregator market. Although the aggregator market had already become an important track prior to this, it remains a relatively unfamiliar field for the general public and ordinary users. However, with the launch of this innovative feature by Uniswap, the aggregator market is beginning to attract more attention from ordinary users. In other words, before the launch of this feature by Uniswap, it may have only been a unique selling point for certain projects focused on specific functionalities, but now it is starting to be seen as a legitimate core feature.

The launch of UniswapX will accelerate the competition in the aggregator market, and UniswapX, with its large user base and brand power, will undoubtedly have an overwhelming advantage over other aggregator projects, potentially becoming the new leader in the aggregator space. This will inevitably impact other aggregator projects, squeezing their market share. Therefore, some aggregator projects are clearly not welcoming the emergence of UniswapX, especially since UniswapX is, to some extent, "copying" the 1inch fusion model or off-chain order matching aggregator platforms like Cow Swap. Although UniswapX still has many differentiated innovations, it is indisputable that in the aggregator field, UniswapX is a latecomer and imitator.

In addition to its impact on the aggregator field, the launch of UniswapX also has implications for the cross-chain market. In fact, Uniswap has been actively promoting a multi-chain plan for a long time, deploying on seven chains and L2. One of the purposes of launching UniswapX is to connect the liquidity between these chains. In the cross-chain field, brand security endorsement is highly relied upon, and with the Uniswap brand power as backing, it is believed that UniswapX will soon become a new leader in this area.

It is very common for a single entity to dominate the market, leading to a winner-takes-all situation, but this often results in a lack of innovation in the industry. Once a project introduces a new innovation, it may face pressure from latecomers relying on brand and market advantages. Currently, there is much controversy in the market regarding the launch of UniswapX. Some community members believe that UniswapX is an innovator that will change the rules of decentralized exchange, MEV, and interoperability. However, others argue that UniswapX, as a latecomer, is squeezing out its peers by relying on brand and market advantages, which does not align with the innovative spirit of blockchain.

However, such accusations clearly selectively ignore Uniswap's contributions to industry innovation. Uniswap has always been a pioneer, playing an important role in exploring new technologies and functionalities. Whether it is the original version V1 or the soon-to-be-released version V4, every new feature introduced by Uniswap has been imitated and followed by other platforms, while also leading the development direction of the entire DEX industry. Although some features launched by UniswapX may not be the first in the industry, perfecting old technologies is itself a form of innovation. In the field of innovation, smaller boats must inevitably endure more storms while sailing alongside larger ships. But at the same time, as the leader, the larger ship also guides the smaller boats in the right direction.