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    Good Game

    How Will UniswapX and UniswapV4 impact DeFi?

    Tue Jul 25 2023
    UniswapAMMDEXMarket MakersLiquidity ProvidersGas EfficiencyCross-Chain TradingDecentralized Trading

    Description

    Uniswap, a popular AMM and DEX, aims to target market makers and liquidity providers with its latest version, Uniswap V4. The introduction of hooks in V4 offers more flexibility for market makers, while fee reduction in deploying strategies makes it cheaper for them. Uniswap is also focusing on developers building implementations using hooks. Gas efficiency improvements and scaling solutions play a crucial role in improving efficiency and reducing value leakage. Cross-chain trading and future developments are important areas of focus for Uniswap, as it aims to be the best place to trade every asset.

    Insights

    Uniswap V4 targets market makers and liquidity providers

    Uniswap V4 introduces hooks for more flexibility and fee reduction for market makers.

    Gas efficiency improvements are crucial for Uniswap's ecosystem

    Reducing gas costs leads to more arbitrage opportunities and routing across pools.

    Cross-chain trading is becoming increasingly important

    Uniswap is focused on supporting tools and mainnet as well as various sidechains.

    Uniswap aims to be the best place to trade every asset

    The platform is exploring other decentralized exchanges and optimizing trading across different pools.

    Hooks provide more value to liquidity providers

    Uniswap aims to make liquidity provision more profitable with the introduction of hooks.

    Uniswap Access addresses losses by traders

    The goal is to reduce profit margins of informed flow and extract more optionality.

    Decentralized trading needs improvement for mass adoption

    General usability of DeFi should be improved to attract more users.

    Uniswap X may put pressure on competitors in the aggregation layer

    Uniswap X competes with other aggregators like One Inch and aims to target every layer of competition.

    Competition in the DeFi space is fierce

    DEX wars are fought on different fronts, with the end goal of giving users the best prices.

    Uniswap's role in the future of trading

    Uniswap aims to capture the entire space and have more value built on top of it than its own platform.

    Chapters

    1. Uniswap Overview
    2. Competition and Aggregation
    3. Uniswap Before and Design Space
    4. Market Makers and Liquidity
    5. Liquidity Providers and Trading Strategies
    6. Gas Efficiency and Scaling Solutions
    7. Cross-Chain Trading and Future Developments
    8. The Future of Trading and Uniswap's Role
    9. New Features and Cross-Chain Trading
    10. Flexibility and Value for Liquidity Providers
    11. Uniswap Access and DEX Wars
    12. Decentralized Trading and Future Developments
    13. Market Makers and Uniswap V4
    14. Uniswap X and Liquidity Providers
    15. Competition and Uniswap's Role
    Summary
    Transcript

    Uniswap Overview

    00:00 - 07:25

    • Uniswap is currently considered an AMM and a DEX
    • Dan Robinson, head of research at Paradigm, co-wrote Uniswap V2, V3, and V4 white papers
    • Evgeny Gavoy, from Wintermute, has experience in traditional market-making and DeFi
    • Uniswap V4 aims to target market makers and liquidity providers
    • Hooks in Uniswap V4 offer more flexibility for market makers
    • Fee reduction in deploying strategies makes it cheaper for market makers
    • Uniswap is also focusing on developers building implementations using hooks
    • Similar to Metamask, Uniswap wants to enable billion-dollar outcomes with hooks

    Competition and Aggregation

    07:02 - 13:50

    • The impact of co-creating with Snap and Zaps is yet to be determined.
    • Developers building strategies on top of Uniswap may struggle against professional market makers like WinterMute and Jump.
    • Uniswap X is competing with One-inch Fusion and CalSwap in the battle for being an aggregator.
    • DeFi protocols, once reaching critical mass, start competing with each other.
    • Uniswap Wallet makes in-app swapping easy and accessible for retail traders.
    • Every DeFi protocol is trying to fight each other on multiple fronts, including wallets, aggregation layers, and AMM layers.

    Uniswap Before and Design Space

    13:35 - 20:29

    • Uniswap before aims to extend the functionality of Uniswap by allowing users to build any kind of DEX or AMM on top of the concentrated liquidity strategy.
    • The introduction of hooks in Uniswap before enables developers to add extra logic to the beginning or end of trades or liquidity provision, opening up design space for customization.
    • All Uniswap before pools are jammed into one contract, making it more efficient and cost-effective to run multiple pools.
    • The goal is to make Uniswap more permissionless and enable founders to build interesting products around its liquidity.
    • Uniswap v3 added multiple fee tiers and governance control over enabling more tiers, showcasing the potential for innovative ideas from outside contributors.
    • Uniswap before opens up a whole new design space and possibilities for building on top of it.

    Market Makers and Liquidity

    20:00 - 26:54

    • It opens up new design space and possibilities for taxes, but also introduces the risk of market fragmentation.
    • The main challenge is determining which hooks should be whitelisted or deemed safe to use.
    • Hook safety is a concern, but the contract provides fine-grained permissioning for what a hook can do.
    • The architecture and router of Uniswap can enforce not losing money without needing to understand the logic of pools.
    • Liquidity fragmentation occurs due to gas costs and potential competition between hooks with lower fees.
    • The goal is to discover where liquidity wants to go and have it pool in a successful strategy.
    • A competitive landscape with multiple market makers providing the best price is desirable.

    Liquidity Providers and Trading Strategies

    26:27 - 33:12

    • There may be multiple liquidity providers on the same pool, each implementing their own strategy.
    • Different designs of pools with different hooks enabled can play a big role for traditional market makers.
    • Gas efficiency improvements coupled with other improvements might make it more attractive for market makers to provide liquidity.
    • The concept of paying a fee or rent to LPs for the option to arbitrage prices is an interesting idea.
    • Charging a premium for the option to trade against liquidity in a block could benefit LPs and still allow trading without fees.
    • A variant of this idea is auctioning off the right to receive all fees from a pool, which could be advantageous if done by an off-chain agent.
    • Paying a rent fee to set fees and get the free option right to trade against LP providers could be interesting for trading firms.

    Gas Efficiency and Scaling Solutions

    32:42 - 39:57

    • Trading on DEXs like Uniswap currently doesn't add much value for trading firms.
    • Firms with better understanding of options and utility in the market would have an advantage in trading on these platforms.
    • Contract deployment fees on Uniswap V3 are estimated to be around 99% cheaper than before.
    • Swapping fees will also be significantly reduced, but the exact numbers depend on code finalization and an upgrade to the EVM.
    • Gas savings come from not having intermediate ERC-20 transfers when trading with multiple pools, saving around 5-10k per pool.
    • The current cost of contract deployment on Uniswap V3 is in the millions of gas, which will go down to tens of thousands.
    • Gas efficiency improvements will still be relevant even if all trading moves to layer twos like Arbitrum and Optimism.
    • Efficiency is important regardless of the platform, and reducing gas costs can lead to more arbitrage opportunities and routing across pools.
    • There are potential ways to achieve significant gas cost improvements by adopting a different architecture or not using UVM.
    • Uniswap has been seeing impressive trading volume on layer twos, but there are no specific plans yet for further expansion into non-EVM layer twos.
    • Reducing gas costs is a step towards addressing value leakage caused by high emissions action costs and leverage rates during arbitrage.
    • Layer twos and scaling solutions will play a crucial role in improving efficiency and reducing value leakage in Uniswap's ecosystem going forward.
    • Uniswap aims to have synchronous DEXs on every layer two platform while also enabling cross-platform trades between rollups through partnerships like Conduit Chain.

    Cross-Chain Trading and Future Developments

    39:28 - 47:07

    • Cross-chain trading is becoming increasingly important in the cryptocurrency space.
    • The firm is focused on supporting tools and mainnet as well as various sidechains.
    • There is interest in exploring other decentralized exchanges like spot decks and derivatives.
    • The GIDX experiment is seen as a proper decentralized experimentation station.
    • Uniswap aims to be the best place to trade every asset and requires work at the UX layer.
    • Most of the volume on Uniswap comes from products integrated by other platforms.
    • Aggregators like One Inch play an important role in optimizing trading across different pools.
    • There is room for products that make trading easier and cater to different user experiences.
    • AMMs were designed due to gas constraints, but if gas was free, order books would be preferred by market makers.
    • Uniswap could evolve into an order book over time, depending on market needs and asset types.

    The Future of Trading and Uniswap's Role

    46:42 - 53:39

    • The central limit order book is not the end state of history in decentralized finance.
    • Tratify offers different ways to trade, including order books, dark pools, auctions, RFQs, and OTC trading.
    • RFQs and aggregators are expected to be the future of retail-facing apps in DeFi.
    • Complexity in a market benefits market makers by allowing for more interesting strategies.
    • There is a trend towards becoming proposers and validators in one physical location to reduce latency.
    • Swap acts as an aggregator using signed orders instead of transactions on Uniswap.
    • Aggregators are like intent-based architectures that source liquidity cross-chain.
    • The architecture of Swap is relatively simple and includes features like Dutch orders for competitive fills.

    New Features and Cross-Chain Trading

    53:10 - 1:00:04

    • Uniswap is introducing new features to make competitive orders, including Dutch orders and the ability to set the initial price using any method.
    • Cross-chain trading on Uniswap is being developed, allowing users to trade assets between different chains seamlessly.
    • The cross-chain trading process involves signing an order on the source chain, having a filler fill the order on the destination chain, and then claiming the user's asset.
    • The messaging protocol used for cross-chain trading can utilize any bridge, such as Chainlink or Layer Zero.
    • Wintermute is interested in becoming a filler for cross-chain trading on Uniswap.
    • MEV protection and no cost for failed transactions are important features of Uniswap's new design.
    • MEV protection ensures that leftover MEV is returned back to the protocol.

    Flexibility and Value for Liquidity Providers

    59:40 - 1:06:30

    • Working with sign doors provides more flexibility than transactions
    • Future possibilities include batch auctions, RFQs, and dark pools
    • T1's time-weighted average market maker allows expressing orders over time
    • Passive liquidity providers benefit from non-aggregatable flow
    • Impermanent loss on Uniswap V3 varies by pool, but most liquidity providers lose money
    • Competition for retail volume on Ethereum leads to profitability for some liquidity providers
    • Hooks aim to provide more value to liquidity providers in the long run

    Uniswap Access and DEX Wars

    1:06:02 - 1:11:57

    • Uniswap Access aims to address losses by traders and provide optimal execution for swappers.
    • The goal is to solve problems for both equity providers and swappers simultaneously.
    • Uniswap Access aims to reduce profit margins of informed flow and extract more optionality.
    • The hope is that Uniswap can capture the entire space and become the best place to trade.
    • There are DEX wars fought on different fronts, with the end goal of giving users the best prices.
    • Wallets play a significant role in trading and improving user experience.
    • MEV is where most value leaks out of the system, so minimizing it is crucial.
    • Hooks present an opportunity for founders to build in the space, similar to the iPhone's app store.
    • The aspiration is for Uniswap to have more value built on top of it than its own platform.

    Decentralized Trading and Future Developments

    1:11:36 - 1:18:27

    • Decentralized prep trading is important
    • Invested in the idea of XMOS and excited about that team
    • Sound Perps are better for derivatives
    • Interested in verticalness protocols to replace articles and support longer tail assets
    • Treasury returns on chain would be beneficial for real-world assets
    • Desire for a stablecoin design that works on chain and is decentralized
    • General usability of DeFi needs improvement for mass adoption
    • Expect incumbents to be dethroned by better products when more users enter the crypto space

    Market Makers and Uniswap V4

    1:18:03 - 1:25:42

    • AMMs in V3 don't provide enough flexibility for market makers to build profitable strategies, but hooks in V4 might enable that.
    • Impermanent loss studies show that makers lose money over time on V3, especially in big pairs like ETH/USDP.
    • Dan is unsure why people still provide liquidity on V3 if they're not making money as makers.
    • Hooks could be used to return profits back to the makers and make them whole from impermanent loss.
    • V4 offers more flexibility for professional market makers to withdraw liquidity at the right time.
    • Gas improvements and hook architecture make it more opportunistic for market makers to join Uniswap.
    • Uniswap X is directly competitive to CalSwap and similar to One Inch Fusion, where fillers or solvers take the other side of trades off-chain before settling on-chain in Uniswap AMM.

    Uniswap X and Liquidity Providers

    1:25:20 - 1:32:56

    • UNOSOP LPs will lose even more money with UNOSOP X
    • The fillers and solvers have first look at the flow, making the leftover flow more toxic
    • The toxic flow could end up on centralized exchanges or the UNOSOP AMM
    • Retail traders often lose money while sophisticated traders like Citadel profit from their flow
    • Cross-chain MEV could be captured by the fillers in UNOSOP X
    • Spreads are high for cross-chain trades, making traditional XOR trading more favorable
    • Uniswap X may put pressure on competitors like Macha and One Inch in the aggregation layer
    • Uniswap is targeting every layer of competition before a potential bull market

    Competition and Uniswap's Role

    1:32:34 - 1:35:35

    • As the aggregator layer, wallet layer, and liquidity layer
    • One inch was only as the aggregation layer
    • They tried the AMM layer but struggled to get liquidity on some pools
    • Uniswap has more liquidity than One inch
    • Uniswap is primarily focused on price and best execution
    • The question is whether Uniswap will cannibalize One inch and Matcha
    • Uniswap is launching wallets and Uniswap X and AMM V4
    • It's difficult for DeFi startups to compete with incumbents due to distribution advantage
    • Panda and Tokenize Yield are making a comeback in DeFi
    • Liquid staking is an interesting area to watch
    • No specific takeaways from Uniswap or Ava in this regard
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