Uniswap V4: A Saga of Hooks, Bidding Farewell to Fork Swap

YBB

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YBB Capital

11 min readJun 28, 2023

Author: YBB Capital Researcher Ac-Core

Word Count: Over 5500

Guide

Compared to the V3 version released in May 2021, which had a two-year gap, V4 offers enhanced asset composability and significantly reduces the gas fees required for liquidity provision and trading.With the support of the new feature called Hooks, developers no longer need to develop xxSwap. Instead, they can customize liquidity within the Hooks, add frontend pages, and incorporate elements that align with their specific requirements to create a “designated venue.” Simultaneously, there is no need to worry about insufficient liquidity in the “designated venue.”Let’s explore how Uni V4 is leading DeFi from the “Lego era” into the “era of countless possibilities.”

Uniswap V4 — Rare True Innovation in a Bear Market

The iterative upgrades of Uniswap have showcased the infinite potential of the DeFi world, as it has remained true to the original intention and rules of X*Y=K throughout.The innovation of Uniswap V4 primarily focuses on providing more customizable trading logic,improving gas efficiency and developer experience, as well as enhancing the convenience and efficiency of transactions.Compared to using V3, both developers and users can benefit from a more open, flexible, and efficient automated market-making service. The following section will provide a comprehensive introduction to the upgrades in V4, with a focus on the two most significant changes: Hooks and Singleton.

The game-changing introduction: Hooks

The core feature of Uniswap V4 — Hooks, allows every developer to create a customized DEX that meets specific scenario requirements, enabling them to build their own “Lego blocks.”Hooks are an important concept introduced in Uniswap V4. They are plugins used for customizing liquidity pools, exchanges, fees, and interactions with liquidity providers (LPs).Through the Hooks mechanism, developers can execute specific actions at critical moments in the lifecycle of a liquidity pool, such as before/after a swap or before/after a change in LP position.

Moreover, Hooks are also smart contracts that interact with the core contracts of Uniswap V4. They can be executed at various “key points” within the liquidity pool (such as before

/after a swap or during LP deposits/withdrawals), allowing developers to define and execute custom logic in a flexible manner.Hooks can be bound to specific liquidity pools, allowing control over the behavior and interactions of the pool. For instance, developers can create a Hook that verifies specific conditions before each swap or executes additional actions when there is a change in LP position.

Through Hooks, pool creators can adjust pool parameters and introduce new features to the AMM. It even allows for the implementation of various DeFi strategies within Uniswap,ultimately benefiting LPs and swappers even more.It’s not difficult to imagine that the introduction of Hooks will bring greater flexibility and innovation opportunities for developers. They can create unique liquidity pools based on their needs and strategies, providing more innovative and personalized trading experiences. For example:

TWAMM: Developers can utilize the Hooks mechanism to create liquidity pools that support the TWAMM strategy, allowing for the gradual execution of large orders over a period of time, thereby achieving a more balanced distribution of trades.
Dynamic Fees: Through Hooks, liquidity pools can dynamically adjust fees based on market volatility or other input parameters to better adapt to market conditions.
On-chain Limit Orders: Hooks can facilitate the creation and execution of limit orders on-chain, allowing users to trade at specified prices.
Interaction with lending protocols: Developers can use Hooks to automatically deposit funds beyond the liquidity range into lending protocols, maximizing the utility of the funds.

Meanwhile, Uniswap V4 currently supports eight types of Hooks callbacks as illustrated in the diagram below. These Hooks can be executed before the start of a transaction and after the transaction is completed, enabling the functionality of on-chain limit orders.In practical implementation, you can set a limit price before the start of a transaction. Then, after the transaction is completed, you can check if the limit price is met. If it is met, the transaction is executed. If it is not met, the transaction is canceled.

Another Hooks of V4 — “Action Hooks”

In addition to Hooks, there is another component called “Action Hooks” in Uniswap V4. It can trigger contract execution only when certain Flag conditions are met, allowing it to invoke logic during contract execution.Referring to the flowchart below, let me explain. Before our asset exchange, the contract checks the Flag to assess the volatility of the liquidity pool. If the liquidity is high, the Flag becomes True, and our Hooks are executed. If the liquidity is insufficient, the Flag becomes False, rejecting the Hooks and maintaining the interaction unchanged. By executing the “Action Hooks” as illustrated in the diagram below, a more gas-efficient method is enabled to execute the required Hooks. Next, we will introduce the Singleton structure and Flash accounting, which will provide a more cost-effective experience for asset exchanges and contract deployments in V4.

The new Singleton structure is introduced in Uniswap V4.

In previous versions of Uniswap, the Factory-Pool contract architecture has been widely used and adopted by numerous DEXs and derivatives in the DeFi world. However, in the V4 version, it replaces the Factory-Pool architecture with a new contract structure called “Singleton.”In V3, each time a liquidity pool was created, it required deploying an entirely new contract, which incurred significant costs. However, in V4, the Singleton structure stores all liquidity pools in a single contract, minimizing the gas consumption for creating liquidity and cross-chain pools (contracts). This eliminates the need for token transfers between different contracts during token swaps, resulting in up to a 99% reduction in gas fees compared to V3.

This Singleton architecture is also equipped with a brand-new “Flash Accounting” system. In V3, asset transfers between liquidity pools were required at the end of each interaction. However, in V4, this system only transfers assets on the “net balance.” Each operation (swap/deployment) only results in changes to the internal balance, represented as a unit called “delta.” At the end of a swap, the net “delta” balance is settled after a series of calculations, resulting in a more efficient system that offers additional gas savings for Uniswap V4.

With the help of “Singleton” and “Flash Accounting,” Uniswap V4 supports Native ETH. Users can directly trade using Ether (ETH) without the need for additional conversion steps, thereby improving the convenience of transactions and saving on gas fees. This tight integration of Uni and ETH ecosystems serves to benefit the Ethereum network.

In terms of contract structure, there have been significant changes in the storage and encapsulation of liquidity positions in V4. In V2, liquidity was distributed across the entire range (as shown in the diagram above), so the Uni protocol used homogeneous tokens (ERC-20) as liquidity tokens. In V3, with the introduction of concentrated liquidity, non-fungible tokens (ERC-721) were used to represent liquidity positions. In V4, we speculate that liquidity positions will not be tokenized but instead managed based on the addresses of each wallet.Additionally, the inclusion of EIP-1153’s “transient storage” in the Cancun upgrade also benefits the V4 system, aiding in further cost optimization.

How to enable custom Oracle and distribute internalized MEV to LP holders

UniSwap V4 is a decentralized trading protocol designed to facilitate trustless token exchanges on the Ethereum blockchain. It aims to provide higher liquidity and an improved trading experience through the use of a custom Oracle implementation and an internalized MEV (Miner Extractable Value) distribution mechanism. To enable a custom Oracle implementation and distribute internalized MEV to Liquidity Providers (LP holders), the following steps can be considered:

Designing a custom Oracle: You need to develop an Oracle that can provide customized price data. An Oracle is a contract that retrieves external data and provides real-time market information to smart contracts. Based on your specific requirements, you can develop an Oracle contract that is tailored to fetch data based on trading pairs, time intervals, or any other relevant factors.
Implementing internalized MEV distribution mechanism: MEV refers to the profits generated in blockchain transactions due to changes in transaction order. UniSwap V4 utilizes an internalized MEV distribution mechanism to directly distribute these profits to liquidity providers. You can design a mechanism that ensures when MEV occurs, a portion of the earnings is directly allocated to the corresponding LP holders.
Contract integration and deployment: Integrate the customized Oracle and internalized MEV distribution mechanism into the smart contracts of UniSwap V4. Simply modify and expand the relevant contracts to support these functionalities. Ensure adherence to best security practices during contract development and modification, and perform thorough testing and auditing.
Notification and incentive mechanism: Promote this new feature to liquidity providers and provide them with appropriate incentives. Communicate with users through social media channels or other means to make them aware of the benefits of the new customized Oracle and internalized MEV distribution mechanism.
Monitoring and improvement: After deployment, closely monitor the operation of the system. Monitor the effectiveness of transactions and MEV distribution and make improvements as needed. Feedback and engagement with the community are crucial for further optimizing this mechanism.

Advantages of customized liquidity pool

Uniswap V4 introduces the concept of customized liquidity pools. However, customization is recommended to be built upon centralized liquidity. This shift not only affects the development landscape of Fork Swaps and the purpose of aggregators but also brings many advantages to liquidity providers and traders.

Expanding options for liquidity providers: Traditional AMM models often have fixed rules and parameters, which limit the choices for liquidity providers. However, Uniswap V4 allows for customized liquidity pools through the Hooks mechanism, enabling liquidity providers to create different types of liquidity pools based on their preferences and strategies. This allows for a variety of liquidity pools of different scales to emerge in the market, providing users with more choices and flexibility.
Reducing costs and improving efficiency: The architecture of Uniswap V4 centralizes all liquidity pools into a single smart contract by introducing the “Singleton” contract. This architecture reduces transaction costs, improves transaction efficiency, and simplifies contract deployment and maintenance. Additionally, customized liquidity pools can also set more suitable fee structures based on specific needs to meet the requirements of different users.
Providing a wider range of trading strategies and risk management tools: Customized liquidity pools offer traders more opportunities for trading strategies and risk management tools. For example, by supporting TWAMM (Time-Weighted Average Market Making) strategies, large orders can be executed gradually over a period of time, reducing the impact on market prices. Additionally, customized liquidity pools can be integrated with other DeFi protocols, such as lending protocols and custom oracles, providing users with a more comprehensive trading solution.
Enhancing flexibility and creativity: Customized liquidity pools provide liquidity providers with greater flexibility. They can customize the management of their liquidity based on market demand and strategies. This flexibility and potential for innovation can incentivize more liquidity providers to participate, offering traders a diverse range of liquidity options.

Questions worth thinking about

1. What problems does Curve solve for Uni V3?

The Uni V3 AMM model is based on the X*Y=K trading model. In the process of actual LP composition, we may find that in extreme market conditions, there is a risk of incurring uncompensated losses in total value, as well as the risk of the exchange rate of the liquidity pool exceeding the range. Curve and Uniswap V3 are two different decentralized trading protocols, each with its own set of challenges and goals.Compared to V3, Curve addresses the following issues:

Profiting from low-liquidity ranges: Uniswap V3 concentrates liquidity within specific price ranges, as influenced by its AMM model, while other price ranges lack sufficient liquidity. This results in higher trading costs and limited liquidity when trading across larger price ranges. In contrast, Curve focuses on trading between stablecoins and increases liquidity within price ranges by utilizing adaptive liquidity curves. This means that users can trade stablecoins with lower slippage across larger price ranges.
Low-cost trading: As Curve focuses on trading between stablecoins, which involve assets with fixed price relationships, it employs specific algorithms and strategies to reduce slippage and costs in transactions. This allows users to engage in stablecoin trading at more competitive prices.
Improved price discovery: Curve provides greater liquidity over a wider range, particularly when trading between stablecoins, allowing for better price discovery. This means that users can obtain more accurate market prices for stablecoins, enabling them to make better-informed trading decisions.
Efficient stablecoin trading: Curve employs specially optimized algorithms and liquidity curves to facilitate efficient stablecoin trading. This allows users to exchange stablecoins quickly and securely with minimal price slippage or costs.

2. Use Uni V2 to create a dual-token economic model DEX: Camelot

Camelot, formerly known as Excalibur, was originally a project launched on the Fantom network. However, it faced a collapse after adopting UST as its stablecoin. It later migrated to the Arbitrum ecosystem and was rebranded as Camelot. Unlike GMX, Camelot focuses more on providing liquidity guidance for new projects. Its main innovative mechanism is the permissionless “Nitro Pools,” where projects have full control over incentive measures to establish the desired liquidity type for their own development.

It is important to emphasize Camelot’s dual-token economic model, which combines the decentralized trading protocols of Uniswap V2 and Curve. It supports trading pairs involving both volatile and stable tokens, distributing liquidity across the entire range from zero to infinity. Most importantly, it allows project teams to set the ratio of transaction fees based on market conditions and specific protocol requirements. This enables the management of dynamic and targeted transaction fees.

In addition, Camelot offers a customizable Launchpad that operates in a permissionless manner, allowing projects to issue tokens and attract more liquidity. Moreover, each project launching or collaborating on the Camelot AMM can configure specific trading fees for its LPs, tailored to its own liquidity strategy and requirements.

To sum up the above summary

Uniswap V4, as a significant upgrade to decentralized exchanges, introduces the concepts of Hooks and customizable liquidity pools, bringing greater flexibility and creative possibilities to the DeFi ecosystem. The Hooks mechanism allows developers to create unique liquidity pools based on their specific needs and strategies, offering a wide range of trading strategies and risk management tools. Customizable liquidity pools expand the options for liquidity providers, reduce costs, improve efficiency, and provide a broader range of trading strategies and risk management tools.

However, the emergence of V4 will undoubtedly rebuild the underlying foundation of DeFi. It provides a massive liquidity base that developers can utilize to deploy their own Hooks or ecosystems. Developers can access high liquidity without relying solely on single-function xxSwap platforms. This allows for the development of multifunctional ecosystems by a greater number of developers on the Uniswap platform. The combination of Hooks and Singleton, along with the advantages of Curve and Camelot, may influence the future development trends of DeFi. Let us wait and see.

About YBB

YBB is a web3 fund dedicating itself to identify Web3-defining projects with a vision to create a better online habitat for all internet residents. Founded by a group of blockchain believers who have been actively participated in this industry since 2013, YBB is always willing to help early-stage projects to evolve from 0 to 1.We value innovation, self-driven passion, and user-oriented products while recognizing the potential of cryptos and blockchain applications.

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