Uniswap V4: A Valuation Update on DeFi’s Trailblazer

2025-02-18 15:29:17 Primitive Reading

From CoinShares Research Blog by Max Shannon

Why Uniswap was built

The decentralised finance (DeFi) sector has advanced significantly since the launch of Uniswap in 2018, which pioneered DeFi exchanges using automated market makers (AMMs). Before this innovation, trading was dominated by centralised exchanges, valued for their deep liquidity, fast execution, thin spreads, and user-friendly platforms. However, these exchanges are associated with significant risks, such as centralised control, lack of transparency, and vulnerability to hacking or mismanagement of funds. These issues spurred demand for DeFi trading platforms where users could retain control over their assets without relying on centralised intermediaries, although other risks such as hacking, loss of funds, higher slippage are inherent.

Issues

AMM-based exchanges have faced several criticisms over the years such as impermanent loss, susceptibility to Maximal Extractable Value (MEV) bots, worse slippage than other types of DEXs, limited functionality (e.g., lack of limit orders and leverage), high fees, and UI challenges. As Uniswap has evolved, endeavouring to solve for these issues.

Evolution of Uniswap through versions

From V2 to V3, Uniswap became more capital-efficient, cost-effective, and flexible, enabling over 465 million swaps without a single hack or exploit. Key upgrades — such as direct ERC20/ERC20 swaps, decentralized price oracles, and flash swaps in V2, as well as concentrated liquidity, multiple fee tiers for liquidity providers (LPs), and enhanced oracles for more cost-effective price feeds in V3 — have aimed to overcome historical barriers to AMM adoption.

The v4 codebase has undergone extensive reviews, including: nine audits (reports on core and periphery contracts), a $2.35M security competition with over 500 participants, and the largest bug bounty in history, offering up to $15.5M for any critical v4 bugs. V4 is a step-change upgrade for Uniswap and broader DEX space.

V4 update

Three main takeaways include: improved customisation, cheaper trading and better UX.

More Customisation: Uniswap v4 introduces “hooks” and flexible accounting, allowing developers to add custom features to liquidity pools. This means new tools such as limit orders, dynamic pricing, and tailor-made oracles can be built directly into pools. Liquidity providers (LPs) can fine-tune pools to better fit their strategies, leading to deeper liquidity, tighter spreads, and an overall better trading experience — driving up volumes and fees. One Contract for All Pools: Instead of deploying separate contracts for each pool, Uniswap v4 consolidates everything into a single contract. This has three major benefits:

Disclaimer: This specification is preliminary and is subject to change at any time without notice. Amazon Finance assumes no responsibility for any errors contained herein.