Original Author: Daniel Li, CoinVoice
As a leader and innovator in the decentralized exchange industry, Uniswap has always been seeking technological breakthroughs to improve and innovate the entire DEX ecosystem. Last month, Uniswap announced the upcoming release of Version 4, which has attracted widespread attention and anticipation in the industry. However, while everyone was still discussing and researching the various disruptive features and technologies of Version 4, Uniswap made another move and announced the launch of a transaction protocol called UniswapX, which is based on an unhosted Dutch auction.
UniswapX has created a new paradigm for AMM protocols. It provides traders with the best market prices by aggregating on-chain and off-chain liquidity sources, while also effectively preventing MEV attacks and offering gasless transactions. It can even extend to support cross-chain gasless transactions, pointing the way for the future development of DEX. Currently, UniswapX has been launched as an optional test feature on the Uniswap Labs Ethereum frontend platform and will soon be expanded to other chains and Uniswap wallets.
What changes will UniswapX bring
UniswapX is a competitive trading protocol that is unhosted, permissionless, and created using Dutch auction. It aims to provide users with a better trading experience by using a combination of on-chain and off-chain liquidity. According to the whitepaper recently released by UniswapX, the protocol will bring the following changes to on-chain trading:
Aggregating on-chain and off-chain liquidity for better prices
The first advantage of UniswapX is that it uses third-party fillers to aggregate assets from different on-chain and off-chain liquidity sources to obtain better prices. These fillers are participants who are willing to provide liquidity, and anyone can become a third-party filler for UniswapX Swap. Fillers can come from on-chain liquidity sources, such as decentralized exchanges like Uniswap, or from off-chain liquidity sources, such as market makers.
In the transaction process of UniswapX, when a Swapper initiates a transaction on UniswapX, the system will search for the optimal trading route and try to find the best trading price in different on-chain and off-chain liquidity pools. If the on-chain liquidity is insufficient, UniswapX will automatically turn to off-chain liquidity pools to obtain more liquidity and find the best price for the trader. Fillers play an important role in this process by providing their assets as initial assets for trading pairs in the UniswapX protocol, allowing others to trade between these assets. In addition, Fillers can use their own algorithms and strategies to help traders find the best price path and optimal trading pairs. This way, the trader does not have to worry about whether they can obtain the best price. With the competition between on-chain and off-chain liquidity pools provided by UniswapX, the trader can easily obtain the best market price. At the same time, all transactions will be transparently recorded and settled on the chain, ensuring the fairness of the transactions.
No Gas fees and no fees for failed transactions
UniswapX adopts the Permit 2 offline signature order structure, which provides traders with a transaction experience without paying high Gas fees.
When using the Permit 2 offline signature order structure, traders only need to digitally sign the order on their local device and then send the signed order to the pair contract.
Specifically, traders first generate a unique off-chain order through the UniswapX interface, and then use their local device to digitally sign the order. Then, traders send the signed order to the Filler, which represents the trader in paying the Gas fees, and the Filler will submit the order for execution on the chain. Since traders do not need to pay Gas fees, they do not need to hold native network tokens of the chain (such as ETH, MATIC) for trading, and similarly, if the transaction fails, traders are not required to bear any fees.
In actual transactions, Filler will include the payment of Gas fees in the swap price and lower the transaction cost through batch processing of multiple orders. In addition, in certain cases, traders still need to pay Gas fees, such as for initial token approvals for Permit 2. Furthermore, packaging is required when selling native network tokens, which also incurs certain Gas fees.
Multiple Measures to Prevent MEV
UniswapX implements multiple mechanisms to prevent MEV, which can provide a better trading experience for traders. First, in the off-chain order matching stage, UniswapX introduces certain features that can regulate the order of transactions, making it impossible for MEV to exploit arbitrage opportunities, thus reducing the adverse impact of MEV on traders. These features include partial ordering by price, execution of limit orders, and local book adjustment of price differences. This makes the transactions in the Mempool difficult to predict, thereby squeezing out the arbitrage space for MEV.
Second, UniswapX eliminates the adverse impact of MEV on traders by increasing the transaction price. Generally, arbitrage traders can capture MEV by exploiting price differences, but in UniswapX, these arbitrage opportunities are eliminated. The MEV that could have been obtained through arbitrage trading is returned to the traders by raising the price, thus eliminating the adverse impact of MEV on traders. Additionally, UniswapX can help users avoid more explicit forms of MEV extraction. For example, when executing orders using the Filler inventory, Filler is incentivized to use private transaction relays. This prevents orders from being sandwiched in the middle, thereby avoiding MEV attacks. Overall, UniswapX's MEV mitigation mechanisms can provide a better trading experience for traders, making transactions more fair and transparent.
Support for Cross-chain Swaps
UniswapX protocol supports cross-chain transactions, allowing traders to seamlessly trade assets on the target chain of the source station. This means that traders can exchange assets on different chains without worrying about compatibility and transaction difficulties between different chains. The support for cross-chain transactions allows traders to conveniently trade assets, while also improving transaction efficiency and reducing transaction costs.
It is reported that the cross-chain version of UniswapX will be launched later in 2023. At that time, traders can achieve inter-chain asset exchanges in a matter of seconds through cross-chain UniswapX. Traders can also choose which assets to receive on the target chain, instead of being specific to bridge tokens.
UniswapX: Changing the game rules of DEX
With the launch of UniswapX and the upcoming upgrade to version V4 by Uniswap last month, Uniswap is using these innovative technologies and features to present a DEX application scenario that is not inferior to CEX in terms of user experience. Although the majority of people still hold the view that DEX cannot surpass CEX, with a series of innovative initiatives by Uniswap this year, more and more people have started to doubt this viewpoint. In fact, the DeFi market has always been one of the largest activities in the Web 3 ecosystem. During the peak of the bull market in 2021, the total locked value (TVL) of DeFi exceeded $175 billion. Despite the crisis experienced by the market in 2022, the TVL of DeFi has remained above $39 billion. As an essential part of DeFi, the market share of DEX compared to CEX has increased significantly 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, Binance founder Zhao Changpeng even directly predicted that the market volume of DeFi will surpass CeFi in the next six years or so. The optimism of leading companies and the future development prospects of DeFi have also brought more attention and investment to DEX. The launch of UniswapX at this time can take advantage of this trend to attract more users and investors to join the DEX industry.
Compared to centralized exchanges, decentralized exchanges still have certain flaws in user experience and transaction speed, which is also the main challenge facing decentralized exchanges at present. The launch of UniswapX provides a more comprehensive solution. UniswapX opens up a broader design space for DEX. By introducing third-party aggregators to aggregate on-chain and off-chain liquidity, UniswapX allows traders to quickly obtain the best trading prices. In addition, the use of Permit 2 executable offline signature order structure enables traders to achieve gas-free transactions, greatly reducing the transaction costs for users on DEX. Most importantly, UniswapX supports seamless cross-chain exchanges, providing the correct design for cross-chain exchanges, allowing users to move between different chains cheaply, quickly, and easily. This will be a revolutionary change for DeFi.
In the future, once UniswapX achieves gas-free transactions and seamless cross-chain exchanges, DEX will have overwhelming advantages over CEX in terms of user fees and asset cross-chain transfers. In addition, UniswapX's new off-chain provider mechanism and Uniswap V4 will provide more opportunities for market makers and attract more traditional market makers to enter the DEX industry, further enhancing the competitiveness of DEX in terms of liquidity compared to CEX. Furthermore, with the disruptive features brought by the upcoming Uniswap V4, it may only be a matter of time before DEX replaces CEX.
The Impact and Controversy of UniswapX on the Industry
The launch of UniswapX may not be as grand and attention-grabbing as Uniswap V4, but its impact should not be underestimated. First of all, the launch of UniswapX further validates the potential of aggregator markets. Although the aggregator market has already become an important track, it is still a relatively unfamiliar field for the general public and ordinary users. However, with the innovative feature introduced by Uniswap, the aggregator market is beginning to attract more attention from ordinary users. In other words, before the introduction of this feature on Uniswap, it may have been considered a unique selling point of certain projects focused on specific functions, but now it is being perceived as a true mainstream feature.
The launch of UniswapX will accelerate the competition in the aggregator market. With a large user base and strong brand power, UniswapX undoubtedly has overwhelming advantages over other aggregator projects, becoming the new leader in the aggregator field. This will inevitably impact other aggregator projects and compress their market shares. Therefore, the appearance of UniswapX is clearly not welcomed by some aggregator projects, especially since UniswapX is, to some extent, "copying" the 1inch fusion model or chain-based order matching and aggregation platforms like Cow Swap. Although UniswapX still has many differentiated innovative points, it is unquestionably a follower and imitator in the aggregator field.
In addition to its impact on the aggregator field, the launch of UniswapX also has an impact on the cross-chain market. Uniswap has been actively promoting its multi-chain plan and has deployed 7 chains and L2. One of the purposes of launching UniswapX is to connect the liquidity between these chains. In the cross-chain field, endorsement by a trusted brand is crucial, and with the endorsement of the Uniswap brand, it is believed that UniswapX will soon become the new leader in this field.
It is common for one dominant player to emerge in the market, resulting in winners taking all. However, this situation often leads to a lack of innovation in the industry. Once a project introduces new innovative points, it may face being overwhelmed by followers relying on brand and market advantages. Currently, the launch of UniswapX has sparked many controversies in the market. Some community members believe that UniswapX is an innovator that will change the rules of decentralized exchanges, MEV, and interoperability. However, others believe that UniswapX, as a follower, squeezing out competitors based on brand and market advantages, is not in line with the spirit of blockchain innovation.
However, these accusations selectively overlook the contributions Uniswap has made in the field of industry innovation. Uniswap has always been a pioneer, playing a significant role in exploring new technologies and functionalities. Whether it is the initial V1 version or the upcoming V4 version, each new feature introduced by Uniswap has been imitated and followed by other platforms while also leading the development direction of the entire DEX industry. Although some of the features introduced by UniswapX may not be industry firsts, pushing the boundaries of existing technology is also a form of innovation. In the field of innovation, small boats sailing alongside the big ship inevitably face more rough seas. However, as the guiding vessel, the big ship also points the way for the smaller ones.
