A Comparison Between the Many Uniswap Versions and The Latest V4

  • Uniswap V4 was recently launched as the DEX’s step in upgrading itself to the current market needs.
  • Although it came with promising features, it has been strangled under several controversies also. 

The launch of Automated Market Makers (AMMs) has revolutionized the DeFi ecosystem which eliminated the concept of the order book, prevalent in the traditional exchange markets. These AMMs are smart contract-based protocols that act as the order-matching system and provide liquidity. These smart contracts were called liquidity pools. Uniswap, launched in November 2018, became a dominant figure in the DEX market and has popularized the use of AMMs. It has more than 3 Million active crypto traders, nearly $7 Billion worth of crypto locked in its market, and has successfully traded more than $1.1 Trillion in crypto on its platform. It has been integrated into more than 300 DeFi apps. 

Uniswap introduced its V1, the original, which was called the Uniswap beta or proof of concept. It was mainly to test the effectiveness of the infant liquidity model. This model had just a single liquidity pool and allowed just the swapping of ERC-20 tokens and ETH. For any other token, the user had to first convert them to either ETH or ERC-20 tokens, and then put them in the liquidity pool. The liquidity providers (LPs) were rewarded with LP tokens and encouraged to add liquidity. It charged a 0.3% transaction fee and was written in the Vyper language. 

The V2 was launched to solve most of the challenges of the V1, which received huge acceptance from traders. The user interface was made friendlier and easy for naive traders, allowing the trade of tokens other than Ether and ERC-20. The Ethereum Bridging Challenge of V1 was solved by introducing more liquidity pools. They also supported wrapped BTC (wBTC) and wrapped Ether (wETH) tokens which helped in lowering the trading costs on DEXs.

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The Time Weighted Average Price Oracle (TWAP) was introduced to improve the price feeds and prevent any manipulation. The feature of Flash Swap first came in under V2 which helped arbitrageurs to withdraw money without first paying the transaction fees. The transaction fee was set to 0.3% as in V1, however, a 0.05% of protocol fee was also voted later. It was written in the Solidity language. 

Just a year after its V2, in May 2021, Uniswap launched another upgrade which went on to become its most effective and user-friendly product. It came up with more interesting features and made the V2 more flexible. It introduced the concept of concentrated liquidity to improve the allocation of liquidity. Now, the LPs could concentrate their liquidity in specific price ranges instead of covering the whole range. 

As the price of stablecoins is almost near $1, they could allocate most of their resources in the range of $0.99 to $1.1, instead of the whole range. This resulted from the capital efficiency being 400X and getting higher returns. It introduced three fee levels: 0.05%, 0.3%, and 1%. The earlier voted protocol fee was removed, and this was too written in Solidity. 

The Features of V4

The latest version was announced on 12 June, 2023, and came up with yet another feature to ensure that Uniswap remains a step ahead in this competitive space. 

It came up with the concept of Hooks, programmable buttons which can be used to add customized features in the liquidity pools. They allow Uniswp liquidity to integrate with other protocols. These can also be called contracts which run at different points in the lifecycle of the pool. With them, the pool creators have more control over their pool. The singleton contract feature has also reduced the gas fees and increased the gas efficiency.

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Final Thoughts

Uniswap V4 was launched to provide more customization, expand the use cases, attract more developers, increase the network throughput, and enable complex transactions within different DeFi protocols. However, it has attracted a lot of license controversy where developers criticized it for releasing under the open-source term while it is licensed under the Business Source License (BUSL).

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