🦄 Uniswap Technical Analysis Series #3: Programmable Exchanges Hello, I am BQ Developer. @BQ_Developer In the last episode, we discussed how Uniswap V3 sacrificed simplicity for efficiency. This time, I will talk about how Uniswap is facing another fundamental limitation. 🤔 The Paradox of Innovation: Even with new ideas, they cannot be used The development of Uniswap up to V3 has been remarkable, but one thing has remained unchanged. Once a protocol is deployed, it cannot be changed. This is the core value of blockchain: immutability, but it has also become a shackle for innovation. Let me give you an example. When market volatility is high, if the fee could be automatically adjusted to 0.5%, and to 0.1% when stable, LPs would earn more, and traders could trade at fair prices. The idea is good, but it is impossible on Uniswap. The fee rate is hardcoded, so no one can change it. So, can’t we just create a new protocol? Here lies the cruel reality of DeFi. The Uniswap ETH/USDC pool already has 100 million dollars, but a new protocol has to start from zero. Even trying to swap just 1,000 dollars could cause the price to slip by 5%. Who would use it? Without traders, LPs won’t come, and without LPs, traders won’t come either. This starts a death spiral. ⚙️ Uniswap V4's Paradigm Shift: Separating Liquidity and Logic V4 approached this problem from a completely different angle. "What if we keep the liquidity pool as is, but allow only the trading logic to change?" The core of the Hook system is this separation. Previously, a single smart contract handled everything from holding funds to executing trades. V4 split this into two. - Core Protocol: Responsible only for liquidity management - Hook: Responsible for the detailed logic of the trading process Now, if there is an idea for dynamic fees, there is no need to create a new protocol. You just need to add a hook to the existing 100 million dollar pool. The hook can check market conditions before a trade, adjust fees, and execute the trade, all while utilizing the existing liquidity. 💭 New Chaos Created by Infinite Possibilities V1 was simple, V2 was still simple, and V3 became complex, but the rules were clear. V4 made the rules themselves programmable. Now, even the same ETH/USDC trade can be done in dozens of ways. Some hooks defend against MEV, some reduce price impact, and some allow trades only under specific conditions. In my opinion, the big problem here is how the average user chooses among these options. Security is the biggest issue. Hooks can execute arbitrary code during the trading process. A malicious hook could sneakily take more tokens or siphon fees to a specific address. However, it is practically impossible for an average person to read and verify smart contract code. 🎯 A New Form of Decentralization Looking at the situation created by V4 raises an interesting question. If the protocol is completely open, but in reality, only a few verified hooks are used, is this true decentralization? Perhaps V4 is experimenting with a new form of decentralization. Keeping the infrastructure neutral and immutable while leaving the application layer above it to the market's choice. Just like TCP/IP provides a neutral communication protocol, allowing Google or Facebook to compete freely on top of it. Ultimately, what V4 has shown is the growing pains of DeFi. From V1 and V2's "simple tools for everyone" to V3's "efficient tools for experts," it has now evolved into a "platform created by developers and chosen by the market." Like it or not, this may be the way decentralized finance is maturing. ✏️ In the next episode, Technically, it seems everything has been resolved, but one last question remains. Who will decide the future of all these protocols? In episode 4, we will look at the new power structure created by the UNI token and governance. --- Your likes and shares are love 🥰 #BQDeveloper #Uniswap #V4 #Programmability