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    Bankless

    The New DeFi Meta with Paradigm’s Head of Research, Dan Robinson

    Thu Aug 03 2023
    DeFiCryptoUniswap XSwappingIntentsOrder Flow AuctionsMEVCross-Chain SwapsBridgingUniswap V4Liquidity ProvisionAMMsOff-Chain Infrastructure

    Description

    The episode covers the introduction of Uniswap X, its impact on swapping in DeFi and crypto, the concept of intents, efficient order flow auctions, MEV threats and opportunities, cross-chain swaps and bridging improvements, Uniswap V4's focus on liquidity provision, challenges in liquidity provision, and the role of off-chain infrastructure in trustless protocols.

    Insights

    Uniswap X introduces five significant changes to swapping in DeFi and crypto

    Uniswap X impacts the decks landscape, bridges, roll-ups, MEV, and makers.

    The key idea of Uniswap X is moving from specific path transactions to intent-based limit orders

    Intents allow users to express their trading preferences as limit orders with desired prices.

    Uniswap X reduces MEV by incentivizing quick filling of profitable orders and decentralized price discovery

    The use of Dutch auctions and intent-based swaps improves efficiency and reduces the risk of bridge exposure.

    The intent model provides a better foundation for order flow auctions and enables more complex trading strategies

    Off-chain processing and encryption enhance the elegance and efficiency of the intent model.

    MEV presents both threats and opportunities for protocol designers

    Lowering the barrier to entry has allowed various players to extract MEV, including professional market makers and amateur MEV searchers.

    Uniswap X enables cross-chain swaps and improves bridging security

    The use of intents and minimalistic bridges enhances trustless asset transfers between chains.

    Uniswap V4 focuses on protecting passive liquidity providers and improving capital efficiency

    Uniswap V4 pushes computation to the margins and offers more freedom for liquidity provision approaches.

    Innovation in AMMs is shifting towards creative design features, but challenges in liquidity provision remain

    Uniswap V3 introduces hooks for more creative strategies, while Uniswap V4 aims to address sustainability issues for liquidity providers.

    Improving liquidity provision requires addressing overprovisioning and creating demand for LP assets

    Active liquidity providers tend to lose more money, but there is potential for increasing yields and attracting more participants.

    Off-chain infrastructure plays a crucial role in trustless protocols like Uniswap X

    Swab aims to decentralize off-chain methods infrastructure and provide a platform for building trustless protocols with efficient execution.

    Chapters

    1. Uniswap X: Bringing Changes to Swapping in DeFi and Crypto
    2. Uniswap X: Protecting Swappers and Optimizing DEX Research
    3. Intents: Enabling Flexibility and Power in Expressing Trades
    4. Efficient Order Flow Auctions and Just-in-Time Liquidity
    5. The Intent Model: A Better Foundation for Order Flow Auctions
    6. MEV: Threats, Opportunities, and Maintaining Efficient Markets
    7. Uniswap X: Enabling Cross-Chain Swaps and Improving Bridging
    8. Uniswap X: Enhancing Security and Trust in Bridging
    9. Uniswap V4 and Uniswap X: Different Approaches to Liquidity Provision
    10. Innovation in AMMs and Challenges in Liquidity Provision
    11. Improving Liquidity Provision and Creating Demand for LP Assets
    12. Uniswap X and Off-Chain Infrastructure for Trustless Protocols
    Summary
    Transcript

    Uniswap X: Bringing Changes to Swapping in DeFi and Crypto

    00:03 - 06:24

    • Uniswap X introduces five significant changes to swapping in DeFi and crypto, impacting the decks landscape, bridges, roll-ups, MEV, and makers.
    • Uniswap V4 focuses on swappers and LPs, while Uniswap X is specifically designed for swappers.
    • The future of LPing yields in Uniswap is discussed.
    • Flashbots' collaboration with Uniswap is mentioned.

    Uniswap X: Protecting Swappers and Optimizing DEX Research

    06:10 - 12:59

    • Uniswap X aims to protect swappers by providing them with the best possible execution.
    • Research in decentralized exchanges (DEXs) should optimize for retaining value between swappers and liquidity providers.
    • Uniswap X opens up a vast design space for DEXs by integrating existing concepts like signed limit orders.
    • The key idea of Uniswap X is moving from specific path transactions to intent-based limit orders.

    Intents: Enabling Flexibility and Power in Expressing Trades

    12:43 - 19:17

    • Intents are statements of user trading preferences that allow for flexibility and power in expressing trades.
    • Users can express their trading intents as limit orders, specifying the desired price rather than the exact AMM to trade on.
    • The current meta of swapping involves users signing Ethereum transactions that are constructed by the interface.
    • With Intents, users sign off-chain messages instead of Ethereum transactions.
    • The entire MEV superstructure is responsible for packaging and including the intent in a transaction on-chain.
    • Uniswap X uses a specific format where users commit to a particular price they're willing to trade at.
    • Uniswap X supports Dutch orders, which are off-chain Dutch auctions with changing prices over time.
    • Intents allow users to pick a particular filler who gets exclusivity on the trade for a few blocks, enabling better quote filling off-chain.
    • Intense system allows users to express their trading intent without broadcasting an actual transaction.
    • By setting a minimum price and using Dutch auctions, Intense reduces MEV by incentivizing quick filling of profitable orders and decentralized price discovery.

    Efficient Order Flow Auctions and Just-in-Time Liquidity

    18:50 - 25:21

    • The Dutch auction mechanism in Uniswap X allows the most profitable person to fulfill an order first.
    • Order flow auctions aim to make users better off by auctioning off the right to trade immediately after them.
    • The current implementation of order flow auctions is inefficient and involves multiple transactions on-chain.
    • Intense offers a more efficient way to facilitate order flow auctions and improve price impact for users.
    • Just-in-time liquidity (JIT liquidity) is another example of inefficiency in the current system.
    • With Intense, it becomes easier to batch together trades and match them against each other.

    The Intent Model: A Better Foundation for Order Flow Auctions

    24:51 - 31:46

    • The intent model provides a better foundation for order flow auctions that return MEV to users.
    • The current protocol for order flow auctions on Uniswap is expensive and inefficient, but the intent model allows for easier batching and matching of orders.
    • The intent model combines the elegance of the Dutch auction model with off-chain processing, avoiding transaction delays and backrunning.
    • The new frontier opened up by the intent model offers opportunities for exploration and improvement in terms of efficiency and infrastructure.
    • With the intent model, user trades can be matched against other user trades, allowing for batch auctions and more complex trading strategies.
    • Encryption and homomorphic computation can be used to create decentralized and fairer actions within the intent model.
    • Intent-based trading provides flexibility and expressivity, allowing users to define their desired trades while still maximizing profitability.
    • Off-chain computation in the intent model eliminates gas costs and enables efficient order execution without relying on blockchain computation.
    • The rise of professionalized MEV ecosystems has demonstrated the power of off-chain authorization and optimization.

    MEV: Threats, Opportunities, and Maintaining Efficient Markets

    31:19 - 37:31

    • Opportunity for profit through MEV (Miner Extractable Value) is a threat and an opportunity for protocol designers.
    • MEV can be compared to a swarm of nanobots that optimize opportunities left open.
    • The players in the MEV ecosystem include professional market makers and amateur MEV searchers.
    • Lowering the barrier to entry has allowed high school students and individuals in basements to extract MEV.
    • Bots are smarter than anticipated, so any behavior should be suspected of being exploited by bots.
    • Efficient market hypothesis relies on the MEV searcher ecosystem to claim profitable opportunities.
    • MEV searchers help maintain efficient markets in protocols like Dutch auctions and lending platforms.

    Uniswap X: Enabling Cross-Chain Swaps and Improving Bridging

    37:01 - 43:30

    • Arbitrum Nova is becoming a web 3 gaming hub and social dapps like Reddit are using Arbitrum.
    • Arbitrum Orbit allows you to build your own layer three using Arbitrum Secure Scaling Technology.
    • Uniswap X enables cross-chain swaps by expressing intent to have assets on different chains.
    • The Dutch order mechanism creates a decentralized competitive market for moving assets between roll-ups.
    • Fast Roll exits on roll-ups allow for fast bridge transfers from Ethereum to optimism.
    • Bridges that rely on on-chain liquidity may become less common with the intent-based paradigm.

    Uniswap X: Enhancing Security and Trust in Bridging

    43:15 - 49:51

    • Uniswap X reduces the risk of bridges by only exposing swaps currently in flight to bridge risk.
    • Once a swap is concluded, the swapper is no longer exposed to bridge risk.
    • The filler uses the bridge to send a message back and claim the swapper's money.
    • Uniswap X eliminates the honeypot quality of bridges, improving security.
    • Bridges create representations of assets on chains that are beholden to the bridge that put them there.
    • Assets on layer twos or non-Ethereum chains are represented by the canonical bridge for that chain.
    • Roll-ups have canonical versions of all ERC-20 tokens and ETH/NFT assets bridged from Ethereum.
    • Uniswap X turns a fast message passing bridge into a fast asset passing bridge, enabling trustless fast exits.
    • Intent-based swaps and bridge minimalism fit together nicely in improving user experience with bridging.
    • Improving composability issues with Ethereum's roll-up centric roadmap requires making bridging easier for users.

    Uniswap V4 and Uniswap X: Different Approaches to Liquidity Provision

    49:22 - 55:42

    • Buying tokens on different rollups should be as easy as buying assets on the same rollup.
    • Uniswap X and Uniswap V4 serve different parts of the ecosystem.
    • Uniswap V4 focuses on protecting passive liquidity providers.
    • Uniswap X ensures price accuracy and offers flexibility in trade execution.
    • Both Uniswap V4 and Uniswap X push computation to the margins.
    • Uniswap V4 improves capital efficiency for liquidity provision, benefiting LPs.
    • LPs have more freedom to approach liquidity provision creatively with Uniswap V4.

    Innovation in AMMs and Challenges in Liquidity Provision

    55:15 - 1:01:24

    • Innovation in automated market makers (AMMs) is shifting from liquidity curve shapes to more creative design features.
    • Uniswap V3 allows for the addition of hooks to enable more creative strategies.
    • Loss versus rebalancing remains a challenge with no general solution.
    • One idea is to adjust fees based on previous block price movements.
    • Uniswap V4 aims to provide improvements for liquidity providers through new features.
    • Being an LP in Uniswap V3 is generally seen as losing money on average.
    • The sustainability of liquidity providing in Uniswap has not been achieved yet.
    • The USDC with five-bit pool in Uniswap V3 sees average LPs losing money, but the reasons are unclear.

    Improving Liquidity Provision and Creating Demand for LP Assets

    1:01:08 - 1:07:15

    • Liquidity is overprovided on the pool, but the reasons why people provide liquidity if they consistently lose money are unclear.
    • Active liquidity providers tend to lose more money than passive ones due to fees and price impact.
    • Some liquidity providers may be making a lot of money while others are losing.
    • The Uniswap V3 app layer, like Infinity Pools, could create demand for LP assets and increase liquidity.
    • There is potential for providing more interesting products to liquidity providers to increase their yields.
    • Suave will be explored in a future episode with Phil Diane and Andrew Miller.

    Uniswap X and Off-Chain Infrastructure for Trustless Protocols

    1:06:59 - 1:10:32

    • Uniswap v1 and v2 are decentralized protocols that operate on-chain.
    • There are costs associated with doing everything on-chain, especially for tasks that don't require global consensus.
    • Off-chain infrastructure, such as MEV searches and complex computations, can introduce points of centralization.
    • Flashbots has been concerned about this potential risk for years.
    • In the MEV space, trust is required when running solvers, matchmakers, or relays in the off-chain infrastructure.
    • Swab aims to decentralize off-chain methods infrastructure and provide a platform for building trustless protocols.
    • Currently, there is no platform to build decentralized batch auctions in a trustless way.
    • Swab allows developers to write code that will be executed off-chain efficiently and securely using untrusted hardware or decentralized guarantees.
    • This capability is seen as a powerful tool for application designers and comparable to the transition from Bitcoin to Ethereum's Turing complete on-chain contracts.
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