Uniswap v4: The Start of a DeFi Super App
Fri Jun 16 2023
Valora and the Crypto Market
- Valora is an app for sending, swapping, collecting, and growing crypto on the cello blockchain.
- The Empire podcast has Santi and two guests from Blockworks research team discussing the crypto market.
- The sentiment towards crypto is bullish this week despite prices being at an all-time low.
- ETH and Bitcoin are up 50-65% from their lows but could easily go back down again.
- Some traders are still waiting for the market to do something.
Uniswap's Evolution and Features
- Hayden, a non-technical person, built Uniswap after Vitalik's call to action.
- Uniswap is an open-source protocol that anyone can join and get trained in.
- Uniswap is the most widely used protocol in crypto despite initial skepticism from investors about AMMs' efficiency compared to order book models.
- Uniswap V1 and V2 started as an AMM model where anyone can create a liquidity pool for liquidity providers to come in and provide full range liquidity.
- Uniswap V3 introduced concentrated liquidity, which allows for more narrow ranges of liquidity to be chosen, providing better execution for traders but also increasing impermanent loss.
- With the release of Uniswap V4, there is a focus on increasing profitability back to liquidity providers and providing more customizability for these liquidity pools. This includes tapping into MEV leakage from liquidated providers and returning to protocol-only liquidity.
- Uni V2 provided X and Y, while Uni-Solve V3 added price granularity.
- Uniswap's Uni-Solve V3 and V4 provide building blocks for enabling crypto transactions.
- V4 adds time or fee granularity to X, Y, and price granularity.
- Hooks allow for customization at the pool level, giving complete control to the pool owner.
- MEV internalization is possible through app chains like Osmosis, which can capture arbitrage opportunities and provide protocol revenue back to its users.
- Hooks can somewhat internalize MEV and allow for transaction ordering preference, but there are limitations due to being smart contracts rather than baked into the protocol layer.
- Uniswap V4 allows for more customizability on behalf of liquidity pool owners, but with added complexity and unknown long-term effects.
- There is a concern that the introduction of KYC pools on Uniswap could lead to fragmentation of liquidity.
- Uniswap V4 may allow for idle liquidity to be leveraged and used in lending markets, potentially making it a DeFi super app.
- Uni V4 simplifies the process for protocols building on top of Uniswap to deposit liquidity into their own pools.
- The Hulkman smart contract handles logical execution for these protocols.
- There is a potential risk with greater customization flexibility if faulty hooks are built without proper vetting.
- Uniswap is transitioning from a platform for liquidity and trading to a developer platform for infrastructure and tooling.
- Developers can now easily build on top of Uniswap using hook contracts instead of building their own decks or AMMs.
- Liquidity provisioning may become more complicated with the introduction of hooks, potentially favoring professional liquidity providers over individual LPs.
Uniswap's Impact and Challenges
- Providing liquidity on Uniswap requires professional expertise and funds.
- Impermanent loss is an opportunity cost that some users may feel more than others.
- Uni V4 potentially allows liquidity provision across multiple invariants, which could democratize market making for all users.
- UNIV4 documents suggest that multiple and various invariants will be allowed, opening up opportunities for passive retail users to provide liquidity.
- Liquidity may not migrate from Curve to UniSwap with the launch of V4 as Curve still has its role in DeFi.
- Uniswap is a market leader that integrates frequent competitors into its protocol and launches them as a platform model.
- The licensing component of Uniswap's open-source narrative is restrictive, leading to criticism.
- Crypto creates monopolies over time due to brand power and advantage.
- Uniswap has liquidity, brand recognition, and users that make it hard to create successful forks or copies.
- In a multi-chain thesis world, the role of Uniswap in bridging liquidity and connectivity is uncertain. Asynchronous cozability may be good enough for most use cases.
Interoperability and Uniswap's Expansion
- Flash loans are not seen as a significant financial innovation.
- Uniswap is deploying across all Layer 2 solutions in the short term.
- The entire crypto space needs to converge on one interoperability standard, which is currently lacking and holding back L2 roadmap progress.
- IBC (Inter-blockchain Communication) is a battle-tested interoperability standard with the least trust assumptions possible and could be helpful for Ethereum ecosystem communication between L2s.
- The industry needs to converge on an interoperability standard, and IBC is the best way to do that.
- Communities are unlikely to leave their ecosystems, so bridging to them through an interoperability standard is necessary.
- Uniswap will have official front ends on every L2, able to talk asynchronously but ultimately abstracting away the multi-chain thesis.
- Dominating the front end and user brand should be the go-to market strategy for Uniswap's growth team, plugging in with IBC wherever liquidity is routed most efficiently.
- The readiness of IBC (Inter-Blockchain Communication) is being discussed, with some teams doing great work to make cross-chain swaps seamless.
- Within the next 12 months, there will be interesting developments in IBC and the entire cross-chain experience will become more seamless.
- There has been a lot of IBC abstraction and cross-chain abstraction done over the past three to six months.
- It may take another six months until app chains deploy official front ends on individual generalized smart contract platforms in Cosmos.
- People outside the Cosmos ecosystem are ignorant about how far IBC has come over the past six months.
- As use cases get built out, real users won't care about their affiliation to Ethereum or Solana or Cosmos; they will care about user experience.
- The timing of Unity V4's release is being questioned, as well as how it will phase out V3.
Migration and Decision-Making
- The migration from V3 to V4 will likely be slower than the migration from V2 to V3 due to the complexity of deploying concentrated liquidity pools.
- Some protocols may build their own smart contracts for hooks or use hooks as a service instead of writing additional complexity for liquidity pools.
- Incentives may be necessary to encourage users to migrate, and Uniswap has been conducting Liquidity Mining/Incentive Studies with optimism.
- Protocols may consider donating to specific in-range liquidity providers and structuring incentives through hooks.
- The addition of a new layer of complexity in decision-making for liquidity providers and token holders makes it harder for them to decide.
- There may be an argument for protocol on liquidity instead of paying liquidity providers, which could lead to digital monopolies over time.
- Unique token holders potentially holding a P switch gives them power and makes the unique token valuable.
- The addition of this feature does not impact whether or not Uniswap will add a piece which or not.
- Uniswap's brand has power and authority.
- The speakers discuss their follower counts on social media.
- The speakers are discussing a competition to see who can gain more followers between now and permissionless.
- They propose a bet where the loser will have to shave their head or beard.
- They acknowledge that it is not a fair bet, but agree to come up with something in the next week.