Uniswap version 4 allows for new liquidity pool types.

Uniswap Labs has released a draft of the code for Uniswap V4, according to a blog post by Hayden Adams, the founder of Uniswap, on June 13. The new code includes “hooks” or plugins that allow developers to create custom liquidity pools.

Uniswap is the world’s largest decentralized cryptocurrency exchange in terms of volume. Its latest version, V3, was launched on May 4, 2021.

According to the post, the “hooks” feature of V4 will allow future developers to create on-chain limit orders, automatic deposits to lending protocols, auto-compounded liquidity provider (LP) fees, and many other innovations to the exchange once it is implemented.

Releasing the source code is the first step in launching a new version of Uniswap. The team plans to engage with members of the Uniswap community and iterate on this base code over time. Once enough consensus has been built around a final version, V4 will be presented to Uniswap’s governing body, UniswapDAO, as a formal proposal.

According to Adams’ post, Uniswap V4 is designed to “create a way for pool deployers to introduce code that performs a designated action at key points throughout the pool’s lifecycle – like before or after a swap, or before or after an LP position is changed.”

For example, deployers will be able to create time-weighted average market makers (TWAMMs) that allow users to sell large amounts of cryptocurrency in small batches over time. This may help traders avoid being frontrun by EVM bots or suffering adverse price movements. Pools will also be able to incorporate logic that lets them fulfill an order only when a token hits a particular price, making on-chain limit orders possible.

Other examples of “hooks” include code that can redeposit fees back into an LP’s pool or lend out inventory when a particular pool isn’t being used.

In a conversation with Cointelegraph, Uniswap Labs Engineer Sara Reynolds said that the new version will enable automated market maker (AMM) exchanges like Uniswap to develop more rapidly than ever before, thanks to the inherent customizability it allows.

“In V4 what we really start to see is sort of this ‘primitive’ for customized logic[…]and that’s really exciting because I think it will really start to evolve AMM innovation quite fast.”

Uniswap Labs Head of Communications Bridget Frey echoed this sentiment, stating that “other people have to build new AMMs to do a lot of this work. Now, what you’ll be able to do is to build your project with a hook contract on top of Uniswap’s security and liquidity in ways that hopefully make the innovation faster and easier to do for all sorts of projects.”

Decentralized exchanges have seen an influx of new users recently. The top three DEXs experienced a 444% surge in volume after the United States Securities and Exchange sued their centralized competitors, Binance and Coinbase, for allegedly violating securities regulations. This surge occurred even though the SEC has also tried to change the definition of “exchange” to include decentralized ones. Crypto venture capital firm Paradigm has argued that decentralized exchanges do not fit the definition of an “exchange” found in securities laws.

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