Thread by @hhe08

1/ Should you launch a serious product using @Uniswap v4 Hooks?! HOLD OFF unless you have a solid plan to attract swaps to use your awesome customized v4 pools - the critical success factor! Uniswap v4 Hooks: the GOOD, the BAD, and the UGLY. medium.com/@hhe/uniswap-v…

2/ The GOOD: opening #AMM core for customization can enable innovations on AMM LP side which couldn't be done before, and Hooks is the right technical architecture & product. For example, distributing rewards based on fees earned by LP positions.

https://x.com/double2winwin/status/1679516461499580416

3/ Side note: to evaluate whether a hook is a good one or not, a simple rule of thumb is to evaluate whether or not the goals of the hook can be achieved completely outside the core smart contracts. If it can be done, then it is not a good hook. Otherwise, it is a good one.

4/ The BAD: it is inevitable that, as an open architecture, Hooks add additional risks either technical or financial, which must be examined extremely carefully. The trade-off between open architecture and additional risks is worth it though.

5/ A hypothetical attack: <ETH, USDC>, pool A with $10M & pool B with $5M. Pool A gets an ETH sell order, using Hooks, A can => beforeswap, remove $8M liquidity => execute swap => afterswap, buy ETH at lower price from A, dump ETH to pool B to profit, & add back $8M liquidity.

6/ The UGLY: if Hooks succeeds, there will be tons of customized AMM pools that will have to compete among each other for swaps to use their pools, and to succeed, pool creators or/and pool LPs must play a more active role to solve the routing issue for their customized pools.

7/ Uniswap’s plan to solve routing and security issues created by customized LP pools powered Hooks, is to send swaps to Uniswap X, and to rely on Uniswap X fillers to route swaps to customized AMM LP pools and conduct security audits on Hooks used in customized AMM LP pools.

8/ Uniswap’s plan sounds logical & solid. But there’s one design flaw: MEV attackers could kill the formation of a super competitive filler market, which is critical for the success of Uniswap X. If it is NOT fixed, it will prevent both v4 Hooks and Uniswap X from thriving!

9/ For most tokens especially long-tail, tail, torso tokens, fillers source liquidity on-chain. Acting like arbitrageurs, fillers won't fill unless profitable when using on-chain liquidity. Unfortunately profitable on-chain tx can be MEV attacked - enter the dark forest!

10/ MEV attackers could kill the whole filler market - the goose that lays golden eggs => kill Uniswap v4 & Uniswap X. Ironically, one value of Uniswap X is MEV protection. In reality, it just shifts MEV from swappers to fillers & creates new MEV in filler market!

11/ 抛砖引玉 (throw a brick to attract a jade). To prevent MEV attackers killing the filler market, a few non-perfect solutions are presented below with a goal to generate wide discussion in the community so as to come up with and reach consensus on solution(s).

12/ Proprietary inventory: fillers will hold the proprietary inventory that MEV attackers can't access. This solution won’t work for most tokens since in general, fillers won’t take inventory risks except for a few top (<50) market cap blue chip tokens.

13/ Private mempool: Classic solution that all fillers use right now. A critical unknown though. If the super thin profit has to be shared, will there be enough profit left to incentivize fillers? Is it inevitable that builders have to become fillers or vice versa?

14/ Permissioned: Only selected entities are allowed to fulfill swaps, used by @1inch, @CoWSwap, Uniswap X beta. Will this create a super competitive filler market?! Until it is proven in the market, the right assumption is that it will NOT.

15/ Auction: fillers compete to win auctions & swappers commit to winning fillers. The whole process can't be done in 1 tx for on-chain liquidity, and hence it can still be MEV attacked - pump on-chain pool & make unprofitable for auction winning filler to fulfill the swap.

16/ A winning DEX market structure is emerging. A decentralized network containing 3 groups of entities: on-chain liquidity including customized AMM LP pools; OFA providers and a super competitive filler market that fulfills OFA orders using both on-chain & off-chain liquidity.

17/ The new DEX market structure has many competitive advantages: 1) Serve a high growth market segment that can’t be served by CEX; 2) Attract order flows that were exclusive to OTC or dark pools before; 3) Include CEX as market participants; 4) Welcome many existing CEX players

18/ AMM, the on-chain liquidity source, will be a critical participant in the new DEX market structure & continue to dominate the whole DEX ecosystem. Innovations that make AMM LPing profitable are launching, attracting massive passive capital into AMM.

https://x.com/double2winwin/status/1695131765625721243

19/ One remaining open question for this new DEX market structure to succeed is how to prevent MEV attackers from killing a super competitive filler market. There are few workable solutions out there. Talented DeFi community will definitely figure things out!

20/ Sincerely appreciate discussions, feedbacks & reviews from @danrobinson @xin__wan @alexjongarn @mattdeible @abandeali1 Tom Zhao @wintermute_t @ShiliangTang @futurenomics @TheiaResearch, @gphummer @JoeButtram @ErikCederwall