Looking back on the road of DeFi innovation, how Uniswap has grown from a founder to a master

Author: Haotian, View on the Chain

The new version of Uniswap V4 has injected a dose of catalyst into the cold and silent Crypto industry in the bear market. Everyone agrees with the power of the Uniswap framework innovation paradigm, and is also confident that DEX will snatch liquidity from CEX in the future. But regardless of whether it is just a master of innovation in the DeFi industry in the past 5 years, the innovative moments of many DeFi protocols in the past are also worthy of sharing and praise.

Everything started with those 500 lines of code. As the gene and origin of DeFi, the AMM algorithm of X*Y=K opened the "Cambrian Moment" of the DeFi industry. This algorithm realizes the automation of asset pricing and exchange, realizes risk hedging and arbitrage mechanism, realizes open and anti-censorship finance, and the most important thing is to realize the modular reorganization of financial business, so that finance can be combined and reconstructed like building blocks , Sow the seeds for the birth of various gameplays in the future.

The Hooks of Uniswap V4 can add new functions and features to the AMM pool, and the Singleton contract changes the account framework and transaction logic. It is a framework innovation, and based on this, countless possibilities can be imagined. Let’s take the new features of uniswap V4 as an example to review the innovative forces that really exist in the DeFi world, starting from Uniswap, but not limited to Uniswap:

**1) **** "Limit Order": ** At the end of 2020, dYdX implemented limit orders based on the "private order book" feature of its underlying StarkEx L2 extension agreement (by matching transactions in the L2 hidden state, and then Present the results on the chain) This is quite different from the price limit logic under the V3 Concentrated Liquidity model, but the limit order idea can reduce the risk of AMM transactions and improve efficiency, which is a particularly important innovation in the development process of DeFi;

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

**3) **** "Dynamic Fee Rate": ** In May 2021, GMX realized the mechanism of dynamically adjusting the transaction fee rate based on market conditions, which greatly improved the competitiveness and pricing efficiency of AMM products. GMX can realize the dynamic adjustment of transaction fees driven by algorithms, which is more sensitive and stable than Curve’s user-selected dynamic fee rate. This time, uniswap v4 effectively combines algorithm-driven and manual selection, further improving the efficiency of liquidity utilization.

**4）"NFT injected into AMM": **In December 2020, NFTX realized the deep integration of NFT and AMM, making NFT highly mobile in the AMM pool like ERC20 tokens Sexual trading and pricing, thus solving the low liquidity problem of NFT. However, NFTX actually converts NFT into ERC20 tokens and mortgages them to achieve liquidity, while Uniswap V4 directly allows NFT to participate in liquidity;

**5) **** "Exceeding the scope of liquidity to borrow and earn interest": **In March 2021, AAVE V2 realized the deposit of AMM's liquid assets in the Aave lending pool for borrowing to earn additional interest This undoubtedly improves the efficiency of the use of funds. The key is that it realizes the combined application of DeFi in cross-protocol and cross-mechanism, and opens up ideas for in-depth cooperation between DeFi protocols in the future;

**6) ****"LP Fee Automatic Reinvestment": **In October 2020, Curve added an auto-compounding automatic compound interest mechanism in the V2 version, which can realize the automatic conversion of LP's income from transaction fees Tokens for LP and added to LP's position. However, in the face of price fluctuations, this mechanism will lead to a loss in the number of LP tokens exchanged. Even Uniswap V4 will inevitably have such challenges.

**7) "Macro contract management subdivided liquidity pool": **In 2020, Balancer realized the function of subdividing the liquidity pool through Vault contract management. This reduces the high cost of deploying a large number of single token pools, and the Vault contract can avoid repeated reading and transfer to generate gas fees. The Singleton of Uniswap V4 is based on the concept of Vault, but it does not need to pre-define all combinations, which is more flexible.

**8) ****“Introduction of Donate function”: **In September 2020, Sushiswap launched the donation function for the first time in the V2 version, allowing users to donate tokens to specific liquidity providers as an incentive. This is conducive to attracting and retaining more liquidity providers. Although this type of mechanism has a certain risk of commercial manipulation, it will be a new paradigm for the construction of the DeFi community driven by the community; in addition, Perpetual Protocol can provide a non-destructive transaction mechanism throughout the process, relying on algorithms and complete pricing to reduce liquidity losses; mStable provides cross- Chain assets are fused into a liquidity mechanism, and users' assets on different chains can be combined into one liquidity; Maverick Protocol can define the annualized rate of return according to the user's lock-up period of tokens; there are many similar innovations that are happening quietly, It may also be adopted by Uniswap in the future.

Uniswap has contributed to the prosperity of DeFi, but in fact, DeFi’s combined innovative micro-forces have also made Uniswap a little bit. It is precisely because of these mechanisms or concepts that have been explored successfully or failed time and time again that Uniswap’s V4 era is so bright. I have been on a business trip to Hong Kong for the past two days, and the international people are hurrying along the complicated and intertwined roads. I am wondering what the significance of Hong Kong to web3 will be, and I hope it is just like Uniswap to DeFi.