From Uniswap to Pump.fun, all DeFi innovations are pool-changing

Written by: Huang Shiliang

I feel like the concept of pooling has always been an underrated concept. Clearly defining the concept of accurate pools is very important for the coin mixing community. LEARNING DEFI, THE POOL IS PROBABLY THE BEST KEY TO USE, AND ANY NEW USER WHO WANTS TO ENTER THIS SPACE SHOULD FIGURE OUT THE POOL AT THE FIRST STOP.

In a centralized exchange like Binance, a trading pair, in the form of an order book, such as ETH-USDT, is the position where the two sides of the transaction place orders, and the seller and the buyer are each other's counterparties. This is a familiar form of trading.

In a decentralized exchange DEX, the counterparty of the buyer and seller is something called a pool. A pool is to throw two tokens that trade with each other into a "pool", and the specific amount of these two tokens in this pool can be changed to meet the requirements of a specific price curve, which is the AMM algorithm.

This is the core of the liquidity pool in a DEX. Let's define what a liquidity pool is, or what are the core elements that make up or define a specific liquidity pool.

To understand the pool thoroughly, you can ask three questions:

1. Who puts the funds into the pool?

2. What does the protocol do with the money?

3. How are benefits and risks distributed across the pool?

FOR THE VAST MAJORITY OF DEFI PROJECTS, IF YOU CAN ANSWER THESE THREE QUESTIONS CLEARLY, YOU ARE BASICALLY AN EXPERT IN THE PROJECT.

HOWEVER, IN ORDER TO BE ABLE TO TRULY INCORPORATE A DEFI PROJECT INTO YOUR FINANCIAL MANAGEMENT OR USE, WE STILL NEED TO DEFINE THE POOL IN MORE DETAIL.

For a pool, it can be split into five elements:

1. Funding component.

For example, the pool in Uniswap contains two ERC20 tokens to form a trading pair. Like Curve, there will be a three-coin pool.

SIMILARLY, FOR LENDING DEFI PROJECTS, IT CAN ALSO BE VIEWED FROM THE PERSPECTIVE OF CAPITAL POOLS. For example, AAVE can be split into a supply pool and a liability pool, and you can also see what ingredients are in the pool.

2. The role of interaction with the capital pool, so as to define the supply and demand role of the capital pool.

For example, Uniswap's capital pool can define trading users and pool provider users. THIS ELEMENT CAN FIND OUT WHERE THE REAL PROFIT OF THIS DEFI PRODUCT COMES FROM. IF YOU'RE INVOLVED IN A DEFI PROJECT AND YOU DON'T FIGURE OUT THE ELEMENTS, YOU'RE DEFINITELY A LEEK.

3. Change or rather constrain the algorithm that restricts the changes in the composition of the pool.

The classic one is Uniswap's AMM curve. All kinds of DEXs are actually modifying the algorithm that changes the composition of the pool, and the essence of various MM curves is a little change in this algorithm.

Parameters such as interest calculation, collateral ratio, and liquidation conditions of the lending protocol are also algorithms that constrain changes in the composition of the pool.

4. Allocation of benefits and costs of the agreement.

The allocation of benefits and costs is part of the algorithm of 3 above. But this one is important and deserves further refinement.

For example, Uniswap's AMM algorithm is to give 100% of the fees contributed by trading users to the pool provider, and most DEXs will share a part of it to the project party.

The distribution of interest on the lending agreement is also one of the most important parameters.

5. Finally, there is the part that we may not be very concerned about, which is governance.

The main thing is how the protocol parameters should be adjusted, and now the governance of various DAOs is that the project party issues a proposal, and then the token holder votes and so on.

NO MATTER HOW COMPLEX DEFI PROTOCOLS ARE, THEY CAN BE ANALYZED FROM THESE FIVE ELEMENTS.

Like the Uniswap v4 version of Hook, I see that a bunch of people on the Internet have written articles about popular science that are difficult to understand, but in fact, it can be understood from the perspective of the pool.

Uniswap V2's pool consists of two ERC-20 tokens, as long as the tokens are the same, they are the same pool. This means that for each token pair (e.g. ETH/USDC), Uniswap V2 has only one pool, in which all transactions take place, and the fee is fixed at 0.3%.

Uniswap V3 introduces more flexibility. In addition to the fee division, V3 adds four fee options: 0.01%, 0.05%, 0.3%, and 1%. This means that for the same pair of tokens, users can choose different fees to form different pools. V2 has only one fee of 0.3%, while V3 allows the rate to be adjusted according to different trading needs.

In addition, V3 also introduces Centralized Liquidity, which allows LPs to choose the price range in which liquidity is provided, further optimizing the efficiency of the pool. This is an algorithmic adjustment of the pool's components, but these algorithms are officially defined by Uniswap, and LPs can only provide liquidity within these preset ranges.

The most significant change in Uniswap V4 compared to V3 is the customization of fees. V4 allows users to set up virtually unlimited fee options for the same pair of tokens, breaking the limit of four fixed fees in V3. This means that two identical token pairs can create multiple different pools in V4, depending on the different settings of fees.

In addition, V4 also introduces the Hook mechanism, which makes the composition and algorithm of the pool more flexible. V4 allows users to add a custom algorithm, i.e., a hook, to further change the behavior of the pool after the original x * y = k constraint. Each pool can only have one hook, so different hooks will create different pools even for the same token pair and the same fee settings.

The V4 version may allow the pool to have an infinite amount of data.

One of the largest projects on SOL, Pump.fun, is also clear from the perspective of a pool of funds.

Pump.fun biggest innovation is the algorithm that integrates the initial pool of coins and minting.

During the issuance process, the principal paid by the user's mint coin will be minted into a capital pool after the issuance of coins, so as to make up for the lack of liquidity of most coins, so that a new coin can be successfully issued with a sufficient pool of funds for everyone to gamble.

IN FACT, IT IS A GOOD WAY TO FIND ARBITRAGE STRATEGIES BY CAREFULLY STUDYING THESE VAST DEFI PROTOCOLS AND LOOKING FOR THE DESIGN DETAILS OF THEIR POOLS.