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Uniswap V4 Features Explained: Plugins for Custom Liquidity Pools



Uniswap V4

Uniswap, the world’s largest decentralized crypto exchange by volume, has released a draft of the code for its upcoming version 4 (V4) on GitHub. The new code introduces a feature called “hooks” or “plugins” that will enable developers to create custom liquidity pools with different logic and functionality.

Liquidity pools are smart contracts that hold pairs of tokens and allow users to swap them, provide liquidity, and earn fees. Uniswap’s current version, V3, which was launched in May 2021, allows liquidity providers to customize their exposure and risk by setting price ranges for their deposits.

However, V4 will take this a step further by allowing pool deployers to introduce code that performs a designated action at key points throughout the pool’s lifecycle, such as before or after an LP position is modified, or before or after a swap.

Some of the possible applications of hooks include:

  • On-chain limit orders: Pools can incorporate logic that lets them fulfill an order only when a token hits a particular price.
  • Time-weighted average market makers (TWAMMs): Pools can allow users to sell large amounts of crypto in small batches over time, avoiding front-running by bots or adverse price movements.
  • Automatic deposits to lending protocols: Pools can lend out their inventory to other protocols when they are not being used for swaps, earning extra interest for liquidity providers.
  • Auto-compounded LP fees: Pools can redeposit the fees earned by liquidity providers back into the pool, increasing their share of the pool over time.

Uniswap V4

Uniswap V4 Upgrade Will Arrive Soon

According to Uniswap’s founder Hayden Adams, the goal of V4 is to “create a way for pool deployers to introduce code that performs a designated action at key points throughout the pool’s lifecycle”. He also said that V4 will allow for more innovation and experimentation in the decentralized exchange space, as developers will be able to build on top of Uniswap’s security and liquidity with their own custom logic.

However, V4 is not ready for launch yet. The draft code and whitepaper are open for feedback and contribution from the Uniswap community. Once enough consensus has been built around a final version of the code, V4 will go into a formal proposal and be placed before Uniswap’s governing body, UniswapDAO. The timeline for this process is not clear yet, but Uniswap fans can expect more updates and announcements soon.