SCP Research Report - After in-depth investigation of Uni V4, Permaswap insists on integrating tokens into the technical system

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Translator: Mic’s May @ Contributor of PermaDAO Reviewer: Xiaosong HU @ Contributor of PermaDAO

Writing as UNI V4 launches, exploring possible paths for DeFi to eat the world

1. The McDonaldization of DeFi. The McDonaldization of Society points out that in a highly commoditized society, people will enjoy the same product quality and aesthetic orientation in any region across the globe, such as McDonald's in the United States and China, which is unimaginable in the traditional era. However, after the release of Uniswap V4, users no longer need other swaps, but only need to realize their own customization needs based on Uniswap.
2. Uniswap's immutability and change. The principle of XY=K and AMM mechanism will not change, and the AMM and order book increasingly show a trend of integration, the new limit price single function is an example. AMM will be the dominant paradigm on the chain for a long time to come, while CEX will stick to the traditional order book to encourage market makers to provide liquidity and take advantage of the opportunity to collect fees from it. Hook and Singleton will be the ultimate killer, with Hook responsible for creative freedom and Singleton responsible for speeding up and reducing fees to encourage more retail investors to participate.
3. Permaswap's disciplined innovation. Permaswap itself has no Gas Fee, while the SCP/Nostr paradigm based on off-chain calculation and on-chain settlement will give developers enough freedom to develop innovative transaction paradigms. Most importantly, in the design of Permaswap, the #PSN token is not a simple governance token, but will constitute a necessary element of decentralization and deeply participate in the uninterrupted operation of the network.

Gains and losses of Uniswap

The most significant feature of Uniswap V4 update is the addition of Hook and Singleton mechanism. We will detail the new features of these two parts and their possible positive and negative effects below.

Born in 2018, Uniswap initially chose the classic XY = K and AMM mechanisms to provide liquidity. In on-chain transactions, the most important features are:

It provides a matchmaking mechanism without third-party guarantee to ensure that the transfer of funds only occurs between the two sides of the transaction, which is the biggest difference between DEX and the current mainstream CEX. The protocol itself does not participate in any process of the user's fund flow.

It provides a market-making mechanism with optimal capital efficiency to ensure that users participate in market-making, trading and governance without permission, while the agreement itself is only responsible for gathering the two parties and the complete operation of the transaction.

There is no need to say much about the miracle created by Uniswap, and the following is mainly to talk about its problems, which is the main background of its improved V4 version.

To some extent, Uniswap has achieved the above stated goals, and its trading volume is the most important on-chain trading venue besides CEX. However, it is not necessary to deny that Uniswap also has some problems, the main ones are MEV, unpaid losses and the inability of token holders to share the benefits of the protocol, and possible fraud.

MEV itself is not intentional by Uniswap, but it is due to the characteristics of the blockchain. In the process of on-chain confirmation, someone can always preempt or delay the transaction through various stages, resulting in a gap between the transaction initiation price and the final price, thus causing user losses.

Free loss can be understood in this way, the success or failure is determined by XY=K. Uniswap's matchmaking mechanism will be extremely efficient in the similar price range, but once it exceeds this range or liquidity is insufficient, it is likely to cause a large price difference, and then cause asset loss.

The insufficient value of the Uni token itself is only the appearance that the price cannot rise, and the core is the conflict of interest between LP and Uni holders caused by the characteristics of the AMM mechanism itself.

In the AMM mechanism, the core income source is not the price difference between buying low and selling high, but the transaction fee, which is different from the classic CEX Market Maker operation mechanism. The exchange commission is collected by the exchange, so it has the incentive to protect the interests of the market maker. In essence, only the market maker is large enough. In essence, only when the market maker is large enough, can it attract enough users to participate in the transaction. However, in the AMM mechanism, what LP fears most is not the sharp fluctuations of the price, but its market maker or OG, because they hope to erase the price difference as much as possible for arbitrage, which will cause the LP to be reversed arbitrage. Once the loss exceeds the commission income, the LP will provide liquidity for nothing.