Since its inception in 2018, the Uniswap Protocol has witnessed remarkable growth, supporting millions of users, facilitating numerous use cases, and boasting an impressive $1.5 trillion trading volume on Uniswap alone. To foster further development in on-chain trading and enhance self-custody swapping, they have announced the launch of UniswapX, a new permissionless, open-source protocol based on Dutch auctions.
Overview of UniswapX
UniswapX is designed as an immutable smart contract, meaning that once it is deployed, no one, not even Uniswap Labs, can make any modifications to its code or halt its operation. This key feature ensures that UniswapX remains fully decentralized and permissionless, placing control firmly in the hands of its users.
To ensure an efficient and effective trading experience, UniswapX has a network of fillers who play a crucial role. These early adopters are committed to setting appropriate starting prices for auctions and swiftly executing orders. Their active participation at the initial stages of UniswapX’s implementation will help to establish a solid foundation for the protocol.
Improvements Offered by UniswapX
UniswapX is set to enhance swapping in several ways, providing users with a superior trading experience:
Better Prices through Liquidity Source Aggregation
As on-chain trading evolves, liquidity pools have multiplied, resulting in fragmented liquidity across various fee tiers, Layer 2 solutions, and on-chain protocols. UniswapX tackles this complexity by outsourcing the routing process to a network of third-party fillers. These fillers compete to execute swaps using on-chain liquidity from Automated Market Maker (AMM) pools or their private inventory. By aggregating liquidity sources, UniswapX ensures users can access competitive prices while simplifying the process.
Gas-Free Swapping and No Cost for Failed Swaps
UniswapX introduces a gas-free swapping mechanism, enabling users to sign a unique off-chain order. These orders are then submitted on-chain by fillers who cover the gas fees on behalf of the swappers.
Consequently, swappers are relieved from the burden of paying gas fees and are not required to possess the native network tokens of the chain they are trading on. Fillers incorporate the gas fee into the swap price and can optimize transaction costs by batching multiple orders, striving to offer the best prices.
Maximal Extractable Value (MEV) has been a significant concern in on-chain swapping, resulting in suboptimal prices for swappers. UniswapX addresses this issue by redirecting MEV, which would have otherwise been captured by arbitrage transactions, back to the swappers, thereby improving their prices. Furthermore, UniswapX helps users avoid more explicit forms of MEV extraction by preventing sandwich attacks during order execution with fillers’ inventory. Fillers are incentivized to utilize private transaction relays while routing orders to on-chain liquidity venues.
How Does UniswapX Work?
Suppose Alex (the swapper) wants to sell 1 BNB for USDT. Alex reaches out to potential fillers: Ethan, Olivia, and Liam.
- Ethan offers to buy Alex’s 1 BNB for 250 USDT
- Olivia offers 240 USDT
- Liam offers 230 USDT
- Alternatively, Alex can directly swap her 1 BNB for 225 USDT using Uniswap v3
Alex decides to accept Ethan’s quote of 250 USDT and signs the order. The order specifies a maximum value of 250 USDT (Ethan’s quote) and a minimum of 225 USDT (Uniswap’s router).
Ethan can fulfill Alex’s order by using his USDT or routing Alex’s BNB to different on-chain venues such as Uniswap Protocol or Sushiswap. Ethan uses his own USDT and sends Alex 250 USDT in exchange for the 1 BNB. If Ethan changed his mind, Alex wouldn’t need to create a new order. The existing order would automatically update, offering the 1 BNB to anyone willing to give Alex 240 USDT in return.
After some time, neither Olivia nor Liam (nor any other fillers on UniswapX) are willing to fill Alex’s order at 240 USDT. Eventually, the 1 BNB becomes available for 230 USDT. Suddenly, Olivia realizes she can fill Alex’s 1 BNB sell order for 230 USDT while making a 10 USDT profit. Olivia executes the trade on Alex’s behalf, utilizing Uniswap v3 and Sushiswap. Olivia sends the 1 BNB to Uniswap v3 and Sushiswap, resulting in Alex receiving 230 USDT while Olivia keeps the additional 10 USDT as profit.
Alex successfully swaps the 1 BNB for 230 USDT through Olivia, which is a better outcome than directly trading through Uniswap v3 (225 USDT). This improved price is achieved by accessing liquidity from various venues and utilizing advanced order routing, allowing for a surplus value that arbitrage traders would otherwise capture. Furthermore, by entrusting the execution process to Olivia, who uses a private relay, Alex avoids the risk of the trade being front-run by malicious MEV bots.
Future Roadmap: UniswapX Goes Cross-Chain
In the near future, Uniswap has plans to launch a cross-chain version of UniswapX, seamlessly integrating swapping and bridging functionalities into a single action. With this cross-chain capability, swappers can trade between different blockchain networks rapidly. Moreover, users can choose which assets they receive on the destination chain rather than being constrained to bridge-specific tokens.
UniswapX marks a significant advancement in on-chain trading and swapping. By leveraging an open network of fillers, aggregating liquidity sources, offering gas-free swapping, protecting against MEV, and providing a future cross-chain solution, UniswapX aims to enhance the trading experience for users. With UniswapX, swappers can enjoy transparent and competitive prices while maintaining the utmost security and self-custody, staying true to the core principles that have made Uniswap a trusted name in the DeFi space.