Looking back on the innovation journey of DeFi, how did Uniswap evolve from a pioneer to a culmination?

How did Uniswap go from being a pioneer to a culmination in the DeFi innovation journey?

Author: Haotian, Chain News

Uniswap V4 has injected a catalyst into the cold and bleak crypto industry in the bear market. People can’t help but marvel at the paradigmatic power of Uniswap’s framework-style innovation and have confidence in the future DEX’s ability to snatch liquidity from CEX. But whether it is just the culmination of the past five years of DeFi industry innovation, or the many innovative moments on past DeFi protocols, they are also worth sharing and praising.

It all started with those 500 lines of code, as the genes and origins of DeFi, the AMM algorithm of X*Y=K opened the “Cambrian Moment” of the DeFi industry. This algorithm automated asset pricing and exchange, achieved risk hedging and arbitrage mechanisms, achieved open and anti-censorship finance, and most importantly, achieved modular reorganization of financial business, so that finance can be combined and restructured like building blocks, laying the seeds for various future gameplay.

Uniswap V4’s Hooks can add new features and characteristics to the AMM pool, and Singleton contracts change the account framework and transaction logic, which is a framework-style innovation, based on which countless possibilities can be imagined. Let’s take the new features introduced in Uniswap V4 as an example to review the real innovation power that exists in the DeFi world, which starts with Uniswap but is not limited to Uniswap:

1) “Limit orders”: At the end of 2020, dYdX implemented limit orders based on the “Private Order Book” feature of its underlying StarkEx L2 extension protocol (matching transactions in L2 hidden state and presenting the result on the chain). This is very different from the limit order logic implemented under the V3 Concentrated Liquidity model, but the idea of limit orders can reduce AMM trading risks and improve efficiency, which is particularly important in the development process of DeFi.

2) “TWAMM”: In July 2021, Perpetual Protocol launched a time-weighted AMM model, which can adjust the token ratio and price in the asset pool based on recent trading records, enabling AMM to quickly and accurately respond to market price changes. Overall, the introduction of time weighting not only improves price discovery efficiency, but also enhances anti-manipulation capabilities, making it difficult to manipulate AMM pricing through large orders. This is of great significance to the evolution of DeFi mechanisms.

3) “Dynamic fees”: In May 2021, GMX implemented a mechanism to dynamically adjust transaction fees based on market conditions, which greatly improves the competitiveness and pricing efficiency of AMM products. GMX can achieve algorithm-driven dynamic adjustment of transaction fees, which is more sensitive and stable than the user’s autonomous choice of dynamic fees provided by Curve. Uniswap V4 effectively combines algorithm-driven and manual choice to further improve liquidity utilization efficiency.

4) “NFT Injection AMM”: In December 2020, NFTX achieved a deep integration of NFTs and AMMs, allowing NFTs to be traded and priced with high liquidity in AMM pools like ERC20 tokens, thus solving the problem of low liquidity for NFTs. However, NFTX actually converts NFTs into ERC20 tokens and mortgages them to achieve liquidity, while Uniswap V4 directly allows NFTs to participate in liquidity.

5) “Interest-bearing borrowing beyond liquidity range”: In March 2021, AAVE V2 enabled liquidity assets of AMMs to be deposited into Aave lending pools for borrowing, earning additional interest income and undoubtedly improving the efficiency of capital use. The key is that it achieves a combination of DeFi protocols across protocols and mechanisms, opening up ideas for deep collaboration between DeFi protocols in the future.

6) “LP fee automatic reinvestment”: In October 2020, Curve added an auto-compounding mechanism in the V2 version, which can automatically convert the income from trading fees into LP tokens and add them to the LP’s position. However, this mechanism may result in a loss of LP token quantity when facing price fluctuations, which is inevitable even for Uniswap V4.

7) “Macro Contract Management Segmentation Liquidity Pool”: In 2020, Balancer achieved the function of managing segmented liquidity pools through the Vault contract. This reduces the high cost of deploying a large number of single-token pools, and the Vault contract can avoid gas fees generated by duplicate reading and transfer. Uniswap V4’s Singleton is based on the concept of Vault, but does not require all combinations to be defined in advance, making it more flexible.

8) “Introduction of Donate function”: In September 2020, Sushiswap launched the donate function in the V2 version, allowing users to donate tokens to specific liquidity providers as incentives. This is beneficial to attracting and retaining more liquidity providers. Although such mechanisms have certain risks of commercial manipulation, under community drive, they will be a new paradigm for DeFi community construction. In addition, Perpetual Protocol can provide a fully lossless trading mechanism, relying on algorithms and complete pricing to reduce liquidity loss; mStable provides a mechanism for merging cross-chain assets into liquidity, and users’ assets on different chains can be combined into liquidity; Maverick Protocol can define the annualized rate of return based on the user’s locked token period; and there are many similar innovations happening quietly, which may also be adopted by Uniswap in the future.

Uniswap has achieved the prosperity of DeFi, but the combination of DeFi’s innovative microforces has also contributed to Uniswap’s success bit by bit. It is because of the successful or failed exploration of these mechanisms or concepts that the V4 era of Uniswap is so brilliant. These days, while on a business trip to Hong Kong, I see international people rushing along the complex and intricate roads. I am thinking about what Hong Kong means to web3, hoping it will be just like Uniswap to DeFi.