Crypto Narratives: DeFi’s Next Killer Use Case
It’s been widely accepted that Decentralized Finance (DeFi) is perhaps Web3’s most valuable use case. The upside potential is massive if you take the total market size of anything related to payments, trading, custody, or banking in general. That doesn’t mean, though, that DeFi should be worth many billions; it just means that the total addressable market is way more significant than any other problem crypto is trying to solve.
That being said, back in 2020, DeFi went through a wave of hype. When automated market makers (AMMs) allowed users to swap between different coins, and lending pools like Aave and Compound allowed users to borrow or leverage their assets, crypto went wild. However, it’s been three years, and arguably the only new major use case with widespread adoption has been Perpetuals, which we have covered heavily. Is there anything left in the tank for DeFi? Cue Uniswap V4, perhaps the most significant advancement in DeFi since Perpetual. With the main feature being “hooks.” Think about it in Web2 terms as a webhook, something you can hit that triggers some logic. Again, remember this section is the narratives section; the hype could be greater than the usage, but let’s examine it closer to understand where that hype could come from. Hooks allow actions to execute throughout the flow of Decentralized Trading. To get everyone else up to date, Uniswap is where DeFi blew up. Uniswap was a decentralized exchange that allowed users to pool two assets together. With a large pool of ETH and a large pool of LINK, for example, people could request to swap one coin for the other. That meant I could come in with ETH and trade it for LINK at the market rate. If the pools became imbalanced (for example, if ETH became way more valuable), people would be incentivized to fill up the pool with more ETH via sharing in the trading fees because their position would be much larger %-wise. Uniswap V3 would also allow different-sized pools to be created but notice that this setup only allows for one coin in, one coin out, at one trade.
Okay, great, so how do hooks come into the picture? A hook is just a contract that can be inserted into this flow. That means you could have a contract before a coin enters—meaning, I can say I’ll buy LINK with my ETH, but only at a specific price. Wait a second; that means limit orders are finally possible on Uniswap! This feature has been missing for YEARS. But what else? The other example could be entering a position slowly. For example, if you had a significant position to enter but didn’t want to time the market, you could have a contract saying, “Enter this position slowly through the day.” However, a large order like this could also be front-run in theory. Some controversy arose; for example, what if someone created a hook to steal all your funds? You enter a position, and the hook says, “Send to x wallet.” Worse yet, this could be sitting on Uniswap’s main page! I am hopeful they will have some safeguards about this.
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