Introduction

Earlier this year, Uniswap unveiled Uniswap v4 and Uniswap X, shaking up the DEX landscape. This article explores the impact these releases could have on the DEX space.

Initially, we will dive into how Uniswap v4 and X aim to solve a major issue that Uniswap has been facing - Liquidity Fragmentation

Then, we will examine the concern that Liquidity Providers (LPs) might be exposed to more toxic flows after the Uniswap X launch by using actual transaction data by Filler.

Lastly, we will scrutinize whether the Request for Quote (RFQ) truly holds an advantage over DEXs by considering MEV, especially focusing on the flows of CEX-DEX arbitrage.

Liquidity fragmentation and Uniswap X as the solution

One of the notable issues faced by Uniswap is the liquidity fragmentation. Since the launch of Uniswap v3, three main fee tiers have been set, and multiple pools for the same trading pairs across different chains. Moreover, with Hooks in Uniswap v4, a substantial increase in the number of liquidity pools is anticipated. Consequently, it is expected that routing through pools will become more highly complex when users execute transactions.

Uniswap X emerges as a solution to this issue. Uniswap X, a type of intent-centric application, aims for best execution by having a third-party entity known as Filler handle the complexity of routing. Furthermore, Uniswap X facilitates interactions with multiple DEXs including Uniswap, Curve, and SushiSwap, while also offering Direct Fill for immediate, direct transactions with Fillers.

The primary concern with the advent of Uniswap X is that uninformed flow may bypass DEX and get executed through Direct Fill by Fillers.

In finance, there are two main types of user orders: uninformed orders, based on personal reasons, and informed orders, where traders exploit price differences between centralized and decentralized exchanges for arbitrage gains.

Uniswap X's Impact on DEX Liquidity and Order Flow

In DEXs like Uniswap, providing liquidity targets uninformed orders—those that don't move prices. Despite short-term effects on DEX prices, informed trades neutralize this impact, enabling liquidity providers to collect fees without price risk.

However, DEX LP may fail to capture the uninformed orders due to Direct Fill in Uniswap X. In Ethereum, the block time is fixed at about 12 seconds, during which the state of Ethereum remains unchanged. Even if significant news emerges 6 seconds post block building, DEXs like Uniswap or Curve cannot reflect the price information until another 6 seconds pass. DEXs are always trailing CEX prices due to this latency issue. On the other hand, Uniswap X, through off-chain Dutch Auction, allows Fillers to bid based on real-time information. This creates information asymmetry, and Fillers can be considered to have informational superiority over DEXs.

Consider the following scenario, at t = 0, the price at Binance and Uniswap is $1500. At t=1, the price at Binance changes to $1600. Ignoring various conditions, Fillers can bid prices between $1500 and $1600 against uninformed flow. This superiority risks a lot of uninformed flow being executed via Direct Fill by Fillers instead of going through DEXs. We will delve into this further in the following sections.

Analysis of Uniswap

The analysis reveals that around 90% of transactions utilizing Uniswap X do not involve DEXs. Moreover, the trend of Direct Fill transactions has been increasing over time, where in July, about 60% were Direct Fills, which surged to 90% in September and October.

Among these, we have quantified the amount of Direct Fills, which are transactions that do not involve DEXs including Uniswap. Specifically, we first fetch Fill events from transactions utilizing Uniswap X. Then, from the transaction hash, we obtain Transaction Receipt Event Logs. Finally, if a transaction passes through a DEX, we should always be able to fetch a Swap function or a similar event log, deeming it a DEX-routed transaction.

So far, we have analyzed Uniswap X by utilizing real data. Now let's delve into whether the RFQ mechanism, exemplified by Uniswap X, truly ameliorates the execution quality for users. While such Intent-based applications simplify user execution, they don't necessarily improve it. The previously described scenario presented an ideal condition for Fillers; however, a closer examination of Ethereum's order flow could reveal a more nuanced reality.