Total Volume + Fees
After last week's surge in crypto, prices are becoming stable however there has been a noticeable drop in trading volume. Whether or not we are on the cusp of a bull market is debatable, however, LP fees are still holding strong.
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Uniswap V4
Today let's take a deep dive into what Uniswap V4 entails for LPs. We are going to take a look at some of the most innovative aspects and try to address some pitfalls and then how periphery Uniswap projects are trying to mitigate it.
In July,2023, the Uniswap team published the V4 whitepaper. It is a monumental change as compared to the fixed template for pool creation from V3. Moreover, it reintroduces native ETH support which means an additional slash in gas prices for not needing to convert your ETH to ERC20 standard (WETH)
We are curious as to what you think of Uniswap V4.
Let us know what you think by replying to this email
with a number corresponding to your prediction and we will add the results to our next newsletter!
1) Uniswap V4 will be a Game-Changer and will see rampant adoption!
2) V4 will fizzle out and V3 will continue to dominate.
3) V3 and V4 will co-exist and compete for liquidity.
Hooks: The Swiss Army Knife of Smart Contracts 🔗
In his announcement for UniV4, Hayden Adams described V3 as too opinionated and hard to develop on. Thus the 'Hook' was born.
Hooks are the cornerstone of UniV4. They enable third party devs to make their own strategy and inject their own functions to cater to every flavor of Defi, making oracles and smart orders like limit orders possible. Developers can be as as expressive with their smart contracts as possible.
One example of an oracle that mitigates the risk of price manipulation is the truncated-oracle-hook. It will slowly increase the price of an asset and hinders whales from profiting off of sudden price changes.
Hooks are highly customizable and the whitepaper highlights four distinct areas where they can be incorporated.
Initialization Hooks: Modify setup and post-setup actions of liquidity pools.
Position Modification Hooks: Insert code around liquidity adjustments for enhanced control.
Swap Hooks: Implement pre and post swap operations for additional swap behavior.
Donation Hooks: Customize the handling of donations to liquidity providers before and after the transaction.
There are concerns within the community that the modifyPosition functions and other permissions open doors for bad actors to drain liquidity from LPs. Laymen would need to be more cautious. While it is not confirmed as of yet, there are expectations that Uniswap would only route through whitelisted pools which could consequently rule out malicious pools for LPs.
Apart from that, the Uniswap Foundation is known for enabling the ecosystem to come up with solutions on it's own. For security and identifying bad actors, BlockSec announced their static analyzer for pool security for this very purpose.
Another concern for V4 came from @atiselsts_eth, where he makes the case that since oracles are now pushed to hooks on v4 which consumes more gas, swappers will prefer the cheaper options leading to more LPs flocking to those very pools. These are evolving conversations and we will be keeping track of what solutions are devised to overcome them.
Why LPs should care about V4?
Uniswap v4 is set to enhance areas where v3 fell short and it attempts to do so by encouraging pool creators to fiercely compete for LP deposits.
Singleton Architecture
V4 will hold the pools in one singleton contract, which will provide important gas savings because swaps will no longer need to transfer tokens between pools. Gas savings on multi-hop transfers!
LPs are the focus
Currently, passive LPs are at the short end of the stick in AMMs. If LPs are not center of the conversation in a two sided marketplace where their contributions are not rewarded, they will simply leave making liquidity a worse problem. However with V4, pool managers will compete for LP contributions making them front and center of the AMM conversation.
Previously in one of our editions we exhibited the Diamond Fee Hook from Arrakis finance that is meant to mitigate LVR. Similarly, as we see pools compete for liquidity, those pools that capture the most amount of MEV that might be leaking, will become the choice for LPs.
Complex Transaction Support
Hooks now enable dynamic fees which allows pools to escape the static tier fee system and adjust their fees based on market conditions, making it smoother to execute advanced trades like TWAMM, Limit/Stop Loss orders right within Uniswap.
Furthermore, certain pools/hooks can incentivize LPs by offering rebates for lost MEV like the MEVictim Rebate hook.
Since hooks can take the liquidity and do pretty much anything with it, it can be speculated that swapping could become just one of the use cases driving liquidity in the pool.
In the future, we will be taking deep dives on how to locate relevant and profitable pools.
The rate at which we are going to see innovation here would be unprecedented. For example just recently, Brevis announced a "VIP trader discount" hook for V4 commonly seen on CEXs. We are now at a point where DEXes can match and even surpass the functionality afforded by centralized exchanges.
Automation
Due to the custom nature of pools, automated liquidity managers would have to evolve and offer much more than rebalancing features. Since now liquidity can be automated within the hook, rather externally, it alleviates certain risks that come with third party liquidity managers.
One example of this is Axiom LP management, A Uniswap v4 hook and position manager to enable trustless LP modification. It can automatically adjust your position, something that currently has to be done manually or with third party tools.
We expect services that allow for automated liquidity management to become more innovative and even launch their own hooks rather than having LPs deposit their LP tokens.
One of our favorite automation tools is Aperture Finance, an automated tool to keep your concentrated position where all the action is happening and even take your LP fees and reinject them into your re-balanced position.
If you want to qualify for a potential airdrop and other rewards then use our link to sign up to their platform and forget about worrying about manual rebalancing! Also read our in-depth blog on how to use Aperture.
Uniswap V4 roll out and adoption
We are now in Q4 2023. In the past months, speculation pointed towards the Uniswap V4 roll out to be before 2024.
Recently, Uniswap Foundation teamed up with Conduit to launch a testnet and deploy Uniswap V4. All of this signals that V4 is now close to launch!
The gas-saving cornerstone of Uniswap V4, the singleton contract, is an evolution of the "flash accounting" concept. This pivotal feature awaits the eagerly anticipated Ethereum Cancun update, which has now scheduled its inaugural testnet deployment for late November.
We can infer from this that Uniswap V4 will either get launched late December this year or may very well be into early Q1 2024.
We are just setting out on our Uniswap V4 strategy. Expect us to cove a wide range of hooks and other projects that are going to level up your LP game. Remember we are always looking for suggestion so do reply to this email with any query or request and we will get back to you!
Top Pools of the Week
High-Risk
CAL/ETH in the exotic pairs category for the ones feeling adventurous.
Low-Risk
ETH/IMX for the balanced swimmers.
Safe
ETH/USDT in the 5bps category for the cautious paddlers.
Hope you enjoyed our V4 primer. Tune in next week to get an update of the LP landscape!