UniSwap v4: How The Flagship DEX Could Further Innovate in DeFi

Uniswap has long positioned itself as one of the most popular and innovative exchanges in DeFi. It’s also one of the oldest decentralized exchanges (DEXs) on Ethereum. But it’s not just a pioneer: it continued to innovate with every new version, and now, Uniswap v4 could be on the horizon.

For context, if this platform is new to you, here’s its market dominance:

Arguably DEXs are more competitive than CEXs, yet Uniswap keeps a steady 50% of trading volume including all major blockchains. But will it maintain its dominance from 2023 and on?

That’s why here we’re discussing Uniswap v4, the features you could see, release data, and how to ancipate.

Quick Takes

• While unconfirmed, there’s likely a Uniswap v4 in development because: it’s been years since the last major update, the v3 BSL has expired, and there now more competitors that could disperse the platforms liquidity and dominance.

• Uniswap has already upgraded the v3, launched a mobile version, and added BnB-blockchain swaps. But they haven’t yet announced the Uniswap v4 release date.
• Uniswap has to renew the business source license or speed up the v4 to avoid losing market relevance in 2024.

Quick Overview: History of UniSwap

Uniswap launched in November 2018 as the first Ethereum-based DEX. The primitive v1 introduced the first liquidity pools (LPs), LP tokens, and swap of ETH with Ethereum tokens, ERC-20s.

Uniswap v1 also introduced the price algorithm that balances the exchange demand with the liquidity pool supply. It’s called CPMMM (constant product market maker model), and it’s one reason so many DEXs imitate Uniswap.

The UNI token launched in 2020 with Uniswap v2, which also optimized Ethereum swaps. Until now, if you had Token A and wanted token B, you had to buy and sell ETH tokens first. Not anymore. Also this direct system boosted LP deposits from $65M to +$9B by 2021.

That same year, Uniswap v3 launches and quickly becomes the most popular DEX on Ethereum. This version was several times more capital-efficient than Uniswap v2, bringing features such as:

• Concentrated liquidity
• Active liquidity
• Flexible fee tiers
• Advanced blockchain oracles
• Multi-range pool positions

This steeply reduced risk and capital needed for LP providers while earning the same fee revenue.

Despite the temporary limitations of Ethereum, all this innovation has kept Uniswap on top, even when compared accross networks (e.g. BnB’s PancakeSwap is catching up).

But will Uniswap v4 be as revolutionary as the others?

UniSwap v4 Potential Improvements

Here’s what we may see in the new Uniswap v4 from most to least likely:

Expanded UX

Now that Uniswap is one of the most liquid DEXs, it makes sense to broaden the scope of the protocol. They can expand on user experience by adding more blockchain and features besides the exchange, both for the dApp and mobile versions.

Uniswap has the liquidity to become an all-in-one DeFi platform, and not just a place where people buy tokens.

Advanced order types

Since the exodus from CEXs, one of the most missed features is limit and stop-loss orders. Ironically, automation is what smart contracts do best. Why doesn’t Uniswap have these yet?

Its most popular fork, PancakeSwap, already offers perpetual trading, including limit orders and leveraged long/short positions. Maybe not v4, but Uniswap eventually should release something similar.

Dynamic fee structure

Uniswap v3 already has three fee tiers, but they’re fixed for every pool. 

Typically the most optimal one gets most of the trading volume and fees, and when it runs out, volume shifts towards the second-best one— assuming the market isn’t moving sideways. 

In short, LP providers aren’t making sustainable fee revenue to provide to the other pools.

Dynamic fees would unify those pools or at least allow all of them to change fees based on market volatility.

Improved gas efficiency

Even though it’s largely Ethereum-dependent, dApp developers can be more efficient when adding transactions to the blockchain. Ethereum has become more scalable since Uniswap v3 launched. There are now DEX aggregators offering lower gas fees than the same DEX that they’re sourcing from.

Trading certain pairs on those platforms is gas-free (achieved by batching transactions with a relayer service) on Ethereum. Uniswap can definitely reduce fees either with a new system or the same one, and it’s not the first dApp to do it.

Here’s another path to achieve it:

Off-chain order book

DEXs resort to AMMs (automated market makers), because unlike CEXs, they don’t have hundreds of matching orders happening at all times. 

That’s not true for the most popular DEX in DeFi.

As you can see, Uniswap is the only DEX that can compete with the top 10 international exchanges. 

It’s not that DEXs can’t support order books, but that they had little use without enough liquidity. Uniswap doesn’t have to replace the AMM model, but it can complement it with an off-chain order book.

Off-chain means higher efficiency and lower gas fees, but there are security risks involved. One solution for this is:

Web3 front-end

Uniswap and most DeFi dApps have an on-chain part (the dApp) and an off-chain one (the website front-end and storage). The latter isn’t decentralized, and it could potentially affect the dApp.

E.g., The Tornado Cash dApp wasn’t taken down but the front-end was, and that was enough to kill the project and its trading volume.

There’s no shortage of solutions to decentralize the Internet infrastructure. There’s IPFS, Internet Computer, Ankr RPCs, and oracles (Chainlink, Fetch, Tellor…) to transfer data securely. This too benefits users, as the current front end does collect user data.

Uniswap could still use the same platform but also keep a Web3 copy just in case.

New LP model

There are LP providers that made millions supplying tokens for Uniswap. The problem is, there’s not enough incentive at that level, either because the pairs are volatile or the rewards are too low. So Uniswap is losing big contributors.

It’s unlikely (and risky) that the v4 changes what’s already working. But if they were to change the foundations, it could be the CPMM model and pool reward minimum.

UniSwap v4 Release Date

There’s no official release date for Uniswap v4 as of June 2023. As for time expectations, you would have to wait at least until 2024. It could speed up to New Year but most likely will be mid or late-2024, and here’s why.

The Uniswap v4 concept doesn’t bring enough features to become a priority, at least not higher than the latest mobile version. Pushing v4 before needed would have little value except for a short term price rally. It could happen in 1-2 years or as soon as they discover another revolutionary system for the DEX.

Even then, instead of v4 they can just add it to v3 via Uniswap Governance. There have to be enough changes so that changing the entire infrastructure is makes more sense than expanding existing code. This also means that whether v4 launches or not, Uniswap continues to increase its utility.

What To Expect From Uniswap v4?

While there’s barely any information about Uniswap v4 in June 2023, the launch looks like a matter of time more than a rumor. The previous versions launched in 2018, 2020, and 2021, so the upcoming one shouldn’t be further than 2024-2025.

Don’t be surprised if the official launch announcement is pushed several weeks further.

Will this be similar to the jump from v2 to v3? When it comes to price action, possibly. As for features, no. Probably bigger.

Uniswap devs know you can only do so much to optimize a DEX, which is why they’re broadening their scope. So Uniswap v4 could look more like your typical all-in-one exchange: limit orders, collateralized loans, staking, an NFT marketplace, or its own bridge.

Whatever they do, v4 will solidify Uniswap as a DeFi leader for many years. At least if they don’t lose dominance while on development.

FAQ

• What’s the best DEX on Ethereum in 2023?

Uniswap was clearly the best DEX when v3 came out, and it can happen again once we see Uniswap v4. While there’s no release date yet, it will likely speed up because of how much DEX competitors there are now. There are DEXs with more networks (e.g., Sushiswap) and lower fees (dYdX, Matcha XYZ) than Uniswap.

• Why is Uniswap so popular?

Uniswap is pioneer in modern DEX economy. It introduced the exchange of Ethereum tokens via liquidity pools and invented the constant-product market maker. They kept innovating with v3 by adding concentrated liquidity, fee tiers, oracle integrations, and range orders.

Also because of a large community, Uniswap v3 is by far the most traded platform. The next closest “competitor” is Uniswap v2, which still trades 5-10x more than other DEXs.

• Why is Uniswap swap so expensive?

Part of why Uniswap is expensive is popularity. Add to that the Ethereum scalability issues and the unbalance between the number of pool providers and swap users.

Also, the same token pair may have different pools and fee tiers. The expensive ones eventually become the only option once the cheaper pools run out of liquidity or prices are too unbalanced.

• How do I avoid gas fees on Uniswap? 

 Gas fees have more to do with Ethereum than Uniswap. The good news is, Ethereum tokens are often available on Layer-2 networks like Optimism and Arbitrum, which are supported in Uniswap.

If you bridge to those networks, you could swap the same tokens for a $0.33 gas fee instead of $13+.

Almost any network is cheaper than Ethereum. But if you have to use it, you can still customize gas fees from the Metamask window.