As a leader and innovator in the decentralized exchange (DEX) industry, Uniswap has been continuously seeking technological breakthroughs to improve and revolutionize the entire DEX ecosystem. Last month, Uniswap announced the upcoming release of version 4 (V4), which garnered widespread attention and anticipation from the industry. However, while people were still discussing and researching the various disruptive features and technologies of V4, Uniswap made another move by announcing the launch of a transaction protocol called UniswapX, based on an unhosted Dutch auction.
UniswapX has created a new paradigm for AMM protocols. It aggregates on-chain and off-chain liquidity sources to provide traders with the best market prices while effectively preventing MEV attacks. It also offers gasless transactions and even extends support for cross-chain transactions without gas fees, which points the way forward for the future development of DEX. Currently, UniswapX has been launched as an optional test version feature on the Ethereum frontend platform of Uniswap Labs and will soon be expanded to other chains and Uniswap wallets.
What changes will UniswapX bring
UniswapX is a competitive trading protocol created using Dutch auctions, which is unhosted, permissionless, and does not require licensing. Its goal is to provide users with a better trading experience by utilizing a combination of on-chain and off-chain liquidity. According to the recently released whitepaper by UniswapX, the protocol will bring the following changes to on-chain trading:
Aggregate on-chain and off-chain liquidity to get better prices
UniswapX's first advantage is the utilization of third-party fillers to aggregate liquidity from different sources on-chain and off-chain, resulting in better prices. These fillers are participants who provide liquidity and anyone can become a third-party filler for UniswapX swaps. Fillers can come from on-chain liquidity sources like decentralized exchanges such as Uniswap, or from off-chain liquidity sources like market makers.
In the trading process of UniswapX, when a swapper initiates a trade on UniswapX, the system searches for the optimal trading route and attempts to find the best trade price from different liquidity pools on-chain and off-chain. If on-chain liquidity is insufficient, UniswapX automatically switches to off-chain liquidity pools to obtain more liquidity and find the best prices for traders. Fillers play an important role in this process by providing their assets as the initial assets of the trading pairs in the UniswapX protocol, allowing others to trade between these assets. Additionally, fillers can use their own algorithms and strategies to assist traders in finding optimal price paths and the best trading pairs. This way, traders don't have to worry about getting the best price. By leveraging the on-chain and off-chain liquidity pools provided by UniswapX, as well as the competition among fillers, traders can easily obtain the best market prices. Furthermore, all transactions are transparently recorded and settled on-chain, ensuring fairness in the trading process.
No gas fees and no need to pay any fees for failed transactions
UniswapX adopts the Permit2 offline signature order structure, providing traders with a transaction experience without the need to pay high gas fees.
When using the Permit2 offline signature order structure, traders only need to digitally sign the order on their local device and then send the signed order to the contract representing the trading pair.
Specifically, traders first generate a unique offline order through the UniswapX interface, and then digitally sign the order using their local device. Then, traders send the signed order to the Filler, who represents the trader to pay the gas fees, and the Filler submits the order for execution on the chain. Since traders do not need to pay gas fees, they do not need to possess the native network tokens of the chain (such as ETH, MATIC) for trading, and if the transaction fails, traders do not need to bear any fees.
In actual trading, the Filler will include the paid gas fees in the swap price and reduce transaction costs by processing multiple orders in batches. Additionally, in some cases, traders still need to pay gas fees, such as for the initial token approval for Permit2. Furthermore, packaging is required when selling native network tokens, which also incurs certain gas fees.
Several mechanisms prevent MEV
UniswapX adopts multiple mechanisms to prevent MEV, which can provide traders with a better trading experience. Firstly, during the off-chain order matching phase, UniswapX introduces certain features that regulate transaction sequencing, making it difficult for MEV to obtain arbitrage opportunities and thereby reducing its adverse impact on traders. These features include partial sorting by price, executing limit orders, and absorbing price differences in the local ledger. Consequently, transactions in the Mempool become unpredictable, squeezing out arbitrage space for MEV.
Secondly, UniswapX eliminates the adverse effects of MEV on traders by increasing the transaction price. Generally, arbitrage traders can capture MEV by exploiting price differentials, but in UniswapX, these arbitrage opportunities are eliminated. The MEV that could have been obtained through arbitrage is returned to traders by increasing the price, thus mitigating the negative impact of MEV. Additionally, UniswapX can help users avoid more explicit forms of MEV extraction. For instance, when executing orders using Filler inventory, Filers are incentivized to use private transaction relays. This prevents orders from being sandwiched in-between, thereby avoiding MEV attacks. In summary, UniswapX's MEV prevention mechanisms can provide traders with a better trading experience, making transactions fairer and more transparent.
Support for Cross-Chain Swaps
The UniswapX protocol supports cross-chain transactions, allowing traders to seamlessly exchange assets on the target chain from the source chain. This means traders can exchange assets on different chains without worrying about compatibility and transaction difficulties between different chains. The support for cross-chain swaps enables traders to conveniently engage in asset trading while improving transaction efficiency and reducing costs.
It is reported that the cross-chain version of UniswapX will be launched later in 2023. At that time, traders will be able to achieve inter-chain asset exchanges within seconds through cross-chain UniswapX. Traders will also have the option to receive specific assets on the target chain, rather than being limited to bridge-specific tokens.
Changing the rules of the DEX game
With the launch of UniswapX and the upcoming V4 upgrade announced by Uniswap last month, Uniswap is painting a picture of a DEX application scenario that is on par with CEX in terms of user experience through these innovative technological measures and features. Although the majority of people still believe that DEX cannot surpass CEX, with a series of innovative initiatives by Uniswap this year, more and more people have begun to have doubts about this view.
In fact, the DeFi market has always been one of the most active areas in the Web3 ecosystem. As early as during the peak of the bull market in 2021, the Total Value Locked (TVL) in DeFi exceeded $175 billion. Despite the crisis the market experienced in 2022, the TVL in DeFi still remains above $39 billion. As an indispensable part of DeFi, the market share of DEX relative to CEX has seen a significant increase since September 2022, rising from a low of 8% to a peak of 22%. In a blog post celebrating Binance's sixth anniversary in July this year, Binance founder Changpeng Zhao even directly predicted that the market volume of DeFi will surpass CeFi in the next six years or so. The optimism of major enterprises and the promising future development prospects of DeFi have brought more attention and investment to DEX. The launch of UniswapX at this time can take advantage of this momentum to attract more users and investors to join the DEX industry.
Compared with centralized exchanges, decentralized exchanges still have certain shortcomings in user experience and trading speed, which is the main challenge facing decentralized exchanges at present. The launch of UniswapX provides a more complete solution. UniswapX has opened up a broader design space for DEX. By introducing third-party filler to aggregate the liquidity on and off the chain, UniswapX can allow traders to quickly get the best trading price. In addition, the use of Permit2 executable offline signature order structure also allows traders to realize Gas-less transactions, greatly reducing the trading costs of users on DEX. Most importantly, UniswapX supports seamless cross-chain exchange and has set a correct design for cross-chain exchange, which allows users to move cheaply, quickly and easily between different chains. This will be a revolutionary change for DeFi.
In the future, once UniswapX runs through Gas-less costs and seamless cross-border transactions, DEX will have an overwhelming advantage over CEX in terms of user fees and asset cross-chain transfers. In addition, UniswapX's new off-chain provider mechanism and Uniswap V4 can give market makers more space, and will also attract more traditional market makers into the DEX industry, further enhancing the competitiveness of DEX against CEX in liquidity. In addition, the disruptive function brought by the upcoming version of Uniswap V4, it's only a matter of time before DEX replaces CEX.
Implications and disputes over the industry
The launch of UniswapX might not have garnered as much attention as Uniswap V4, but its impact is not to be overlooked. Firstly, the introduction of UniswapX further validates the potential of the aggregator market. Although the aggregator market has become an important venue, it is still a relatively unfamiliar domain for the general public and ordinary users. However, with the introduction of this innovative feature on Uniswap, the aggregator market is starting to attract more attention from ordinary users. In other words, before the launch of this feature on Uniswap, this feature might have been a unique selling point for some projects focused on specific functions, but now it is regarded as a legitimate feature.
The introduction of UniswapX is likely to accelerate the involution of the aggregator market. With its huge user base and brand power, UniswapX will definitely have an overwhelming advantage over other aggregator projects, thus becoming the new leader in the aggregator market. This will inevitably impact other aggregator projects and squeeze their market share. Some aggregator projects are obviously not welcoming the appearance of UniswapX, especially as UniswapX is to some extent "copying" the fusion model of 1inch or the off-chain order matching aggregation platform like Cow Swap. Although there are still many differentiated innovative points for UniswapX, in the field of aggregators, UniswapX can be indisputably regarded as a latecomer and imitator.
In addition to its impact on the aggregator field, the introduction of UniswapX also has made an impact on the cross-chain market. Uniswap has been actively promoting a multi-chain plan for a long time, deploying 7 chains and L2, and one of the purposes of the introduction of UniswapX is to facilitate fluidity between these chains. In a field that relies heavily on brand security endorsement, with Uniswap's brand power as an endorsement, it won't be long before UniswapX becomes the new leader in this domain.
It is quite common for there to be a single dominant player in the market, a "winner takes all" situation, but this often results in a lack of innovation in the industry. Once a project has a new innovation, it may face the crushing dominance brought by latecomers by virtue of the brand and market advantages. Currently, there are many controversies in the market regarding the introduction of UniswapX. Some community members believe that UniswapX is an innovator that will change the rules of decentralized exchange, MEV, and interoperability. However, others think UniswapX, as a late entrant that relies on brand and market advantages to squeeze out peers, does not conform to the innovative spirit of blockchain.
However, this accusation obviously selectively ignores Uniswap's contribution to industry innovation. Uniswap has always been a pioneer, playing an important role in exploring new technologies and feature fields. Whether it's the initial V1 version or the upcoming V4 version, each new feature introduced in every version of Uniswap is emulated and followed by other platforms, while also leading the development direction of the entire DEX industry. Although some of the features introduced with UniswapX are not the first of their kind in the industry, perfecting old technology is a kind of innovation in itself. In the field of innovation, smaller boats must inevitably take on more wind and waves while following the bigger ones. But at the same time, as a guide, the bigger ships also point out the right direction for the smaller ones.
