What is Uniswap X? Will it Overturn the Entire Aggregated Trading Market?

Introduction to the New Trading Protocol Uniswap X

Those familiar with cryptocurrencies know that Uniswap can be considered a leader in decentralized exchanges. Since its inception in 2018, it has completely revolutionized the ecosystem of decentralized exchanges, leading to exponential growth in on-chain trading volume. Each new version release garners widespread attention and imitation from the industry. Although the launch of Uniswap X did not attract as much attention as Uniswap V4, its impact should not be underestimated.

On July 17, Uniswap founder Hayden Adams officially announced the launch of a new non-custodial aggregate protocol based on Dutch auctions, Uniswap X. Uniswap X is a new permissionless, open-source (GPL), Dutch auction-based aggregate trading protocol that provides trading services for users across AMMs and other liquidity sources. Uniswap X aggregates on-chain and off-chain liquidity sources to provide traders with the best market prices while protecting against MEV attacks and offering gas-free transactions, even potentially supporting cross-chain gas-free transactions in the future.

Image Source: Uniswap Official Swap

As shown in the picture above, using Uniswap X is very simple; we just need to turn on the switch indicated by the arrow on the trading page.

How does Uniswap X achieve its claimed advantages? Let’s explore one by one.

How Uniswap X Works

To thoroughly understand all the advantages of Uniswap X, we first need to know how Uniswap X operates.

In the entire Uniswap X ecosystem, a Relay Network system is used to complete each transaction, and in this system, there are six important roles:

• Swapper: The trader, or the user;
• Filler: The filler, or third-party matchmaking service provider (market maker). They get orders from the api service and help users complete transactions. They can choose to provide liquidity themselves or find liquidity on other platforms;
• API Service: API service is a back-end service controlled by the official, responsible for submitting user orders to the Filler;
• Executor: Smart contract deployed by the Filler, used to complete the core logic of the swap, and interface with other swaps at the underlying level;
• Reactor: Smart contract deployed by the official, mainly responsible for coordinating the Filler to complete the swap logic and check for validation;
• Quoter: Smart contract deployed by the Filler, used to provide quotes to users before the start of the transaction.

Image Source: Uniswap Official Transaction Flow Chart

The above picture is an official illustration of how each transaction should be implemented at the underlying level. To simplify understanding, here is a brief explanation:

Before each transaction begins, the system will try to find the best quote in different liquidity pools on-chain and off-chain. If the on-chain liquidity is insufficient, it will switch to off-chain orders. Users can see the quotes provided by third-party quotes, which will not be higher than those of Uniswap V2 or V3. If the user accepts the quote, they can sign the off-chain order. Since this is not an on-chain order, there will be no gas fees. After signing, this off-chain order will be uploaded to the API service, and the Filler can synchronize the order book through the official interface. In simple terms, all Fillers can see the order at this point. Since they are essentially competitors, the official will use the Dutch auction method to determine who will facilitate the transaction. The Filler executing the transaction will use the user’s tokens in their own liquidity pool or anywhere else (can be any other swap) to complete the token transaction. The Filler bears the actual transaction gas fee, so the user perceives a gas-free transaction experience. After the Filler completes the transaction, the post-transaction tokens will be transferred to the user, and the underlying implementation logic of the entire transaction process is as such.

In summary, Uniswap X enables many third-party market makers (Fillers) to help users find the best transaction price. Third parties can choose to use their own liquidity or any other platform, and of course, other aggregate platforms as well.

UniswapX Core Features

Having understood the operational principles of UniswapX, let’s take a look at the features introduced in its official documentation:

1. Better prices through aggregated liquidity sources

2. Network fee-free exchanges

3. Protection against MEV attacks (e.g., sandwich bots)

4. No network fees for failed transactions

5. Future expansion of UniswapX to gasless cross-chain exchanges

Does this seem more straightforward to understand now? Essentially, all these benefits are made possible by the off-chain node provider system (Relay Network) mentioned above. Some people may not fully understand how UniswapX protects against MEV, or even what MEV is, so let’s briefly explain it: MEV refers to the profit value that users can obtain through the rules of the blockchain network, such as reordering, inserting, and reviewing transactions within a block. Standard practices like arbitrage, liquidation, and sandwich bots all fall under the category of MEV. UniswapX protects against MEV by ensuring that orders executed by “Fillers” cannot be intercepted in the middle. Also, when orders are routed to other on-chain liquidity locations, the official incentive for “Fillers” is to use private transaction relays. This means that the transactions received by “scientists” (users) may not necessarily be in the order of price, making the transactions eventually present in the Mempool very difficult to predict. This approach directly squeezes out the arbitrage space for MEV, thus achieving MEV protection.

Overall, UniswapX’s aggregated liquidity consolidates capable third parties to assist users in trading. The official platform is an open liquidity outsourcing system, allowing all third-party fillers to compete to complete aggregated liquidity, naturally achieving the best price. The feature of fee-free exchanges is also effectively supported by third parties that help users bear the fees.

Conclusion: UniswapX is a Blessing for Users

From the user’s perspective, UniswapX is a qualified product. For its users, attractive features such as high-quality exchange prices, no gas fees, and MEV attack protection are the most favored functionalities. Solving these pain points will encourage more users from centralized exchanges to consider using decentralized exchanges. Overall, the entire UniswapX experience is becoming increasingly similar to centralized exchanges because the ultimate strategic intent of Uniswap is to continuously expand its user base, which naturally includes capturing users from centralized exchanges.

However, the launch of UniswapX will disrupt the entire aggregator market because UniswapX will leverage its vast user base and brand strength to capture the market, forcing other platforms to provide liquidity for UniswapX. For other aggregator platforms, UniswapX is evidently unwelcome, especially since it openly “borrowed” some features from platforms like CowSwap and 1inch fusion, which has attracted significant criticism.

It is normal for the market to rely on moats to expand its competitive advantage. As users, we do not need to worry too much about the stories behind the scenes; more important is to understand that if UniswapX can offer users a better-aggregated trading experience, then its mission is accomplished. Moreover, no one can ignore Uniswap’s contribution to the entire DeFi industry, as it played a crucial role in expanding the decentralized exchange market.