Image courtesy of Uniswap Protocol

Uniswap, currently the crypto market’s largest decentralized exchange (DEX) with a trading volume of $622 million over the last 24 hours, has launched a new protocol called UniswapX to improve user experience.

According to a Twitter post that accompanied the announcement, the protocol, released as a beta version, is designed to enhance liquidity and efficiency of the decentralized finance (DeFi) sector, especially on the Uniswap platform.

Enhancing User Experience in DeFi With UniswapX

Uniswap caters to the needs of investors in the crypto market by operating a DEX. This refers to a platform that lets users trade crypto assets directly with each other, without relying on third-party intermediaries like Binance or Coinbase.

On the other hand, a centralized exchange (CEX) is a platform that acts as a middleman between buyers and sellers and holds their assets in its own wallets. DEXes offer more security, privacy, and control over your funds, but CEXes offer more liquidity, speed, and ease of use.

With UniswapX, users in the DeFi space can trade across automated market makers (AMMs) as well as other related liquidity sources. In the unveiling on Monday during the EthCC conference in Paris, the company CEO Hayden Adams said that the novel protocol seeks to address various challenges encountered with on-chain trading and self-custody.

“To grow onchain trading and improve self-custody swapping, we’re excited to announce a new permissionless, open source (GPL), Dutch auction-based protocol for trading across AMMs and other liquidity sources,” Uniswap Labs said in a blog post.

In a related report, CoinDesk outlined that UniswapX, although still in beta, allows users to access “liquidity, better prices, MEV (or maximum extractable value) protection, and gas-free swapping.” Users may also look forward to zero cost on failed on-chain transactions.

Uniswap called upon interested users to join the “opt-in beta for the protocol on the Uniswap Labs interface, available for Ethereum Mainnet and expanding to other chains and the Uniswap Wallet in the future.”

How UniswapX Works

The whitepaper describes UniswapX as a “non-custodial Dutch auction-based trading protocol implemented for the Ethereum Virtual Machine.”

UniswapX combines both on-chain and off-chain liquidity and internalizes MEV as a method of price enhancement to offer gas-free swaps which the team intends to extend its scope to support cross-chain buying and selling of crypto assets.

A Dutch auction-based trading protocol utilizes signed off-chain orders which can be “executed and settled on-chain” to outsource tasks such as routing and batching to a decentralized network of Fillers, which ensure Swappers receive optimum execution on their orders, thanks to the aggregated on-chain and off-chain liquidity.

Those familiar with the DeFi space can attest to the fact that despite liquidity pools being the lifeline of the DEXes economy, they are prone to drying up. Uniswap believes UniswapX will put an end to liquidity crunches by collaborating with third-party fillers who directly fill swaps or direct user requests to specific AMM pools where liquidity exists.

Swappers will enjoy lower swap prices on UniswapX as competition from the same third-party fillers grows.

Users will no longer have to worry about finding the best price for their swaps as long as they are connected to the new UniswapX interface. Using on-chain records, the DEX has committed to ensuring transparency.

“All orders are backstopped by the Uniswap Smart Order Router, which forces fillers to compete with Uniswap v1, v2, v3 and, once it launches, v4,” Uniswap added in the blog post.

Image courtesy of Uniswap Labs blog

Fillers are expected to cover the gas fees on behalf of traders, which eliminates the need for swappers to maintain a balance of the blockchain’s protocol’s token for example Ether or MATIC to execute trades. With this, Uniswap promises zero cost on unsuccessful on-chain transactions.

According to Uniswap’s detailed explanation “orders that are batch settled and/or filled directly from fillers’ inventory are more gas efficient than swaps on the core Uniswap Protocol.”

In contrast to AMMs, UniswapX integrates MEV within its design structure, reducing price obligation by reinvesting any extra value made from an order back to the swappers for price enhancement.

“UniswapX does not specify how fillers fill swappers’ orders: Liquidity can be sourced from a combination of on-chain liquidity venues like Uniswap or other DEXs, off-chain liquidity, or from other UniswapX orders,” the whitepaper explained. “Multiple orders can be bundled into the same transaction, which can also execute other actions atomically on-chain.”

Looking Ahead For Uniswap

The launch of UniswapX beta is just the beginning, with the DEX expected to release a cross-chain version of the new protocol later this year. The X-chain will integrate swapping and bridging into a single seamless process.

Such a development would support users on UniswapX to move between chains in a split second. Cross-chain trading is a feature that allows swappers to smoothly “trade assets on the origin chain” for different assets on the desired destination chain. For instance, trading Ether on the origin chain (Ethereum) and receiving MATIC on the destination chain (Polygon).

Uniswap assured users via the blog post that “UniswapX is an immutable smart contract built to be fully permissionless.” The contract cannot be modified by anyone, not even Uniswap Labs.

UNI Price Jumps on UniswapX Launch

Uniswap is up 5.6% to $6.00 at the time of writing on Tuesday, a day after the launch of UniswapX DeFi protocol. The token’s trading volume soared to $262 million with the market cap growing to $4.6 billion. Currently, Uniswap holds as the world’s 17th largest crypto after zooming past Shiba Inu (SHIB) and Wrapped Bitcoin (WBTC).

The Rise of Decentralized Exchanges

Although DEXs have been an alternative to CEXs for many years, investors started paying more attention to them after the implosion of FTX exchange in November. According to a report on ‘Decentralized Finance Market Size’ by Grandview Research, the DeFi sector was valued at $13.61 million in 2022 and could grow at a CAGR of 46% between 2023 and 2030.

“The widespread acceptance of Decentralized Finance (DeFi) has brought about a significant revolution in the financial sector, becoming a key driver for market growth. Over the past few years, the integration of DeFi with decentralized blockchain platforms has gained immense popularity,” the report detailed.

US DeFi market by size, component, 2020 – 2030 | Grand View Research

With the launch of UniswapX, Uniswap could lead the growth of the DeFi sector. Increased regulatory pressure from the US on CEXs like Binance and Coinbase could also drive the masses to DEXs and other DeFi platforms.

As investors search for platforms that offer cheaper solutions with a simple yet enhanced user interface and experience, UniswapX could become the go-to protocol. However, Uniswap’s success would be determined by how it handles competition from other DEXes such as dydx, PancakeSwap, and Balancer v2.

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