Programmable Trading Arrives: How Hook Becomes the 'Brain' of the Trading Pool?

Uniswap v4 Hook is redistributing market profits.

Written by: Thejaswini M A

Compiled by: Chopper, Foresight News

At the beginning of October, a Memecoin project on Ethereum named Claus replaced part of its 'brain'. Claus splits transaction fees for buybacks, burns, liquidity injections, and rewards for NFT holders.

The financial operations of this token are closely related to the weather. Claus allocates transaction fees to buybacks, burns, liquidity, and rewards for NFT holders. At one point, weather reports from London Heathrow Airport were used to decide how much funding would go towards burning tokens and how much would flow back into the liquidity pool to support trading. Rainy days favored token burns, while sunny weather favored liquidity. If weather data was interrupted, funds were distributed evenly.

The weather experiment is just one of the many functions of its trading pool. On October 6, the project team announced the removal of the arbitrage function while retaining the token contract address, trading pool, and all other functions. This way, holders do not need to exchange their tokens for a new version. The ability to perform such operations is rooted in the fact that the Uniswap v4 trading pool adopts an upgradable Hook.

A Hook is a smart contract that can attach additional instructions during the trading process. Other developers can use Hooks to adjust fees or activate idle liquidity. Developers can build various differentiated markets within existing exchanges without having to deploy a new decentralized exchange from scratch and convince all users to migrate.

Thus, by October 8, if you queried the publicly available Hook registration contract on Uniswap, the contract responsible for all fee logic of Claus had switched from the old FeeWeatherHook to the new FeePrivacyHook.

The project team claims that this token itself is a smart agent: the token is its body, and the upgradable Uniswap v4 Hook is its brain. In the past, once the rules of a token were written into a contract, all exchanges would permanently adhere to this fixed set of rules.

However, Hooks separate these rules from the token contract and place them at the trading market level. Some Hooks even support rewriting trading rules later.

A new industry is taking shape around this technology. It has spawned a plethora of interesting products but also introduced new risks of asset losses.

What is a Hook?

Suppose one trading pool quotes ETH at $2000, while another pool quotes $2020. Trading bots can buy in the lower-priced pool and sell in the higher-priced pool, and after deducting fees and gas costs, the remaining profit is the arbitrage gain. Such arbitrage trades will eliminate the price difference between the two pools. Typically, arbitrage bots take all the profits, while the trading pool only earns transaction fees.

Ordinary liquidity pools already have built-in rules for calculating trades and collecting fees. However, developers may want to leave part of the arbitrage profits for users. A Hook is an independent smart contract that executes additional instructions at specific points in the trading process. Some Hooks can utilize this logic to detect price differences after a swap is completed and execute arbitrage operations within the same transaction to eliminate the price difference. Subsequently, the captured arbitrage profits can be distributed to liquidity providers, traders, and the project deploying the Hook.

In Uniswap v4, there is a shared contract called PoolManager that uniformly handles swaps and records the balances of each pool. All v4 pools on the same chain share this PoolManager, but each pool has independent liquidity and parameter settings.

When you swap ETH for CLAUS tokens, the PoolManager will call the ETH/CLAUS pool to process the transaction. If that pool has a Hook, the system will also determine when to trigger the Hook.

Hooks can include a beforeSwap function, meaning these instructions run before the transaction executes. For example, calculating the transaction fee for this swap or verifying whether the trader has trading permissions. There is also an afterSwap function, representing instructions executed after the transaction is completed, which can trigger token buybacks or record updated prices. Hooks can use either one of these functions alone, enable both, or be combined with other functions related to adding/removing liquidity.

These instructions do not need to be frequently modified. A set of Hooks can use the same rules for many years, such as consistently taking a portion of fees as rewards.

Trading pools can also operate without a Hook; in this case, the PoolManager will process transactions according to the v4 standard logic. Hooks are aimed at developers who want to customize trading logic.

The challenge lies in developers wanting to replace instruction logic later. When a pool is created, the configuration will write the Hook contract address, and the PoolManager relies on this address to call the corresponding contract. In the design of Uniswap v4, this address is a permanent part of the pool's identity. Deploying a brand new Hook with a different address will not automatically bind to existing old trading pools.

Without an upgrade mechanism, if you want to use a new Hook, you must create a new trading pool and migrate liquidity over.

Claus adopts an upgradable architecture to avoid this issue. Its Hook is divided into two parts: one contract retains a permanent address for the pool to call; the second contract stores the actual executable instruction code. The first contract is called the proxy.

When Claus's authorized administrator wants to modify the rules, they only need to deploy the new version of the instruction code and notify the proxy contract to switch to the new version. The trading pool continues to call the same Hook address, but the logic of the code executed by the Hook has been updated.

This is the principle that allows existing trading pools to gain new functionalities without requiring users to migrate their tokens. The party holding the upgrade rights has the power to control the pool's behavior, which is also where users need to assess trust risks.

Previously Unachievable Functions

Before Hooks were born, developers could already implement special logic for tokens, but it was challenging to be compatible with the DeFi ecosystem.

The first solution was to write the rules directly into the token contract. This led to the emergence of 'tax tokens' on Ethereum, where ERC-20 tokens automatically deduct a fee during transfers. If you transfer 100 tokens for a swap, the token contract deducts 2 tokens, leaving only 98 tokens entering the trading pool. However, the exchange contract expects to receive the full 100 tokens, and the transaction will fail.

Uniswap v3 documentation states that such tokens cannot be compatible with standard routing contracts. Developers can only use wrapping contracts or custom routing as workarounds. While the tax mechanism can raise reward funds, it increases the difficulty of token trading, and many exchanges cannot handle such automatic deductions.

Developers could also build contracts around the pool separately or modify exchange code to deploy independent versions of DEX. However, the workload of building an entire infrastructure far exceeds the functionality itself.

Hooks provide developers with a dedicated carrier for trading rules. They enable the following capabilities:

• Only extract funds for buybacks or rewards during trades, without taxing ordinary wallet transfers;
• Automatically adjust trading fees, such as adjusting rates during periods of increased market volatility;
• Distribute captured arbitrage profits to traders and liquidity providers;
• Restrict trading permissions, allowing only whitelisted wallets to trade in the pool;
• Connect liquidity to lending protocols, generating interest on idle liquidity when not being swapped;
• Build the above functions within existing exchanges without needing to deploy and maintain a separate DEX.

Hooks have also spawned a new business model: the core of the product is custom trading logic for pools.

On October 14, Uniswap deployed VolatilePair, a Hook that distinguishes between buy and sell rates, first launched in the Ethereum ETH/USDC trading pool. This Hook charges different fees to buyers and sellers based on recent price fluctuations. Official announcements indicate that the previously launched stablecoin pair Hook StablePair achieved a trading volume of $3.1 billion in four weeks.

Other teams are also dynamically adjusting fees based on the type of trading assets.

The DEX project Fables on the Robinhood Chain adopts this approach, supporting the trading of tokenized stocks and other assets. It relies on Hooks to adjust fees based on signals such as time and volatility. When the underlying securities market is closed, stock tokens can still be traded, but reliable price data sources and hedging opportunities decrease.

The logic supporting dynamic rates is that the risks of providing liquidity during these periods differ significantly from those during active trading periods.

Fables adjusts fees based on the opening and closing times of the US stock market. Some tokenized funds only allow qualified investors to hold.

Uniswap Labs launched permission-controlled trading pools with Uniswap v4 in July, with Superstate, Securitize, and Dowgo as the first partners. This solution relies on Hooks to verify whether wallets have the qualifications for trading and providing liquidity.

Its DualPool Hook allows idle tokens from market makers to be lent out and recalled when needed for swaps. Spark has already migrated $150 million in liquidity to v4 and plans to integrate this Hook. The auction Hook can gradually sell new tokens over a period, ultimately generating a trading pool based on the buyer's settlement price. Aztec has raised about $59 million from over 17,000 bidders using this Hook.

In terms of data, v4 has achieved a trading volume of $39.7 billion in the past 30 days, accounting for about half of Uniswap's total trading volume and contributing 64% of Uniswap's fees. A significant portion of this trading volume comes from the Robinhood Chain. Bitquery found that in early September, only about one-third of v4 pools had Hooks, but these pools contributed 74.5% of the trading volume.

Ethereum Ecosystem

If Hook becomes a new vehicle for storing token trading rules, the opportunity lies in selling ready-to-use rule toolkits, represented by programmable.market. It claims to be the foundational infrastructure for the open launch of Uniswap v4, which is essentially a toolkit that allows for one-click deployment of preset trading rules for tokens on Ethereum and Robinhood Chain. By choosing the Classic version, tokens with custom buy and sell fees can be deployed, paired with a permanently locked ETH trading pool.

In my view, this is essentially a tax token, except that the fee logic is now embedded within the trading pool, allowing the routing contract to identify it in advance. The Custom version, deployed via API, is aimed at project teams wanting to customize Hook solutions. In the default settings of new custom projects on Robinhood Chain, a 0.2% fee is extracted and transferred to a designated address. The documentation also candidly states that the contract has not undergone external audits or public security competitions.

Claus was launched through programmable.market. Buybacks, NFT rewards, and weather-driven fund allocations can all be integrated into the token trading body. Claus can modify the use of trading fees without issuing new tokens. However, holders need to continuously monitor changes—rules recognized when purchasing tokens may be modified later.

There is also a similar tool platform on Robinhood Chain called Hookrfun, which offers 22 types of "Hook components" for creators to select from, including sniper protection and automatic destruction. Among them, the What The Hook component can capture price differences between pools before arbitrage bots do, distributing profits to traders and liquidity providers. The token issuance toolkit of Hookr includes this service.

Third-party pools directly access the default profit distribution rules of What The Hook: 45% goes to liquidity providers, 5% to traders, 40% to the treasury, and 10% to referrers. The above is the distribution ratio for capturing arbitrage profits. What The Hook is the only tool that publicly shares relevant data, with most of the cumulative distributed arbitrage funds retained in its own treasury.

Solana Ecosystem

The Uniswap protocol has not been deployed on Solana, where transactions are dispersed across multiple DEXs such as Raydium, Orca, and Meteora. There is no unified PoolManager to mount Hook, so Solana embeds Hook within the tokens themselves.

The new token standard on Solana, Token-2022, supports creators adding transfer Hooks. Each time a token is transferred, this program runs, covering buy and sell transactions as well as regular wallet transfers. It can validate rules, such as checking whether the receiving address is eligible to hold the token; if the conditions are not met, the transfer is intercepted.

Hooked is Solana's token launch platform, where each token issued by the platform comes with a transfer Hook. Creators can choose from 39 sets of ready-made rules, such as the "hot potato" mechanism, or require buyers to wait 15 minutes after purchase before selling; they can also let AI generate custom rules. Each rule comes with a simple explanation, and some tokens support project parties or holders voting to rewrite rules later. A 1% fee is charged on each transaction, most of which is used for buybacks and burning the native token of the Hooked platform.

However, there are limitations; unless approved by the administrator, Raydium will not create trading pools for tokens with transfer Hooks. Meteora can support such tokens on the value curve; however, when tokens are upgraded to the main trading pool, the transfer Hook logic will be removed. Hooked's workaround is to keep the tokens permanently on the curve, ensuring that the rules remain effective.

In Uniswap v4, additional rules belong to the trading pool. The same token can be traded in pools with Hooks as well as in pools without Hooks. Users can choose trading pools themselves or let the router automatically select.

The transfer Hook logic on Solana is different: rules are bound to the token itself, and any transfer behavior of the token will trigger the rules, including transfers between wallets. Both solutions have corresponding upstream and downstream ecosystems: the router determines which pool the transaction flows into, and the exchange decides which token features to support.

Developers have more market design tools, but the choices they make will determine whether the project can attract users and liquidity.

What Changes Can Upgradeable Rules Bring?

I believe that the upgradeable feature is more important than the Hook itself. A fixed Hook is merely an improved version of a tax token. It makes the trading market corresponding to the token feel like an application that can receive version updates.

Previously, if one wanted to modify the token logic, they could only migrate the token. The project would deploy a new contract, requiring all holders to exchange tokens and requesting exchanges to relist, while liquidity would be dispersed between the old and new versions. In September 2024, Polygon will replace MATIC with POL, requiring all holders to exchange at a 1:1 ratio, with exchanges also assisting users in completing the switch.

Such migrations always leave some holders behind. Upgradeable Hooks allow projects to modify the trading behavior of tokens without large-scale user migration. This significantly reduces the trial-and-error costs for projects.

The most valuable landing scenario for Hooks may not be Memecoins. I think of tokenized securities—the trading rules of real-world assets will continue to change. A fund may add open quotas for investors from other countries, requiring updates to investor qualification checks. Upgradeable Hooks can make adjustments while retaining existing trading pools. They will not rewrite the legal rights of investors or remove restrictions within the token contract, but they can allow trading venues to keep up with rule changes. For markets that need to operate long-term, this capability is far more practical than locking all rules at launch.

Funds may need to update trading rules, while Memecoin communities may wish for rules to remain untouched by project parties. Both demands are reasonable. In the face of upgradeable Hooks, I would focus on checking what content the controllers can modify. Simply updating trading access qualifications is one thing; being able to modify fees and redirect reward funds would give pool users stronger control.

I hope to have time to review before updates affect my funds; if I disagree, I also want the opportunity to withdraw. Projects can embed notification waiting periods in contracts, limiting the scope of modifications developers can make. Completely relinquishing upgrade rights, while eliminating subsequent changes, would also lose the ability to fix vulnerabilities later. Before depositing funds, I will carefully review these terms, as well as the fees and expected returns.

Claus refers to Hook as the brain of the token. In the future, project teams can allow AI agents to automatically update Hooks according to market conditions. For example, AI can adjust fees within the range set by the team and explain the reasons for each change. This kind of automated adjustment is very attractive, but I will confirm: who sets the boundaries for this AI, and who has the authority to shut it down when AI makes erroneous decisions?

Money has had its own ideas since ancient times. During the Great Depression in 1932, the town of Wörgl in Austria issued local currency. To keep the paper money valid, holders needed to purchase a stamp tax of 1% of the face value at the end of each month. Who would want to hold currency that continually shrinks in value? This design incentivized people to spend rather than hoard.

The local government funded public works with this mechanism and allowed residents to use the currency to pay taxes, including back taxes. In 1933, the Austrian central bank intervened, and this experiment was declared over.

In that era, currency rules were set by the government. The government still sets rules today, shaping how people use money. And cryptographic technology allows developers to set such rules for independent tokens and markets, enabling buyers to freely choose solutions that fit their needs.

Choosing a token is essentially judging whether this set of rule arrangements suits you.