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UniswapX Revealed: A Game-Changer for DeFi

Tue Jul 18 2023

DeFiDecentralized FinanceOrder ExecutionMEV ProtectionCross-Chain SwapsLiquidity SourceAuction MechanismOptimizationUser ExperienceRouting Solutions

Description

Uniswap X is a protocol for competitive order execution in DeFi that maximally protects swappers ahead of MEV extractors, arbitrageurs, and front runners. It uses a Dutch auction mechanism to maximize swapper returns, reduces bridge risk, and abstracts away bridging altogether. Uniswap X formalizes a new kind of player in making trading and DeFi more efficient. The chapters cover the features and benefits of Uniswap X, efficiency and optimization, user experience, challenges and solutions in routing solutions, Uniswap X as a liquidity source, the auction mechanism and price optimization, maximizing MEV protection and cross-chain swapping, efficient cross-chain swaps, decentralized order flow, integration with various systems, and the rollout plan.

Insights

Uniswap X aims to maximize MEV protection

By using a Dutch auction mechanism and off-chain orders, Uniswap X prevents front running and increases the percentage of MEV that goes back to the Swapper.

Uniswap X enables efficient cross-chain swaps

With off-chain signed orders, Uniswap X simplifies the complexity of pools and bridges, allowing fillers to manage bridge complexity and provide swappers with their desired tokens.

Uniswap X complements AMMs like Uniswap 1-4

While Uniswap X focuses on order routing and optimization, AMMs have proven to be an efficient way of creating liquidity. Both systems work together to create decentralized markets with better user experience and efficiency.

Uniswap X is part of a collaborative effort in building decentralized order flow networks

Various teams are working together to build decentralized order flow networks, and Uniswap's dominance in volume and users makes its entry into this space significant.

The rollout plan for Uniswap X involves an early opt-in beta stage on mainnet

During the beta stage, only certain trades will route through Uniswap X, and trades executed through Uniswap X will not cost gas but require a signature instead of a transaction.

Chapters

Introduction to Uniswap X
Features and Benefits of Uniswap X
Efficiency and Optimization in Uniswap X
Optimizing User Experience in Uniswap X
Challenges and Solutions in Routing Solutions
Uniswap X as a Liquidity Source
Auction Mechanism and Price Optimization in Uniswap X
Efficiency and Flexibility in Auctions
Maximizing MEV Protection and Cross-Chain Swapping
Efficient Cross-Chain Swaps
Decentralized Order Flow and Future Releases
Integration with Various Systems and Rollout Plan

Summary

Transcript

Introduction to Uniswap X

00:00 - 06:52

Uniswap X is a protocol for competitive order execution in DeFi that ensures the best possible order execution for token swaps.
It maximally protects swappers ahead of MEV extractors, arbitrageurs, and front runners.
Uniswap X uses a Dutch auction mechanism to maximize swapper returns and retain MEV.
It reduces bridge risk and abstracts away bridging altogether.
Uniswap X formalizes a new kind of player in making trading and DeFi more efficient.

Features and Benefits of Uniswap X

06:25 - 12:54

Uniswap X is a Dutch auction based protocol for routing and aggregating liquidity.
It offers improved prices, gas-free trading, no slippage on failed transactions, and internalizes some MEV.
Uniswap X aims to harness the complexity of Uniswap pools and provide a solution for it.
The goal is to create a competitive marketplace for routing across liquidity sources.
This marketplace can include both on-chain and off-chain liquidity.
By decentralizing the routing problem, Uniswap X allows routers to find the best routes and pools for traders and swappers.
The blockchain nature of Uniswap X also addresses problems like gas optimization, transaction ordering, and latency.
Batching trades in the same direction at the same time can lead to price improvement.

Efficiency and Optimization in Uniswap X

12:37 - 18:59

Uniswap X creates a competitive marketplace for price improvement by allowing users to compete in an auction and find the most sophisticated strategies.
Batching transactions can save gas costs and internalize price improvement for Swappers.
Off-chain signatures in Uniswap X orders abstract away gas for users and prevent failed transactions from being submitted.
Uniswap X is different from traditional DEX aggregators as it allows multiple solutions to compete in the marketplace instead of relying on a single team integrating liquidity sources.
Uniswap X integrates various liquidity sources and can include other sources in the future.
Signed off-chain order-based auctions are a powerful primitive in Uniswap X, combining gas and price optimization into a single process.
Uniswap X improves efficiency by bundling gas auction with price auction, optimizing transaction fees and asset prices simultaneously.
There is a UX benefit in Uniswap X as users don't have to think about gas when trading different tokens.

Optimizing User Experience in Uniswap X

18:36 - 25:15

UniswapX aims to optimize the trading experience by reducing complexity and improving user experience.
Off-chain orders allow for better optimization of gas fees and swap outcomes.
UniswapX is focused on optimizing what's in between transactions to benefit users.
The current system has intermediaries like mem pools and block builders that are not optimized for user value.
UniswapX plans to give more value back to swappers by optimizing the process.
UniswapX also enables cross-chain swapping, allowing for efficient trading across different chains.
Uniswap X is a new protocol that focuses on order routing rather than being an AMM like Uniswaps 1 through 4.
Swappers come to Uniswap X with their trade parameters, and fillers compete to fulfill the best trade for them.
Naive routing solutions through AMMs may not be sustainable in the long term, as they need to consider factors like MEV and user intent.

Challenges and Solutions in Routing Solutions

24:46 - 30:57

Naive routing solutions through AMMs in the long term are not going to make it.
Routing solutions need to be aware of things like MEV and more expressive in user-intent.
There is already a routing layer called the auto router and client-side routing in the web app.
The smart order router, auto router, is open source and lives as a protocol in that domain.
Uniswap X enables a new type of player called a filler, formalizing their role.
The goal is to drive value back to swappers by having fillers compete with each other.
Over time, more volume may go through Uniswap X, but most Uniswap X volume will still go through Uniswap AMM product.
AMMs have proven to be an efficient way of creating liquidity and unlocking new possibilities in decentralized finance.
Uniswap aims to innovate and push beyond AMMs while also embracing complementary market structures.
Other liquidity sources will exist regardless, so it's important to discover and incorporate them into the ecosystem.

Uniswap X as a Liquidity Source

30:36 - 36:35

Uniswap is still the largest liquidity source for every aggregator, despite having private market makers and other liquidity sources.
Uniswap X pushes the Uniswap ecosystem beyond strictly AMMs.
Uniswap X is the best way to route across AMMs and offers routing efficiency.
The solution to discovering new custom hooks is to find a filler willing to integrate it into the Uniswap UI.
In a world with millions of pools, relying on a single team to audit and integrate hooks is not feasible.
MetaMask introduces MetaMask Portfolio, a holistic view of crypto portfolios with the ability to buy, swap, bridge, and stake assets.
Arbitrum offers secure Ethereum scaling solutions for DeFi and NFT ecosystems with faster transaction speeds and lower gas fees.
Mantle Network reduces gas fees by 80% and provides a stable foundation for web3 projects in its Dow-led Layer 2 ecosystem.

Auction Mechanism and Price Optimization in Uniswap X

36:13 - 42:12

Markets harness complexity well by allowing multiple players to manage different pools and compete.
Uniswap X works by starting with the Uniswap front end, which is similar to the regular front end for swappers.
There is no gas fee for swaps, but token approvals may require gas.
After signing a transaction, it goes into a pending state and is broadcasted to a network of fillers.
The order is a decaying price auction where the price decreases over time, creating competition among fillers.
The filler submits the transaction on-chain and pays the gas, pulling tokens from the user's wallet based on the execution timestamp.
About 75% of Uniswap trades execute in the first block after signing, and about 90% in the second block.
RFQ (Request for Quote) can be used to determine market prices more accurately by asking for quotes from multiple parties.
If RFQ is used, there is slight priority given to the RFQ winner for a few blocks before others can outcompete them with price improvement.

Efficiency and Flexibility in Auctions

41:58 - 48:05

The RFQ (Request for Quote) winner in the auction has a slight priority, allowing for efficient and fast price discovery.
Transactions that include the RFQ can execute in one to two blocks, compared to five to ten blocks without using the RFQ.
Extending the time or slowing down the decreasing price in the auction allows users more flexibility.
Some users may not depend on the RFQ system or find it optimal for their trade, so they prefer slower execution times.
Waiting longer can optimize prices by giving more time for liquidity to be sourced and more people to discover the trade.
However, there is a risk of price movement during this extended period of time.
Batching within the system can make netting against other orders more efficient.
The design space of fairer outcomes and minimizing power imbalances is being explored through experiments with batching and awareness of MEV (Miner Extractable Value).
Users have preferences for immediate execution or optimized trades, but faster auctions may limit optimization opportunities.

Maximizing MEV Protection and Cross-Chain Swapping

47:40 - 54:22

Slower auctions can be more efficient and lead to more optimal prices.
Faster auctions may result in higher costs for instant transactions.
MEV (Miner Extractable Value) exists in various forms such as sandwiching, front running, and reordering transactions.
Uniswap X aims to change how MEV is expressed by maximizing the percentage of MEV that goes back to the Swapper.
By encoding transactions differently and using an auction mechanism, Uniswap X prevents front running and increases MEV protection.
The Dutch auction mechanism ensures orders are filled at the first profitable opportunity, reducing front-running opportunities.
Off-chain orders allow fillers to discover and complete multiple orders simultaneously, improving efficiency.
Cross-chain swapping allows for efficient and seamless token swaps across different chains using off-chain signatures.
The user experience remains the same for Swappers, while fillers handle the complexity of bridges and settlement.

Efficient Cross-Chain Swaps

54:10 - 59:24

Cross-chain swaps allow for native asset swaps between chains
Currently, asset bridging and swapping involves creating a bridge representation of the asset on another chain
With cross-chain swaps, users can directly swap assets between chains without the need for bridging
The swap is completed on the input chain and the filler is responsible for sending the tokens on the output chain
The filler needs to prove that they completed the swap to claim the user's input tokens
Any possible bridge or messaging protocol can be used for cross-chain swaps
Initial smart contracts have been developed for optimism, arbitrum, and polygon bridges
Proofs can be done optimistically or through a bridge depending on challenges or time lockups
Off-chain signed orders simplify complexity of pools and bridges
Fillers manage bridge complexity and provide swappers with their desired tokens

Decentralized Order Flow and Future Releases

59:02 - 1:05:00

The complexity of token swaps is left up to the free market and fillers.
Smart contracts on the input chain ensure that swappers get what they wanted.
Canonical bridges will likely be used in the UI for swaps between optimism and other chains.
The optimistic pattern can be used to enable fast L2 exits.
Most bridging protocols have passive exposure to bridge risk, but this system reduces that exposure.
Bridge hacks occur because tokens are held by the bridge as representations on other chains.
In the future, most assets will live on their originating or most secure chain.
Bridges in this model are used to pass data rather than hold long-term liquidity.
Users are only exposed to bridge risk while transactions are in flight.
This system supports any possible bridge and can be seen as a bridge aggregator.

Integration with Various Systems and Rollout Plan

1:04:30 - 1:11:05

They could use centralized exchanges, bridges, or settlement oracles for trades.
The protocol is agnostic to the system used for trade fulfillment.
Initial smart contract designs work with L2 bridges like optimism and polygon.
The protocol can potentially work with any bridge in the space.
Bridges compete on security, latency, and liquidity storage.
Uniswap X is an order router and optimizer, not an AMM like Uniswap 1-4.
Uniswap X and AMMs complement each other as two sides of the same coin.
The goal is to create decentralized markets with better user experience and efficiency.
Decentralized order flow networks are being built collaboratively by various teams.
Uniswap's dominance in volume and users makes its entry into this space significant.
The rollout plan for Uniswap X involves an early opt-in beta stage on mainnet.
In the beta stage, only certain trades will route through Uniswap X
Trades executed through Uniswap X will not cost gas but require a signature instead of a transaction.