Hello everyone, and welcome back to Dive in the Pool! In this fourth episode, we’re taking a journey back in time to study the evolution of one of the most influential protocols in the DeFi space: Uniswap.
Whether you're a seasoned DeFi expert or just a cryptocurrency enthusiast, understanding the innovative progress made by Uniswap from V1 to V4 is an insightful experience. So, let's dive in!
Uniswap, known as the leader of decentralized exchanges (DEXs), boasts a Total Value Locked (TVL) of 4,403 billion at the time of writing. Renowned for its pioneering role, Uniswap is one of the most forked projects in the world of decentralized finance.
Before reaching this stage, Uniswap went through several versions, which we'll (re)discover today.
From Uniswap V1 to V4 🧬
Launching in November 2018, Uniswap V1 revolutionized trading by allowing cryptocurrency exchanges without intermediaries, using liquidity pools and Automated Market Makers (AMMs). (If you're new to AMMs and liquidity pools, we've got you covered with our beginner-friendly articles 😁)
A limitation of V1 was its requirement for each pool to contain ETH and another token (ERC20/ETH), leading to a two-step process for trades not involving ETH. So, if you wanted to swap USDC for UNI, you first had to exchange USDC for ETH, then ETH for UNI, which was inefficient. Uniswap V2 resolved this.
May 2020 saw the arrival of Uniswap V2, which addressed the inefficiencies of V1 by enabling the creation of pools with any two ERC20 tokens. This major breakthrough meant direct token swaps without needing ETH as an intermediary, streamlining the trading process. However there were still inefficiencies from a liquidity point of view, that’s where Uniswap V3 comes into place.
Launched in 2021, Uniswap V3 brought the concept of concentrated liquidity to the forefront. This innovation allowed liquidity providers to allocate capital within a specific price range, leading to:
V3's model meant that providers would earn trading fees when prices stayed within their set range, but they would not generate yield if the price moved outside this range.
While Uniswap V3 is the most optimized type of liquidity pools, this model requires users to have an in-depth understanding of concentrated liquidity and actively manage their positions to stay within the profitable range. Let's take a look at what Uniswap has in store with its latest innovation.
Uniswap V4, whose code was revealed last June, focuses on personalization and cost efficiency. Its standout feature is the singleton architecture, which consolidates all Uniswap pools within a single smart contract. This innovation is expected to reduce gas fees by 99% for creating a liquidity pool and 50% for swaps, significantly enhancing cost efficiency.
Another novel feature of Uniswap V4 is the introduction of hooks. These allow developers to customize liquidity pools with specific functions. Hooks enable actions during a transaction at predetermined times, such as dynamic fees or on-chain limit orders, offering greater flexibility and functionality.
While Uniswap V4's release date is not yet confirmed, its launch is closely tied to the anticipated Ethereum Improvement Proposal EIP-1153, known as the Cancun upgrade. This Ethereum upgrade is critical as it aims to reduce network fees and optimize gas allocation, further boosting Uniswap V4's efficiency.
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