Uniswap v4 Announced: What’s Next for the Top DEX?

On June 13th, decentralized exchange Uniswap announced their much-anticipated version 4 upgrade, over two years after v3 was released. Many of the new features assist Uniswap in keeping its status as the top DeFi exchange in terms of volume and total value locked. Let’s review what these features are, their significance, and what they could mean for the UNI token.

Uniswap v3 revolutionized liquidity provision with the introduction of concentrated liquidity. This efficient model lets liquidity providers stipulate a valid price range for their liquidity rather than the traditional entire price spectrum. This improvement leads to higher capital efficiency, thereby boosting provider fees and providing better prices for traders. Such enhancements have propelled Uniswap to average half a billion dollars in volume and secure $2.6 billion in total value locked.

While not providing massive improvements, v4 sets the stage for Uniswap’s sustained supremacy. The highlight is the introduction of hooks, which trigger the execution of smart contracts following specific pool actions, such as the provision or removal of liquidity or the completion of a trade. They can be utilized to create a dynamic fee model or support on-chain limit orders. It could also distribute maximal extractable value (MEV) to LPs instead of Ethereum stakers, solving a controversial problem within the blockchain space. Something as advanced as providing out-of-range liquidity to a lending pool like Aave could be accomplished, along with countless other possibilities. Hooks pave the way for developers to create unique and customizable primitives for crypto exchange, strengthening Uniswap's competitive edge.

Several other improvements create a better quality of life for the Uniswap ecosystem. For example, instead of separating each pool into its smart contract, all pools will be managed by a single smart contract in v4. This will make deploying a new trading pair 99% cheaper and reduce the cost of multi-coin swaps. 

As a further competitive edge, Uniswap has an exclusive license over the code for up to four years. At that point, it will become public and copyable by other exchanges, just like v3 was. Recently, when v3’s license expired, its model was adopted by clone exchanges like Sushiswap, which is one of the reasons that v4 was released at this time. 

Like prior versions, Uniswap v4 gives UNI token holders the option to enable a fee switch, which would allocate some of the trading fees to the Uniswap DAO and consequently the token holders. While enabling this may seem obvious, it comes with several consequences. Not only would it lead to regulatory backlash and the possibility for UNI to be labeled as a security by the SEC, but it would also establish Uniswap as a “late-game” protocol that, much like dividend stocks, focuses on cash flows instead of growth and innovation. Moreover, it would incentivize liquidity providers to move to other exchanges where they get a greater share of the trading fees. The more lucrative decision may be to hold off on the fee switch until there is regulatory clarity and Uniswap has established itself as the sole DeFi DEX worth using.

Uniswap’s continued innovation since its initial release in 2018 has made it a DeFi blue chip and one of the safest Ethereum tokens to hold. V4 continues this trend and provides the infrastructure for developers to create custom plugins and processes on existing liquidity, lower transaction fees, and the long-awaited fee switch option. Though it will still be a few months until V4 is fully released, it will surely be a consequential and exciting upgrade.

By Lincoln Murr

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