In the world of cryptocurrency trading, usability is still a serious issue. Token swaps can be slow, complicated to perform, costly in terms of gas fees, and complex. It's all too easy for even reasonably experienced traders to make mistakes that could result in the loss of their tokens.
This issue was one of the subjects of discussion at EthCC 2023, where the top minds in the industry were showcasing their work and speaking on the importance of building tools and platforms for users as the next step in the evolution of Ethereum.
In the event, Uniswap, one of the largest decentralized exchanges (DEXes), announced the launch of UniswapX, a permissionless, open-source solution for trading across AMMs and other liquidity sources. The goal of UniswapX is to give traders access to more liquidity, better prices, protection against Maximal Extractable Value (MEV) bots, lower gas fees, and even gas-free swapping.
Let’s learn more about Uniswap and its approach to improving DeFi trading in terms of usability and cost, starting with a brief note on Uniswap.
A Short Background on Uniswap#
The Uniswap protocol was launched in 2018, and it quickly grew to become one of the biggest on-chain trading platforms, handling around $1.5 trillion in trading volume. Uniswap allows users to swap tokens, receive yields as a liquidity provider, engage in lending, and vote on the proposals and decisions of the ecosystem.
Uniswap is incredibly popular and currently has about $3.8 billion in total value locked up. However, there are some issues with the platform that could be inconvenient for users. For instance, gas fees can be high, depending on how busy the chain is. Similarly, MEV bots can exploit the chain and extract profit through selective mining. And failed transactions are a common source of frustration and confusion, especially for users who are unaware of how on-chain transactions work.
Another issue with Uniswap, or a trading platform in general, is liquidity. While those who primarily trade the most popular tokens are unlikely to run into issues, smaller tokens can be difficult to work with as liquidity pools could dry up. Slippage can make it difficult to get fair prices for swapping tokens, and fees can be high. UniswapX aims to fix many of these issues.
What Is UniswapX?#
UniswapX is a permissionless, open-source protocol that uses Dutch auctions for trading across AMMs (Automated Market Makers) and other liquidity sources. The goal of UniswapX is to make swapping faster, cheaper, and easier by:
- Aggregating prices from various liquidity sources, thereby bringing down fees
- Offering gas-free swaps
- Protecting users from MEV bots
- Ensuring there's no fee for failed transactions
- Introducing the option for gas-free cross-chain swaps (coming soon)
In the early days of DeFi, there were just a handful of pools, and the activity was concentrated on the base layer. But now, there are numerous on-chain protocols and layer 2s, which have resulted in the fragmentation and spreading of the available liquidity across numerous sources. This makes it harder for traders to find the best prices when they need them. This issue of difficulty in finding the best prices due to the scattering of liquidity across multiple pools is known as routing complexity.
UniswapX aims to remove this complex issue by outsourcing the job of finding the best prices across multiple chains to open networks of third-party fillers. They fill swaps directly or route users to appropriate AMM pools. Over time, this should have the result of bringing down prices for traders.
With that, the traders will be able to get the best prices directly from the Uniswap interface, and the transactions will be recorded transparently on-chain.
Fillers need to ensure their offers are competitive to see any trades. The fillers pay gas on the swappers behalf, meaning swappers don't have to be in possession of the chain's native token to cover the cost of the transaction. If the transaction fails, the swapper isn't out of pocket. Fillers are expected to factor the gas fee into the price they offer for swaps. To keep fees to a minimum, it's possible for fillers to batch multiple orders.
UniswapX for Preventing MEV Bots#
Maximal Extractable Value (MEV) bots have been a significant problem for swappers in recent times. These bots front-run users’ transactions, aiming to sweep up any arbitrage opportunities as a way to make money. UniswapX protects users from sandwich attacks and other forms of MEV because orders executed with a filler's inventory can't be sandwiched. In addition, UniswapX encourages fillers to use private transaction relays as an additional layer of protection.
The Dutch auction system and the way the gas fees are handled help reduce any MEV that might have otherwise been available for bots, giving back that value in the form of improved prices for swappers. Preventing the MEV bots completely is challenging due to the nature of public ledgers and the decentralization of blockchains. But UniswapX puts in many layers of protection that make it even harder for opportunists to arbitrage the system.
Participate in UniswapX as an Order Filler#
UniswapX is a major upgrade to Uniswap, yet it retains the original principles of self-custody and security that made Uniswap itself so popular with DeFi pioneers. UniswapX is open to anyone who would like to join, and those who are interested in participating in UniswapX as order fillers can get started today. The cross-chain elements of the protocol aren't yet available, but the developers are tirelessly working on them, and those who are interested in learning about the technical details of cross-chain transactions can learn more by reading the whitepaper.
Final Words#
UniswapX was just one of many projects presented at EthCC Paris 2023. The conference was full of fascinating new ideas, from Chainlink's CCIP to Arbitrum’s Stylus launch, which aims to provide blockchain developers with resources to create even more robust DeFi applications. Not to mention Vitalik Buterin's speech about Account Abstraction and its role in onboarding a massive number of users to Web3.
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If you’re a project owner looking to protect your community or a trader interested in receiving yields by providing liquidity, we'd love to help you. Contact us today to learn more about our parametric insurance and the Neptunite ecosystem.
