0xResearch

Ambient: Building The On-Chain Venue for Price Discovery | Doug Colkitt

Wed Jun 28 2023

Polygon's Proposal to Switch to Validium

00:00 - 06:35

A proposal has been made to turn the current polygon proof of stake chain into a Validium, which would increase scalability and lower transaction fees but sacrifice security and censorship resistance.
The proposal lacks details on how the data availability layer would be managed.
Switching to a Validium could solve issues with reorgs on the proof of stake chain, but there are concerns about centralized power and lack of transparency.
Some believe that using the Matic token to secure the data could be part of Polygon's plan to export its services to other chains in the future.
There is confusion about Polygon's end game and their focus on multiple initiatives at once.
Polygon's lack of clear communication about their roadmap is frustrating for users who want a better user experience in the proof-of-stake chain or in the Polygon ecosystem.
Polygon's market cap is significantly higher than optimism and arbitrum, which raises questions about its value.

Duality Labs Building Consumer Chain Aligned with Cosmos Hub

06:17 - 13:17

Duality Labs is building a consumer chain aligned with the Cosmos Hub.
Duality Labs will use atom as the gas token and provide liquidity to LP into duality.
Replicated market making allows unified liquidity pools for each asset.
Duality Labs will offer advanced orders and dynamic routing to prevent front running.
This is the first consumer chain fully aligned with the hub using atom as the native gas token.
The proposal could be a good way for atoms to gain value and build an economy around the hub.

Inter-Shane Allocator Expected to Go Live in Q3 or Q4

12:52 - 19:40

The Inter-Shane allocator is expected to go live in Q3 or Q4 this year, which will provide a solution for governance proposals.
The Cosmos Hub is gaining momentum and attracting more projects within its economic zone.
Osmosis faces tough competition from duality and other DEXs being built within the Cosmos ecosystem.
The community is taking initiative to drive value back to the hub and move away from the idea of credible neutrality.
Osmosis still has a strong position in the market with IBC transfers and a large user base.
SAP is testing their SAP digital currency hub for international payments using stablecoins, which could revolutionize cross-border payments.

SAP Integrating Blockchain Technology for Cross-Border Payments

19:17 - 26:27

SAP is integrating blockchain technology to improve cross-border payments
SAP is currently in the test phase and integrated with Ethereum
This integration is a significant upgrade for SAP's infrastructure
SAP's alignment with Ethereum is exciting news
The announcement went under the radar despite SAP's influence in global commerce
Coinbase's upcoming L2 launch could benefit from partnering with SAP
The use of blockchain rails for B2B payments could generate substantial interest income
The next step after B2B payments is B2C and eventually P2P payments
Transaction fees on Ethereum can be high, so migrating to an L2 like Base seems likely for SAP
Cosmos' vision of app-specific chains is being adopted by various Ethereum L2 solutions
Cosmos has been working on this vision for several years and now it's becoming mainstream
ZK Sync is a modular software stack that enables building chains with different security assumptions and interoperability features
Cosmos' early adoption of this thesis has proven impressive, but there are challenges such as low usage of applications on DeFi platforms like AirDrop Sivalers parking capital into the ZK Sync Bridge without using ZK Sync itself

Concerns About ZK Sync Bridge and Low Usage of Applications

26:16 - 33:09

There is a concern that people are just parking capital into the ZK Sync Bridge without actually using ZK Sync itself, which could prove to be non-organic activity.
Arbitrum and Optimism have seen robust activity, but block space is becoming more abundant while demand is low.
Many layer one protocols are building similar technology stacks that allow for the creation of multiple chains optimized for specific use cases and interoperable with each other.
The winners in this space will likely be determined by market share and capturing builders on their stacks.
Solana takes a different approach as a high throughput single shard maximalist, which provides a unique energy and potential for success.
The ZK stack offers promising technology with roll-ups designed on a spectrum of centralization to decentralization and native communication based on cryptography and mathematics.
Decentralized identity solutions are crucial for real-world applications to emerge in the blockchain space.
More application-specific block space is needed to unlock the next iteration of product UX and capital efficiency.
ZK Sync has shown benefits in terms of high compute capabilities, higher capital efficiency, and growth in liquid-staking token market share.
Zero to one innovation requires more real-world applications, while subsequent improvements may be small iterative changes.

Importance of Real-World Applications and Liquidity in AMMs

32:44 - 39:47

Zero to one innovation requires more real-world applications
Duality might only bring small improvements
No hyper chain builders announced yet in the ZK stack ecosystem
Speculation that big payment processing companies like Visa could be potential hyper chain builders
@digitalmostafa on Twitter shared a thread about modular versus monolithic, working at Visa
Shout out to the Adam accelerator sponsor for their exciting developments in the atom economic zone
Interview with Doug Colquitt, founder of Ambient Finance (formerly Crock Swap)
AMMs have been successful in bootstrapping markets without relying on a few trading firms
Order books require specific firms to create liquidity, while AMMs allow anyone with a wallet to provide liquidity
Liquidity providers face economic problems and impermanent loss in AMMs
Ambient aims to fix these problems and create a user-friendly experience

Ambient Finance Aims to Improve LP Experience and Market Efficiency

39:19 - 46:22

The goal of the platform is to fix economic problems and make the experience more user-friendly.
DEXs today feel more like trading applications, so Ambient aims to make things faster, easier, cheaper, and more fun to use.
Providing liquidity in decentralized platforms can be complicated and unintuitive for users.
Ambient supports both passive and active AMM models within the same pool.
Passive liquidity is important for early stages when prices are volatile, while active liquidity becomes more important as tokens become more liquid.
Having everything in a single contract reduces the complexity of managing collateral and improves market efficiency.
Flash accounting allows for efficient trading between different markets without moving tokens around.

Improving Market Efficiency and LP Profitability in AMMs

45:58 - 52:57

Reducing ERC-20 transfers between pools makes markets more efficient and lowers costs for arbitrage.
Cheaper swaps result in more frequent arbitrage trades, benefiting smaller pools with lower liquidity.
Lowering barriers to arbitrage decreases total toxic flow but increases the number of trades and fees collected over time.
Dynamic fees are employed to adequately compensate LPs for impermanent loss (IL) based on expected volatility.
Market makers don't charge the same bid-ask spread every second, and AMMs should adopt a similar approach.

Dynamic Fees and Governance in AMMs

52:39 - 59:42

They're still fixed, right? So if I'm in the five basis point cool, I'm in 30 basis point cool I'm only collecting that for the entire period Some sophisticated players might move which won't be peers But that's pretty few and far between and again I like kind of gets away from decentralization where just six packs
The goal is to charge adequate fees relative to the toxicity of the flow, which determines IL on a macro scale
Dynamic fees are based on regimes where liquidity is scarce and demand is high, resulting in higher fees, while periods with flat markets and abundant liquidity have lower fees
A clever hack allows for fee adjustment by comparing performance of different pools over time
Toxicity in order flow can be determined by its origin, with certain wallets being more toxic than others
Order flow from liquidation bots and reputable routers like MetaMask or Coinbase are considered non-toxic
The pricing model leverages Uni pools as a starting point but has alternative models based on volume, volatility, and other factors
User-defined pools will be introduced soon to allow experimentation
The Uni V4 announcement validates the importance of the ideas being worked on

Improving LP Profitability and Market Quality in AMMs

59:15 - 1:06:23

The speaker believes that the ideas they have been working on are important and validating.
They mention the singleton contract and how it eliminates the need to answer questions about whether it's a good idea or not.
There is a focus on improving the LP experience and increasing fees and revenue for them.
The protocol aims to balance between LPs and traders, but it's challenging because they are two separate customers.
Uni or existing AMMs are considered a good deal for only a small percentage of swappers who generate significant profits.
Fixing things may not change much for regular swappers, but discriminating against low will eventually lead to better prices for most.
Favoring LPs over traders can result in better prices for traders, but adverse selection can also occur with JIT liquidity.
Flash orders and last look in traditional finance markets have led to lower market quality over time due to less passive liquidity.
Surplus collateral allows users to hold their balance directly at the exchanger without needing to move tokens in transactions, reducing gas costs.
The protocol supports 'gasless transactions' through ERC-712 signatures off-chain, enabling features like stop losses or conditional trades.

Improving LP Profitability and Market Quality in AMMs (cont.)

1:06:04 - 1:13:30

The collateral balance in decentralized exchanges (DEXs) enables the specification of arbitrary conditions for trading, such as stop losses or conditional trades.
DEX relayers get paid from the collateral circle, allowing traders to pay with any tokens they want and eliminating the need for a wallet.
This feature also enables trading without connecting to the chain or worrying about native tokens.
Large players with strict compliance departments may take time to get comfortable using DEXs, but there will be a competitive drive to use them for arbitrage opportunities.
Regular traders can benefit from using DEX balances for short-term trades instead of managing wallets.
Retail flow may not exclusively flow through DEX aggregators due to user preferences for better user experience over slightly cheaper prices.
The protocol has governance power and is upgradable, allowing for changes over time while maintaining backward compatibility.
Governance controls aspects such as defining pool types, protocol fees, and JIT thresholds.
Governance powers are carefully gated by long-time locks and will be decentralized going forward.
The policy layer in governance allows certain responsibilities to be offloaded to other smart contracts or systems in a limited predefined context.

Pool Templates and Governance in AMMs

1:13:03 - 1:20:06

Pool templates define the parameters and permissions for creating pools.
Governance determines which templates are instantiated.
A policy system allows for permissionless creation of pool templates.
Exciting possibilities include shaping liquidity curves and creating private markets.
Knockout liquidity provides on-chain atomic limit orders within a range.
The minimum tick size determines when an order is fully filled.
For most users, the current tick size is sufficient.

Order Flow Segmentation and Reputation in AMMs

1:26:07 - 1:32:10

Order flow segmentation system can be used to signal non-toxic border flows.
Relayers can be responsible for policing order flow and have a reputation score over time.
A tip system can be implemented to fix LP profitability.
DEX market dominance of Uniswap is due to its strong brand position and loyal LPs.
On-chain activity has been down in the bear market, making it easier for Uniswap to maintain dominance.
Ambient Finance plans to launch on other chains but will be selective due to limited resources.