The Innovative Engine in the DeFi Space: Analyzing the Four Revolutionary Mechanisms of Uniswap V4

On June 13, a well-known decentralized trading platform released its V4 version code draft, which caused a strong reaction in the industry and became a recent hot topic. As the largest decentralized trading platform by scale, it has long occupied more than 50% of on-chain trading share, with a trading volume more than three times that of its second-largest competitor. The launch of the V4 version will further consolidate its leading position in the Decentralized Finance (DeFi) field.

The official vision document and white paper detail the Hooks that enable customizable AMM, the Singleton that changes the account framework and order logic, and the Flash accounting and Native ETH that can greatly reduce Gas fees. These innovative features will bring greater freedom, better liquidity, lower fees, and more choices to DEX. At the same time, these innovations inject new momentum into DEX, accelerating its pace to catch up with centralized exchanges, which will have a profound impact on the future development of Decentralized Finance.

Leading the Development of the DeFi Industry with Innovation

The reason why the V4 version upgrade has attracted the attention of numerous institutions is, on one hand, due to the recent lawsuit against a globally renowned centralized exchange by regulatory authorities, which has raised concerns among industry institutions about the future development of centralized exchanges. As a result, DEXs with decentralized and censorship-resistant characteristics have gained more favor. On the other hand, as a leader in the industry, each version launched by this platform has set the development direction for DEXs, which successors are eager to imitate, thus promoting the prosperous development of the entire Decentralized Finance ecosystem.

Looking back at the historical versions of the platform, we can see its significant impact in the Decentralized Finance space:

The V1 version was launched in November 2018, introducing the automated market maker model for token trading, providing a fast, simple, and low-cost solution. This innovation inspired many later decentralized exchanges and laid the foundation for the development of the entire Decentralized Finance ecosystem.

The V2 version was launched in May 2020, further supporting trading between ERC-20 tokens and introducing a liquidity mining mechanism. These innovations have propelled the emergence of a series of Decentralized Finance projects, such as Yearn.finance, AAVE, Compound, and Chainlink.

The V3 version was launched in May 2021, introducing centralized liquidity and price limit order functions, enhancing the capital management efficiency of market makers and the trading control capabilities of users. These innovations have spawned a number of new Decentralized Finance projects, such as Concentrated Liquidity and BarnBridge.

The upcoming V4 version will undergo a comprehensive renovation on the DeFi infrastructure. For example, V4 will offer token pools that can be created and managed independently, AMMs that can add new features through "hooking", and a large contract framework to replace the previous Factory/Pool model. These innovations will further strengthen the characteristics of decentralized trading platforms and bring new changes and opportunities to the entire DeFi ecosystem.

V4: Four Major Innovative Mechanisms to Build the True Infrastructure of Decentralized Finance

As an important participant and leader in the Decentralized Finance industry, the platform has played a key role in promoting industry progress and improvement. The V4 version has created an efficient, flexible, and low-cost infrastructure truly suitable for DeFi by introducing innovative mechanisms such as Hooks, Singleton, and Flash accounting, providing users with a better trading experience and more opportunities.

Hooks

One of the key innovations of V4 is the introduction of "hooks". Hooks are essentially external contracts created and defined by developers to implement trading logic. With hooks, developers can call external contracts at specific points in the lifecycle of a liquidity pool to perform specified actions, such as creating limit orders before a trade, adjusting trading fee tiers after changes in liquidity pool positions, etc.

This customizable feature makes V4 a flexible liquidity pool platform. Developers can freely create various new functions to meet the needs of different trading scenarios, deeply binding liquidity to the project's own development. In addition, this customization can inspire the creativity of developers and the community, further enhancing the network effect, making it a fundamental infrastructure of the entire Decentralized Finance ecosystem.

Currently, V4 showcases the following hook samples:

1. Time-Weighted Average Market Maker (TWAMM): By splitting large trades into multiple smaller trades, it reduces price volatility, lowers slippage, and improves the smoothness of trading.

2. Dynamic Fees: Transaction fees are dynamically adjusted based on factors such as the amount of assets in the liquidity pool, trading volume, and volatility.

3. On-chain limit orders: Introduce limit order contracts that allow users to automatically execute preset trading orders under specific price conditions.

4. Lending of Idle Liquidity: Deposit liquidity that exceeds a specific range into lending protocols to improve capital utilization efficiency.

5. Customized on-chain oracle: Introduce aggregated oracle contracts to achieve customized oracle services.

6. Internalized MEV profit distribution back to LP: Allow liquidity providers to directly benefit from MEV profits.

Singleton

Singleton is a new contract architecture of V4. In this architecture, all liquidity pools are stored in a single contract, which greatly reduces the cost and Gas fees of creating liquidity pools and improves trading efficiency.

The advantages of the Singleton architecture include:

1. Reduce costs: Developers do not need to deploy separate contracts for each liquidity pool.

2. Improve Efficiency: Multi-hop trading has been implemented, allowing users to complete all exchanges with a single contract call.

3. Scalability: Convenient to add new features and characteristics, leaving more possibilities for future innovations.

4. Simplified liquidity position management: Using addresses for position management is simpler and more efficient.

Flash Accounting

Flash Accounting is a new accounting method introduced on top of the singleton contract architecture. It can calculate transaction fees based solely on the net balance (i.e., the change in balance), thereby reducing Gas consumption.

The Flash Accounting system takes advantage of the fact that all liquidity pools in V4 are managed by a single contract. When users make a trade, the system queries the net balance of the current pool and then calculates the transaction fees based on the user's net balance in the trade. This method avoids calculating the balances of all related positions, thus reducing the Gas required for the calculations.

In addition to reducing Gas consumption, the Flash Accounting system can also improve cross-pool routing efficiency and further reduce transaction costs when crossing multiple pools. This feature becomes particularly useful when combined with pegged contracts, supporting more complex integrations and innovations, which can significantly increase the number of pools.

Native ETH

Native ETH in V4 refers to direct trading between Ethereum's native token (ETH) and other tokens during the trading process. This allows for direct transactions between ETH and other tokens without the need to first convert to WETH, significantly reducing transaction costs and time.

V4 has added an ETH pool in the core contract, specifically for direct trading between ETH and other tokens. When users trade ETH for other tokens, the system automatically compares the trading volume with the amount of ETH in the pool, and then calculates the corresponding amount of other tokens based on the ratio.

The introduction of native ETH has made V4 more convenient and efficient, providing users with a better trading experience and further enhancing the platform's liquidity and competitiveness.

V4 may become an opportunity to solve the DEX dilemma.

In the digital asset trading market, centralized exchanges and decentralized exchanges are the two main exchange models. Due to the long-standing issues of insufficient liquidity, poor user experience, and high transaction fees and costs that DEX has faced, centralized exchanges have long occupied the majority of the market share. With the rapid development of Decentralized Finance, the developmental difficulties of DEX have also attracted increasing attention. In this context, the release of V4 may become an opportunity to solve the dilemmas faced by DEX. Through innovative solutions, V4 plans to improve the condition of DEX in four aspects:

1. Improve liquidity: By introducing the Hook function and internalizing the MEV profit distribution back to LP, the customizability and liquidity of the DEX have been enhanced.

2. Improve user experience: The introduction of the TWAMM algorithm and limit order trading function has enhanced price discovery efficiency and user trading experience.

3. Reduce transaction fees: By internalizing MEV profit distribution back to LP and utilizing technologies such as flash accounting, transaction fees are reduced.

4. Improve cost efficiency: Singleton architecture and lightning accounting technology help users achieve maximum benefits or value at minimized costs.

Summary

As an important innovation in the Decentralized Finance industry, V4's emergence will undoubtedly drive the development of the entire cryptocurrency sector. V4 grants users greater freedom, higher liquidity, lower fees, and more comprehensive and convenient services. These advantages not only make it a more competitive trading platform but also promote the progress and improvement of the entire DEX industry.

Although there is still a significant gap between DEX and centralized exchanges in terms of user experience, fees, and security, this gap is gradually narrowing with the continuous updates and improvements of DEX technology. It is believed that in the near future, V4 will occupy a more important position in the competition between DEX and centralized exchanges, becoming the liquidity growth engine of the DeFi industry and leading the development direction of the entire industry.