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

Episode Date: August 3, 2023

Dan Robinson is GP and Head of Research at Paradigm. He, over the years, has done a lot of deep thinking about markets, auctions, and liquidity in DeFi, with a particular focus on Uniswap and Uniswap V3. Recently, Uniswap Labs released UniswapX, a new dutch auction mechanism, that Dan thinks changes the meta for swapping assets in DeFi, MEV, chain interoperability, and much more.  The last time Dan was on Bankless was September 2020…almost 3 years ago! If you have ever heard Ryan or I say the phrase “Ethereum is a dark forest”...it came from that episode. ------ 🚀Join Ryan & David at Permissionless II in September. https://bankless.cc/GoToPermissionless  ------ 📣 STADER LABS | ETHX LIQUID STAKING https://bankless.cc/Stader  ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE ⁠https://k.xyz/bankless-pod-q2  ⁠ 🦊METAMASK PORTFOLIO | MANAGE YOUR WEB3 EVERYTHING ⁠https://bankless.cc/MetaMask  ⚖️ ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum  ⁠ 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle  ⁠ 👾POLYGON | VALUE LAYER OF THE INTERNET https://polygon.technology/roadmap  🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/Toku  ------ TIMESTAMPS 0:00 Intro 6:00 Why UniswapX is Needed 11:09 What’s New About UniswapX? 14:00 Intents  16:25 The Magic Behind MEV Reduction  20:00 Order Flow Auctions  26:25 It’s Still Early  33:05 Who Are the Nanobots?  37:42 How Rollups Will Change  42:22 How Bridges Will Change  49:55 UniswapX Complements Uniswap v4 53:30 What Uniswap v4 Do for LPs?  59:15 LPing with Uniswap v4 vs. v3 1:04:11 Uniswap’s App Layer & Yields  1:06:05 Why Be Excited About Suave  1:09:55 Closing & Disclaimers   ------ RESOURCES Dan Robinson https://twitter.com/danrobinson  https://twitter.com/danrobinson/status/1681061703818305536   ------ Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures ⁠

Welcome Bankless Nation to State of the Nation, where we dive down into a topic that is currently floating around the world of crypto. This week on State of the Nation, we are talking with Dan Robinson, head of research GP at Paradigm. And recently across my Twitter feed, I saw a tweet thread from Dan Robinson about how there are five big ways that Uniswap X changes the game for swapping in DFI, swapping in crypto. And I learned a ton in this tweet thread, and I thought it would be super useful if Dan Robinson came on to the show. and explained each point himself here. And so that is what you are about to get here today. Because Uniswap X doesn't just stop at Uniswap X. It also brings with it a bunch of new changes for the Dex landscape

that impacts so many other things across DeFi, across Ethereum. It impacts bridges. It impacts roll-ups. It impacts M-E-V. It impacts market makers. And so there's about to be, perhaps, if you believe, in this new intent-based paradigm, which is something that we will define in the show, it flips a lot of what it means to be a Dex

or to be a Dex Swapper on its head. So you're going to learn about all of these details and this coming new meta for DeFi, as well as what it means for you, the user, you the swapper, and also perhaps you, the LP, if you are an LP in this world of DeFi as well. Then we also open up some other doors

is what does the future of LPing yields in Uniswap look like? What can Uniswap V4 do for LPs? while Uniswab X is focusing on swappers and why swappers and LPs are the two parts of a decks that need to be held in the highest regard and why everything else is secondary. And then also we open the door to what FlashBots is working on with Swab, which is at the very end of this episode. Overall, you're going to learn a ton about the Dex landscape that is changing quickly, both with Uniswad V4 and with UniswapX, as well as some other things in the intent-based world, which is a hot topic in a Dex and Dev landscape. Quickly before we get into our interview with Dan, Uniswap is a main focus of this episode, and Uniswap is also a sponsor of Bankless. Bankless also holds a supply of Unitokens, which you can see at bankless.eath and also

bankless.com slash disclosures. So let's go ahead and get right into our episode with Dan Robinson from Paradine. But first, a moment to talk about some of these fantastic sponsors that make this show possible, especially Cracking, our preferred exchange for crypto in 2023. Before you get to Uniswop on chain, you first have to bridge your money from all. off-chain from the trad world. Consider using Cracken, our preferred exchange for crypto in 2023. If you do not have an account with Cracken, consider clicking the link in the show notes to get started with Cracken today. Cracken Pro has easily become the best crypto trading platform in the industry.

The place I use to check the charts and the crypto prices, even when I'm not looking to place a trade. On Cracken Pro, you'll have access to advanced charting tools, real-time market data, and lightning fast trade execution, all inside their spiffy new modular interface. Cracken's new customizable modular layout lets you tailor your trading experience. to suit your needs. Pick and choose your favorite modules and place them anywhere you want in your screen. With Cracken Pro, you have that power. Whether you are a season pro or just starting out, join thousands of traders who trust Cracken Pro for their crypto trading needs. Visit pro.crakhan.com to get started today. Introducing Polygon 2.0, the value layer for the internet. For too long,

the limitations of blockchains have held back app development and stifled user adoption. The internet allows anyone to create and exchange information. What's missing is a value layer that lets anyone exchange, store, and program value. That's where Polygon 2.0 comes in. Polygon Labs has unveiled a series of innovations that will radically alter the Polygon ecosystem and Web3 as a whole. By leveraging groundbreaking ZK innovations such as Polygon ZK EVM, the next iteration of the best in class Planky 2 proving system and a first of its kind, ZK-powered interoperability layer, Polygon 2.0 will give users and devs unlimited scalability and unified liquidity. Right now, there is a Polygon improvement proposal regarding a potential ZK-powered upgrade of Polygon proof of stake.

If approved, Polygon proof of stake would become a layer 2, ZKEVM, Villadium. So make your voice heard on this proposal by joining the Polygon Discord today. You have a chance to help the Polygon community give the internet the value layer it deserves. Are you planning to launch a token? Is your token already live? And are you granting your employees and contractors vesting token awards? And are you trying to figure out how to take care of taxable events for your team? Toku makes implementing a global token incentive award.

simple. With Toku, you will get unmatched legal and tax support to grant and administer your global team's tokens. Toku will help you navigate across the life cycle of your token from easy-to-use pre-launch token grant award templates to managing post-cliff taxable events with payroll. For legal, finance, and HR teams, it's a huge complex task to have to comply with labor laws, payroll, and tax obligations, tax reporting, and crypto regulations in every country that you employ someone. It's difficult, time-consuming, manual, and costly, and it's drawing more attention from global regulators and governments. Toku makes it simple for leading companies in the space, Protocol Labs, Hedera, Gitcoin, and many more. So if you want some help in navigating the

complex world of token compliance, go to Toku.com slash Bankless, or click the link in the description below. Bankless Nation, I would love to introduce you to Dan Robinson. He is GP and head of research at Paradigm. He, over the years, has been a lot of deep thinking about markets, auctions, and liquidity in defy with a particular focus, I'd say, on Uniswap, Uniswap, and Uniswap V3. recently Uniswap Labs released Uniswap X, a new Dutch auction mechanism that Dan thinks changes the meta for swapping assets in Defi and also MEV, chain interoperability, and many more things. The last time we had Dan on Bankless was September of 2020, almost three years ago. If you've ever heard Ryan or I say the phrase Ethereum is a dark forest, it came from that episode.

Dan, welcome back to Bankless. Thanks for having me. Dan, you recently wrote a thread which triggered my imagination and was the impetus for bringing you on to podcast that was titled Five Reasons I Think Uniswap X changes the game for decentralized exchange, MEV, and interoperability. And this already kind of gave me a model, an agenda for this episode, which we want to get into. But just I really want to start at the highest of levels. Can you maybe define the landscape for why something like Uniswap X is needed in the D-Fi sphere? What are the current variables or the current things that are producing this need for Uniswap

X? Yeah, so I can talk about that. And I think it'll also talk a little about Uniswap v4 and why I see where I see that fitting in. So from my perspective, decentralized research, which is where I've spent a lot of my career and my research focus has been a paradigm with Uniswap, decentralized exchange research, in my view, has to be about reducing the amount of value that leaks out of the system, the decentralized exchange system. And so with, when you were in a decentralized exchange, it was particularly with automated market makers, you have on one side, liquidity providers and on the other side, swappers.

And swoppers are coming in because they can get the most liquidity or the best prices from your decentralized exchange. And liquidity providers are hoping to earn the best returns from trading fees being paid. And a lot of what I would say in research in decentralized exchange design that I've seen happen elsewhere has been focused on trying to tip the balance one way or the other between take money out of the swappers pockets and put it in LPs pockets or vice versa. And I think when you see a lot of reactions to some to decentralized exchange research is often saying, oh, you know, this hurts LPs to benefit swabbers or this word swappers to benefit

LPs. And in my view, I think sustainable Dex research is going to be about reducing the value that leaks out of this system entirely. It's not going to be about, you can't just like benefit swappers by making LPs make less money. You can't just benefit LPs by having swappers get worse prices. You actually have to find where is the parts of the system where you can benefit both or reduce the leaks that come out of the system. And almost all those leaks go into MEV. And so I think the types of Dex research, the valuable lines of Dex research correspond to different types of MEP that come out of the system. Now, I think there's three kinds of MEPV there. One is just EIP 5059 burn, just ETH that's being burned gas cost from the transaction.

And that's being paid by both swappers and LPs effectively. That's, I think, a really important one. And UNSWFV4 and UNSWPX both address that one. But for the other two, one is loss versus rebalancing, and that's losses that liquidity providers suffer to arbitrageeers. Someone's coming in and they're trading on this pool at a better price than the liquidity provider maybe should be giving them. So liquidity providers is losing money to ARBs.

And that all goes basically to MAV in the modern system. And so UNISWPWB4, and I can talk later about a little about how we think about that, is about addressing those losses to arbitrage, and opening up new ways for developers, for AMM designers to reduce that. But UNISWOPX, in my view, is largely about the other side, is trying to help the swappers. and a couple ways that swappers lose money, they can be sandwiched. You can have your transaction actually executed a worst price because somebody traded ahead of you.

You can have just ordinary slippage. You're trading at a price and the price has moved away from you on the decks and so you're getting worse price than you're expected. And you could just be getting a worse price and is available somewhere else. And in my view, if uniswap, the system is not providing swappers with the best possible execution they could be getting anywhere, then what are we even doing here? And so that's the motivation for me with UniswapX is how can we actually protect swappers, the swapper side of this, from getting worse prices than they could otherwise. I think to reword what I heard from you, research in AMM and just, you know, Dex's on Ethereum and in Crypto broadly has two players that you think need to be held as first-class citizens of the highest regard.

And everyone else should actually be minimized. these two players are swappers, people that want one token and have one token and want a different token, and then liquidity providers who are providing liquidity. And I think what you're saying is that research in the realm of dexes in crypto needs to figure out how to optimize for retaining value by the net between these two players. And anyone else, MEV arbitrageers, the Ethereum Protocol with EIP-1559, needs to be minimized while these two players are are maximized. That's how I would reword what you are saying. Is that fair? Yeah. I think that's, that's basically how I think about it. And then Uniswap X is specifically a technology that benefits

swappers the most. Yes, largely focused on benefiting swappers. But I think, again, in a way where you're benefiting primarily retail swappers, right, it's not about, it's not about helping arbitrageers trade against, you know, Uniswap LPs more effectively. It's the people who we care most about actually helping here. Okay. So I'd actually like to take this opportunity. to start with your tweet thread and number one, because I think this is where this goes. Your first tweet in your thread goes, the architecture of Uniswap X opens up a vast design space for dexes. And so maybe we can talk about, like, I think the secret sauce that Uniswap is bringing to the table. We might actually need to define what Uniswap X is for people that didn't listen to

our episode with Hayden, but I definitely recommend that as well. So what is the new thing that Uniswop X is bringing to the table? What's the new secret sauce here? Yeah. So first I'll say, I don't like to use the term new because I think a lot of, as many people have pointed out, a lot of the ideas in Uniswap X have been around in Ethereum deck space, actually some since before Uniswap. And I think some of the concepts, especially around signed limit orders, I think, are, you can trace back through Zerox or even before. And so I think part of what Uniswap X is about is, are we actually at a time when some of these concepts that have been around for a while really make sense and start to be worth integrating into how decks is actually done? done on Ethereum, which right now, again, is dominated by just on chain flows on AMMs. And I think actually that there's a lot to be gained from going to into the into these,

digging up some of these rich old ideas. So, yeah, so the key idea for me of UniswapX is that we're moving from a system where all transactions created by retail order users are expressed as transactions with a specific path. You know, imagine just like an itinerary of here's, I'm going to take, exactly this route on the subway to get from point A to B to an intent or a limit order. And an intent, if you think about it, is just a statement like, I want to get to point, I'm at point A, I want to get to point B, but I don't necessarily care how I get there.

And, you know, there's been a lot of discourse on intents and I think, and, you know, a lot prior, even just on the more general concept and decks of limit orders. but I think it's very important that we start actually operating with user intents. I think they're incredibly flexible and powerful. And UniswapX, the main thing to me that it achieves is starting to move toward users expressing their trades as intense, as limited or saying, I'm willing to, I want to trade at the best price possible, no worse than this particular price, rather than expressing I want to trade on this exact AMM.

So people who have swapped on Uniswap before, you open up with the asset that you have, you open up the asset that you want, and then you, you know. you click confirm and then you like approve that transaction, your metamasky or letter or whatever. And then you like go to EtherScan to watch that transaction get verified. In that, what you're saying is that is a specific, the user has chosen their point A and their point B. And then the app, the web app, actually codifies that into a specific transaction. And then the user commits to that transaction and then that is committed to on chain. And then a bunch of MEV happens in the background that the user doesn't really see, but definitely

does happen. And so I think that's the current meta of swapping. And what you're saying is there's this new alternative called Intense, which is, can you explain like how that actually gets expressed and then how that actually turns into the outcome that the user wants? How is that different from an actual codify transaction? And how does it actually achieve the same result? Right. So the way it works is the user, you know, the user still sees a similar interface on the web interface. And when they go to sign, to sign their trade, instead of signing an Ethereum transaction that is, again, constructed by the interface, they sign just an off-chain message. They sign, you know, a message in a particular format, but that isn't an Ethereum transaction.

and then it's the job of the entire MEV superstructure out there to get this, turn this intense somehow package it in a transaction that somebody creates and get it included on chain. But this can, you know, intense in general could include anything. It's a more general format than an Ethereum transaction. And this, the Unisop. UnisopX uses a particular format where the user commits to a particular price that they're willing to trade at. Yoseubek supports the ability to do a Dutch order, which is a kind of off-chain Dutch auction where they sign this order.

They say, here's my decay rate, and basically it's going to change the price to make it more, basically get a worse or worse price, the longer goes on until you get some limit. And that's in order to do it to facilitate some off-chain price discovery for it. And then it also allows the ability to pick a particular filler who gets exclusivity on the trade for a couple blocks. And that's in order to enable them to potentially through a request for quote like system off chain, find someone to fill this quote better. But all these are details about how this particular transaction format works.

And it's, I think, how we see sort of the initial way that UPS helps find users of the best price. But again, to me, the key is you're moving into now I'm signing a mess. message it just says, expresses my trading intent. And it's up to this system to try to find the best price for it. So in the example that, say, just for round numbers, ether is $2,000. And in the old way, is you would have 2,000 USDC, and then you would say, hey, give me one ether. And then you would ultimately get like 0.987 ether before a number of different reasons. One of them would be gas fees, one of them would be slippage, one of them would be front running, and a bunch of different both humans and protocol eat away a little bit at that. And I think the way that this intense

system works is, actually, since you don't broadcast a transaction, you actually, excuse me, you do broadcast a message, but you do not make a transaction. And so I would guess maybe this, like this package that you're talking about, you're just saying, hey, I have 2000 USDC. The minimum price that I'll take is one ether for that. But if anyone can give me more than that, then you are allowed to fulfill this order. And then Dutch auction is, just to define a Dutch auction is you set a high price and then over a period of time, that price comes down little by little by little. And I think that's kind of the magic. Can you elaborate on why that's so magical for how that actually reduces MEV? Yeah. Yeah. So the idea there is,

but when I want to set, if I want to discover the price, suppose I don't know at all what the price is. And this, by the way, I use Dutch auctions all over in like every mechanism of my own because I think they're just a fantastic way to get decentralized price discovery. But I think this is, you know, it's one component of a piece of U.S. HubExpo. But the way it works is when you put, if you publish this order to the world with some particular starting, some particular starting price, if that price is, if anyone in the world can actually fill that, they're incentivized to do it as fast as possible. And so you'll, you'll actually get included, if they can fill that profitably. So you'll get that included as quickly as possible.

If nobody can fill that, then, okay, maybe that price is too high. I'm going to start lowering it. And as soon as, if the system is sufficiently competitive and there's enough potential bidders out there and nobody and people aren't censoring multiple blocks at a time. And again, I think these are assumptions that are worth questioning. But in that case, basically, as soon as this order becomes profitable for anybody in the world to fill, they'll fill it. And we have the assumption that basically, once you hit that point, that's the right price to actually fill. it at. Now, again, like, there's some possibility you could lose a little to slippage from the system. Like, if the price, you know, moves in the other direction at the same time that your price

fills, you maybe don't get the best execution possible. And I think there's, that's why there are these other systems as part of it. And to me, Unisob X, again, is not about just the Dutch order. It's not about the RFQ. It's about this general concept that we actually get a lot more flexibility from intense. But Dutch, that's one mechanism that Unisob X uses to try to make a competitive market for filling orders. I think another way, the way that resonates with me in my brain is that the Dutch auction mechanism, say ether is $2,000, price, $2,000, give or take. But like you said, you actually don't know in one single moment of time, you actually don't know what the fair price of ether is. So you start at like $2,010, and this Dutch auction mechanism lets that decay, you know, 10 cents every second until someone fills it.

And I think the idea here is that the most profitable person who can make that trade profitable first at the highest price possible will fulfill that because they can squeeze a profit out of it. And it allows the margins of what you call the system, like this MEV system, the market maker system. It allows the first reasonable rational person who can make a profit will fulfill that order first. and that's how you're coming to the conclusion that, well, yes, that was the best possible price for the swapper, right? That's exactly right. Okay, and so I think this is why you come into the second tweet saying it's a better foundation for order flow auctions. Order flow auctions versus what's the opposite of an order flow auction?

What's the other half? Yeah, well, so, right. Well, so backing up a little about order flow auctions. So I think we've seen some systems, and FlashBots has one called MevShare, and I think there's some others out there. where the idea is right now when users trade on decentralized exchanges, often they may get sandwiched, they may get front run. And one way that you can potentially just make the user strictly better off than they otherwise would be, assuming already that there's so many a transaction, is instead of just letting anybody in the world front run this transaction, or even maybe instead of just letting this transaction get included and see what happens, we can auction off the right to backrun your transaction. And a background happens because, you know, if I trade on an AMM, I might push the price. It might be such a large trade that it pushes the price to a level where it's profitable to trade after me.

And so I could potentially get a rebate on my transaction by, if my transaction gets included, by basically selling off the right to say, you're allowed to trade immediately after me. That's a right that I in some sense have, although it can be hard to facilitate this market between me and somebody who might want to background me. And so if I can get someone to pay me for the right to backrun me, I will get a rebate effectively on my transaction. So this is how order flow actions have been implemented by flashbots and others with the transaction model. Now, the thing is, it's sort of a hilariously inefficient way to actually pay somebody for the MEV that's being created by their transaction. Because what's actually happening there is I'm trading at a worse price than I actually want to trade at. I want to trade maybe at the current price or at a better price, but I'm trading at some bad

price on the AMM, such a bad price and causing so much price impact that actually it's profitable for somebody to pay me to be the trader afterward to trade the AMM back in the other direction. And this involves at least two transactions on chain. It involves fees being paid to liquidity writers who haven't actually really done anything because what's happening in this transaction is economically, is that I, the user, I'm actually just trading with some backrunner. I'm buying a token that they are selling,

and I'm buying at such a bad price for me that they can sell it back to the AMM at a price that is profitable for them. And so we should just cut out the middleman here. We should actually just have the user and the backrunner basically trade with each other. But the transaction format doesn't allow this kind of order flow auction. And so that's why when you move into an intent,

suddenly all I'm saying is I want to actually trade. I'm not saying it has to be on this particular AMM. that you have to extract this money from me, you know, by backrunning and then making a side payment to me. You can just come in and trade with me at a better price. The metaphor that I'm getting here, maybe you'll like this one is like, it sounds like we're trying to build a ship, design a ship that doesn't leave a large wake. And it sounds like in this, the current paradigm of Uniswap trading where the reasons why the pools get balanced or the who we're trading with is because in order to fulfill that order,

there needs to be enough wake for arbitrages to come settle the waters. And right now, with this off-chain intent model, we actually are just designing a ship that doesn't disturb the waters that much. Is this a fair metaphor? Yeah, I like that. I think that's the idea,

is you're ultimately getting more efficiency from doing it this way because it's just a more flexible format. And so these things that people are, it's so needed that it actually getting hacked into the current model. And I'll give you another example, which is just in time liquidity or JIT liquidity, which I've been going on like a rampage about for about a year, partly in preparation for anticipation of UNICEFX coming out, talking about how I think, so JIT liquidity, the way it works is when somebody's trading and they're going to trade at a bad price. Someone can come in and provide concentrated liquidity right around the current tick right before their trade and then withdraw it right afterward.

And what they're functionally doing is they're improving the user's price impact. They're actually helping the user a little bit by trading against the user. But this too, very gas inefficient. A lot is being paid in 1559. And it's not, in this case, like not actually going to liquidity providers. Who's it going to? It's basically just being wasted or it's going to gas costs, all the inefficiency of this system, which is really what we want is, okay, if I'm a user, I'm about to trade at a bad price, can someone just come in and save me?

And again, the intense allows us to do this more efficiently. Your second tweet, your second point in your five-point tweet thread is it's a better foundation for order flow auctions that return MEP to users. This is what we're discussing, correct? That's right. Yes. So if you want to, right now, the way that those work and the way they fit into the Uniswap model involves like this multi-transaction, expensive and often an efficient

protocol for like paying someone to backrun them. When really, again, like when you've got an intent, it's much easier to just batch these together and match them against each other. So maybe to summarize points one and point two to the best of my ability, there's two, there's kind of two birds with one stone in this intent model. We get the elegance of the Dutch auction model, which like we said earlier, naturally emergently finds the most profitable actor

who can give you the best trade and still be profitable themselves. And because it's not on chain, we don't have all of this wake in the transaction. So there's not just in time liquidity. There's not back running. There's not two trades that help settle a first trade. It is all done off-chance.

which helps retain value from going to EIP-1559, and it's helped retain by swappers and also therefore liquidity providers. So that's my summarization of your first two points. Would you say that's fair? That's right. Although, again, I think I would separate out the Dutch auction point as being maybe part of, it's part of point, yeah, it's part of point one, where it really is like this is the kind of thing you can do with intents that you actually can't do with ordinary transactions on

AMMs. Beautiful. Okay, let's go into number three, which I love it. It's so simple. It's still early, which is you say that we've opened up a new frontier of exploration. So elaborate on what this new frontier looks like. What's needed in this new frontier? What kind of infrastructure do we need to settle on this new frontier?

Like what's left to build here in this new design landscape to help this efficiency become even more efficient? Yeah. So I think part of the motivation for you to help X is, okay, we see all this. behavior that's happening on chain with, say, like, JIT liquidity or people designing MEV order flow auctions of, like, you know, mev action, back running auctions, right? And thinking, okay, like, this is a sign that actually there's some serious inefficiency here that should be, that should be streamlined, that should be improved. And I think, in my view, the design, I think, does this and gets users better prices and is more gas efficient in many cases. And I think that's, you know,

why I think it's, I'm excited about it, a bit worded out right now. But really once you're, now we're up in intense space, the sky is really the limit on just like how you can actually match these orders and process them. So for example, right now, the way that USOPX works every order is, well, there's, there is this R-FQ process, which I alluded to earlier, where you can use, you can choose a particular filler to fill your order and give them exclusivity for a couple blocks in exchange for basically giving you this good quote early on. But right now, the trades are being matched primarily against these fillers.

But what happens when you actually start to match user trades against other user trades when you do something more like a batch auction like Cow Swap Innovated? I think what happens when you start to do, you can do some sort of more interesting math with that, right? Like when you have a bunch of, suppose you have like a bunch of user orders, you can execute them all at a common clearing prices. There's algorithms for trying to do that. you can do like match ring trades where you have multiple assets being traded and you try to like maximize the total amount of volume. These can be, you know, you can encrypt these orders, right? Like you can, and I'm not sure how much other some of these other solutions have done this yet, but you can actually say like, all right, we're going to have everybody do a sealed bid batch auction that's actually enforced by cryptography where you encrypt your orders, you do a this homomorphic computation on it to try to compute basically the common clearing price.

or you unseal it by using a group or some multi-party computation. And that gives you like a more decentralized or fair, potentially fairer auction. You can match it against on-chain liquidity using a particular algorithm. You can put it in trusted hardware, which I go out at a moment. But like you can, you know, it's much easier potentially for trusted hardware to operate on orders because they can include basically all the information you need about them right in the order without having to involve interaction with a bunch of Ethereum state. Like, for all these reasons, they're just more tractable.

And so I think, like, in the long run, I have no idea, actually, what these things will look like. But I think I know I'm pretty sure it's going to look like some kind of intent, some kind of, when users express their desire to trade, it's going to look more like an intent, I think, than a particular on-chain transaction. And that's because, you know, they're just so much more flexible. So there's just a lot more room to explore. It's the flexibility of the expressivity of an intent, as in it's very, very open-ended. I think maybe another way to help define an intent is it just provides like kind of the bowling alley guardrails as to like, here's everything I don't want, but anything inside it in this specific landscape of what I do want, you're allowed to give me. And so basically saying you just write the rules of like, hey, you can't give me less than this.

and then the mechanism will naturally give you as much as possible. But not codifying it, I think, allows for a lot of expressivity. And I think that's one half of the magic that I think you're talking about. The other half is that, like, since it's off-chain, the cost of computation are zero. If there's no gas costs to matching orders of user A to user B to user C, you can compile every single order together all at once. and all of that computation that it takes to clear those orders doesn't have to actually run on a blockchain that can run on some local market makers server.

And all of a sudden we get really good order execution from not having to be encumbered by blockchain computation. That's my intuition. Is this right? That's right. I think just off-chain computation is incredibly powerful. and we actually saw just with the rise of the professionalized MEV ecosystem, just a tremendous amount of ingenious work being an optimization being done off-chain.

And I think this is something where a lot of people see MEV as a threat, but as a protocol designer often it is, you know that if you leave some opportunity open to be optimized for MEV, someone is going to take it. And so, like, you can't be lazy as a protocol designer, maybe as lazy as you could have been, maybe in, like, 2018. But it also is a huge opportunity. It's a massive support. And I think of it as, like, a swarm of nanobots that's always in the air around us.

And if you were to, like, leave out an apple on the table, it's not only just in your, it becomes a core, right? Because the nano is, like, the swarm and eat it. And if you, you know, this is scary because it means, like, you can't leave your food line around. But it also means, okay, like, this is useful. It's like if I want to like, you know, clean something, I can just like spread, you know, spread some jam on it or something and you know that the nanobots are going to come eat that and do that task for you. And that's what, that's how we rely on this system in the, and with Dutch orders, right, in Uniswap X. Is you say, like, we know that with a Dutch auction, if we auction this, like, it's an efficient enough nev market that like someone's going to take it. Someone is going to pick up this money that's lying there.

And as a result, we can rely on this. And the user, it helps the user, right? that like this opportunity for profit is not going to be left unclaimed. Because if it were, then the auction might clear too late at a worst price than the user would otherwise get. But because you know that this is efficient off-chain, you can rely on that. And that's like, that's something that I think is really has changed in the past couple of years, where there were a lot of protocols in people we were talking about in like 2017, 2018, where you couldn't actually rely on just there being efficient, every efficient arbitrage being taken.

And like, oh, someone is incentivized to like, do it, you know, challenge this thing. so they will. That's something that today is actually much more realistic than it used to be. Who are these nanobots? Who are the players that make up this swarm of nanobots? When we open up this new frontier, what are the verticals that actually compose this swarm of nanobots? I'm sure we got market makers, we got MEP bots.

What composes this swarm? Yeah. So I think there's professional, that's right, there's professional market makers. There's a lot of, especially for Atomic Nav, a lot of, a lot of, lot of amateur mev searchers who I think, you know, it's just like the, it's just sort of amazing how you've seen this actually happen where by lowering the barrier to entry to becoming a mev a mev searcher, you actually just found that basically all, you know, all topic mev gets extracted pretty quickly by often people, you know, who are in high school

or in their basement somewhere. Or, you know, I don't, I really don't, I don't actually know that's part of the beauty of it. And that's, you know, when we're talking about the Ethereum is a dark forest post before, that's, that's, that's, that. was this realization that we had that actually the bots are a lot smarter than you might than you might even have anticipated. And so you actually, you know, this someone has, if there's some behavior out there, like you should suspect or worry at least that somebody's written to bot to take advantage of it.

But again, like once you get to this, once you're in this world, yeah, and like you can sort of just treat it as a force of nature, the kind of efficient market hypothesis here, that, okay, if we're creating MEV here, then it's going to be. claimed. And we rely on that, for example, in like, Bland is a protocol that I worked on with the, with the Blur team, where we also use Dutch auctions because, again, I love Dutch auctions. But if, you know, you might get your NFT liquidated. If there wasn't an efficient market here, because if somebody closes out a loan, what happens is there's a Dutch auction to continue it. And if nobody was out there just looking for opportunities to lend at a profitable

interest rate, then, like, potentially someone loses their NFT. But you can kind of rely on, do a trust fall onto the MEP. search your ecosystem and just know that somebody's going to actually claim that. Are you a Metamask user? Well, you're listening to Bankless, so of course you are. The wallet you know and love just got a whole lot better. Metamask portfolio is the ultimate one-stop shop for all of your crypto needs. It gives you a holistic view of your crypto portfolio across multiple chains and multiple addresses all at once. You can easily view and manage all your coins, tokens, and NFTs in one convenient place just by connecting your wallet. Metamask portfolio goes

beyond just viewing your portfolio, though. Inside the portfolio, you can do all the incredible money verbs that make defy so powerful. You can buy, swap, bridge, and stake your crypto assets with ease. It's like having a powerful battle station for all your defy moves right at your fingertips. So if you're looking to do more in Web3

your way, Metamask portfolio is the answer. I already know that you have Metamask wallet, so go check out your Metamask portfolio. Learn more at metamask.io slash portfolio. Mantle, formerly known as BitDow, is the first Dow-led web 3 ecosystem, all built on top of Mantle's first core product, the Mantle network, a brand new,

high-performance Ethereum Layer 2 built using the OP stack, but uses Eigenlayer's data availability solution instead of the expensive Ethereum Layer 1. Not only does this reduce Mantle network's gas fees by 80%, but it also reduces gas fee volatility, providing a more stable foundation for Mantle's applications. The Mantle treasury is one of the biggest Dow-owned treasuries, which is seeding an ecosystem of projects from all around the Web-Free space for Mantle. Mantle already has sub-community, from around Web3 onboarded, like Game 7 for Web3 gaming, and ByBit for TVL and liquidity and on-ramps. So if you want to build on the Mantle network,

Mantle is offering a grants program that provides milestone-based funding to promising projects that help expand, secure, and decentralize Mantle. If you want to get started working with the first Dow-led layer 2 ecosystem, check out Mantle at mantel.xyZ and follow them on Twitter at ZeroX Mantle. Arbitrum is accelerating the Web3 landscape

with a suite of secure Ethereum scaling solutions. Hundreds of projects have already deployed onto Arbitrum 1, with a flourishing defy and NFT ecosystem. Arbitrum Nova is quickly becoming a Web3 gaming hub, and social daps like Reddit are also calling Arbitrum home. And now Arbitrum orbitum's secure scaling technology to build your own layer 3, giving you access to interoperable, customizable permissions with dedicated throughput. All of these technologies leverage the security and decentralization of Ethereum and

provide a builder experience that's intuitive, familiar, and fully EVM-compatible. Faster transaction speeds and significantly lower gas fees. Arbitrum empowers you to explore and build without compromise. Visit arbitram.io where you can join the community, dive into the developer docs, bridge your assets, and start building your first app on Arbitrum. I'd like to add an important player in this role, and this is it brings us to your fourth point in your tweet thread, which are bridges. In your fourth tweet, you say, seamless cross-chain and especially cross-chain swaps will be revolutionary. So how does Uniswap X in this intent-based meta change the game for the nature of Ethereum's roll-up-centric roadmap? How is this a player here?

Yeah. So one way I can talk about this. Okay, so I'm really excited, but there's something that Uniswap is planning to roll out later this year. But this is for cross-chain swaps using Uniswap-X. And you can use Uniswap-X for, you know, it's in the white paper the description of how this protocol works, but it's pretty simple adjustment to the algorithm where if I'm, you know, you know, you know, you, I express my intent on Ethereum to have ethereum rather than just to have like die on Ethereum. Or you could say, you know, I have ethereum and I want to have die on optimism or something like that.

You just express where you want to actually have the asset. And the thing is if there's a message passing bridge from the place that I want to go to to the place where I currently am that can pass basically the proof of the fulfillment of this through, then I can have my order claimed on, you know, on Ethereum. and then filled on optimism and then the success of this has actually passed through. And a couple of cool things about this. One is with the Dutch order mechanism, this can actually be a really decentralized competitive market for how to get money off from one roll up to another. So the price is set by the market, and anybody who actually has assets on both chains and

wants to run the strategy can do this. You don't have to depend on being like a trusted party. or having like on-chain liquidity or anything. Second, I think the liquidity can be off-chain. And I think it's much more efficient. For one thing, if you just have bridges and you're trying to bridge over, you know, ETH from one chain to like some wrap teeth on another chain,

bridged teeth on another chain, if that involves a huge AMM pool, like a lot of liquidity providers with just static bridge dashes there, that's a massive honeypot. You just have to have exposure to this, like bridged eath over there. And I think it's actually a much cleaner model to have the liquidity be off chain.

And like, I'm holding their native asset on this other chain, right? Or I'm holding something else, you know, or dye or something. Like I don't actually have to have a huge pot of bridged asset over there. And I think that's just like hugely valuable. But with roll-ups, again, often you have a canonical ether.

And third is, there's a really nice property where, I mentioned going one direction, but if you go the other way for fast-exits on roll-ups, this is like, this is a design we talked about for fast roll-ups on exits like on plasma on roll-ups like years ago, but it's a very neat feature is you can,

there's a fast bridge from Ethereum to optimism, right? Like there's just a native bridge in optimism. You don't have to use the slow exit for it. As a result of that, you can actually build a fast exit protocol from optimism to Ethereum, where if I have Ethan optimism, I can get onto Ethereum

or onto another roll-up for that matter. You can get it over to but let's just talk on Ethereum for now really quickly. And the way that works is I have my Ethan optimism and I basically auction off the right to do a Dutch auction, say, send me Eith on Ethereum. And once someone does, they will basically be able to, they'll be able to send a message, a fast message from Ethereum to optimism that then claims my, you take five minutes or ten minutes or whatever it does, that then claims my trade.

So the filler, I'm sorry, the swapper, in the happy case, the swapper immediately, basically, is faster than even this bridge, you know, within like a minute gets the, gets their money on main net. The filler can actually conclude this swap by the time that their transaction, their message has moved from Ethereum to optimism. And yeah, so in the happy case generally, like this all concludes within, you know, like within 15 minutes or something. And I think that's just going to be incredibly efficient for getting money off of roll-ups.

One final really cool thing I see about it is. If you want to go the example I started with, you want to go the other direction. You might actually get paid to bridge from Ethereum to optimism because you can effectively rebalance somebody who wants to exit. So if somebody's trying to exit optimism, maybe they're a market maker who previously bridged somebody on to optimism for or off of optimism for a fee, so now they have optimism ETH. They might actually be willing to pay you more than one ETH to get your ETH, made net ETH.

And so you might actually, and I'm not sure how the economics will work quite yet. But it's conceivable that you might actually get paid to bridge your money onto a roll-up. How does this change the nature of bridges? Because I remember in 2021, 2022, the building a bridge cross-roll-ups was like a big movement, right? We have socket, we have Li-Fi, we have Hot Protocol, we have a cross, all of these bridges. How are these bridges, if we go into this intent-based paradigm, how do the nature of bridges change? So I think some of these bridges, and I'm not an expert in how all of these work, I do think across actually has some similar characteristics to how Uniswap works and other ones do. So I'm not calling out any particular bridges either positively or negatively here.

But I think some depend on this kind of like on chain liquidity. And this is ironic for me and Uniswap to be sort of talking about moving away from having on chain liquidity for bridges. but having having, if you imagine just, oh, you actually get some canonical representation of like optimism eth on optimism bridge teeth over on Arbitrum, and then there's an AMM on Arbitrum where you can now, like, trade that. I think that, for one thing, it becomes a honeypot where if this bridge, there's a lot of money right now that rides in the security of this bridge and potentially could get hacked by this. And we've seen catastrophic, the most catastrophic hacks, of course, in crypto history, our bridges. In part because you just have a lot of money that's just sitting there, right? It's sitting in like one contract because the money's off like off doing something else.

But the representation of the money is going somewhere else. But here it's just like sitting in this bridge contract and it's exposed to this thing. And what I like about Uniswop-X for security perspective is only the only money that's at risk that's exposed to the bridge is swaps currently in flight. Swaps currently in flight. In flight, yeah. So basically, like, once the swap has concluded, so somebody starts a swap, right? And then a swapper expresses their intent they want to bridge over. A filler on that chain claims, okay, I says, I'm going to fill you.

They basically make a promise to fill them. Right now the swapper is exposed to the bridge risk. But then the filler immediately, hopefully, fills them on the other chain. And now the swapper no longer has bridge risk. like they've already been filled. So they're exposed for like a minute. And then if the bridge gets hacked, like people should stop swapping on it. But, you know, like there's that minute maybe when they're exposed.

And then for the filler, they actually, now they use the bridge. They have to use the bridge to actually send a message back to claim the swapper, to get the swappers money. But once they do, they're no longer exposed to the bridge risk. They don't have any money like overnight. If they turn off their server and they stop filling stuff, they're not exposed to the bridge so they can sleep easier. And I think that's getting rid of that honeypot quality of bridges is just a huge improvement.

To make sure I understand this, there are certain bridges that when you use them, you create a representation of the asset on the chain that is beholden to the bridge that put it there, correct? And so like, say we have bridge just to make up a bridge name, bridge like bridge one, two three, two, two, three. And then you have ether on main chain Ethereum and you use bridge one, two, three to get your ether onto optimism. It's not optimism ether. It's bridge one, two, three, ether on optimism. And that is the honeypot because it's this bridge that is now this persistent custodian of this ether that is a IOU on optimism. But it's not canonical ether. And canonical ether, we would say is ether that's deposited into the canonical optimism bridge, correct?

Yeah, exactly. And, you know, it's possible for the swap. Maybe the swapper trades immediately from that optimism eath into, oh, sorry, from that 1, 2, 3Eth into optimism Eth. So maybe the swapper doesn't have long-term exposure to the bridge, to the bridge. But if that liquidity's on chain, if liquidity is on chain, it might be like they've got an AMM, right? Like, anyone could provide liquidity on this AMM on a particular roll-up between 1-2-3-Eth

and OPEEth. And that's exposed, as long as somebody's providing liquidity on, in that, as a NLP in that pool, they're exposed to that bridge risk. Whereas if that liquidity is off chain, the way that it is in Unswap X, they're actually not exposed while they're not actually currently executing a trade. So this, I would, it logically concludes in that assets that are on layer two or, you know, non-Etherium chains are most likely going to be assets that are represented by the canonical bridge for that chains, like the optimism bridge, the Arbitrum Bridge, the actual bridge

that creates the layer two, not another ancillary bridge that isn't relevant to the layer two. That's right. And this is why I think it's incredibly powerful in the roll-up case specifically. Because so every roll-up has a canonical bridge,

a message-passing bridge from Mainnet to the roll-up. Every roll-up has canonical versions of all like EOSC-20 and Ethan NFT assets, I think generally, from Ethereum that have been bridged over to that, right? So you don't actually have to have a remote representation of the, you know, the way that you might with Solana, you have to have some remote eth, like, so, like, how do we get there? I think there's a lot of challenges in how to figure how to do that securely.

But we don't actually need that with roll-ups because there's the canonical bridge. And so it becomes really useful to say, let's just, we don't have to solve that problem. We only need to solve the swapping problem. I've got eth over here, I need eth over here. and then we just try to reduce all the risks around around that. And then, you know, I think the other benefit is because this bridge to main net, the nice thing is the bridge from main net to the roll-up generally is a fast bridge. And like one of the biggest downsides of especially optimistic roll-ups is the exit is, can be, is slow.

But the nice thing here is this optimism, I'm sorry, UniswapX turns a fast bridge from message pressure bridge from B to A into a fast. into a fast asset passing bridge from A to B. Right. And so it's designed basically to create these trustless fast exits, which I think is very nice. Would you say an intent-based swap paradigm is also a bridge minimalism paradigm? I would say they fit together very nicely. And yeah, I'd say they fit together very nicely.

Cool. Okay. And I would assume the nature of this is probably one of the big UXUI problems, UX problems, of just like, bridging is not bridging is a burden. Bridging is a chore. It's not like friendly for users. And so this is probably one of the many things that we need in order to improve the composability issues that Ethereum's roll-up-centric roadmap brings to the table. Yeah. I mean, in my view, it should be really easy.

If you want to buy a token and that token happens to be native to. to some roll-up, and your money is on some other roll-up. It should be basically, like, you know, it should be transparent. You should see that you're buying this asset on this roll-up, so you know actually the exposure you're getting. But it shouldn't be any harder than buying an asset, you know, you should just go to Uniswap where you already are maybe going to buy the asset, and you can just trade from one chain directly to a different asset on a different chain.

I think that's a big U-X problem right now that you actually have to even think about bridges at all. Yeah, so, of course, this isn't a panace. for solving the cross-roll-up composability issues. But, man, it sounds like a really big step towards that direction. Yeah, that's the hope. Okay, so that was number four. Moving on to number five, the final one.

You say Uniswap X complements Uniswap v4, which is designed to enable new techniques to sustainably improve passive liquidity provision. Can you unpack that statement for us? So why does Uniswap X complement Uniswap V4? And what's the significance of all this? Yeah. So a couple ways.

First, going back to how I started this, I do think they are, UNOSOPV-V-4 and NS, each are primarily designed to serve each half of that ecosystem that I was referring to earlier. UniswifV-4 is about new ways of protecting passive-locutic providers. Unisov-X is about ensuring that swoppers are getting the best prices. And so I think, you know, maintaining that balance is important. And I think the designs that help one are often very, sort of very different from the designs and help the other. But when you're helping them, it's generally not at the expense of the other, at least in my view, because again, like, in the long run, these are our users. This is the system. And like, you can't, you can't, like, just screw over swappers in order to help LPs long term. You'll end up with no one swapping on your decks anymore. Or vice versa. So some specific ways in which it complements it. So one is, I think, well, they have some, another way, they have common themes. So UnistopV4 is about, um,

flexibility. It's about allowing someone who has a cool design for a decks to build it on this platform on U.SovV4 rather than building it as a fork or as a different pool. And I think that's, you know, that's similarly with Unisop X, it's much less opinionated about how this trade actually gets executed. And, you know, again, like I said before, you can use basically the same on-chain format. Basically, you don't have to change Unisob X to protocol itself at all in order to radically change how you actually match these things off-chain. And I think that's, yeah, I think that's just a really, it's a shared theme there where we thought, oh, like, you know, there's, there actually is this very wide design space and Unitsup doesn't have to be as opinionated anymore. And we can open up more, more innovation from others and from, and from, Unitsop labs and from people who contribute to the ecosystem.

So that's the second way. And then the third is some specific ways, Unisop before, because of this new innovation and openness, means you'll probably get just a lot more pools on chain. And routing across and between those pools is going to be a tough problem. And I think it's one nice thing about Unosop-X is that actually outsources the problem of figuring out how do we route across this multiplicity of pools to this incentivized network of fillers and generally the MEP ecosystem. And right now already, Mev does a pretty good job of arbitraging pools.

If you build a new AMM, it, you know, even if you're, docs are terrible and you don't have an API and everything, it will probably get arbed, basically. If anyone can, if it's, if it's easier to arb than it is to like hack, find a zero day in Viper. Because that happens. So like, if it's easier, if it's easier to arve it, then it will get armed. And so you just, you know, similarly, we have that for arbitrage across pools. We don't have that right now for routing the swaps. For if you've got like an unformed flow order, like what's the best way to actually read it? I think we don't really have a decentralized ecosystem trying to get users the best swap possible. And that's what we're trying to do

with Uniswap X. Yeah, the thing that I saw between Uniswap V4 and Uniswap X is both that it pushes computation to the margins. And like you said, you said, Uniswap X is for the swappers. Unswap V4 is for the liquidity providers. Maybe you can take a moment. Bankless listeners, I'll have told them to definitely listen to our episode with Hayden on Uniswap V4, as well as our episode with Hayden by Uniswap X prior to this, but just to unpack Uniswap V4, why does Uniswop V4 benefit LPs? And how does that benefit, how does that, if we've been talking about this entire episode about Uniswop X benefiting swappers, what does Uniswap V4, what's the secret sauce about Uniswap V4 and what it does for LPs?

Yeah. So I'll start by talking about Uniswap V3. And so, you know, with UNISWP, when we started working on UNISOPV-3, we're thinking about what are the big challenges in UNISWP or what are we trying to solve anything. We landed on capital efficiency for liquidity provision as a major problem to solve. And I think that's true both because it was just very capital and efficient to provide liquidity at all in all price ranges. And you actually just get, it's much easier in LPs. It benefits LPs, but also because it increases the creativity that LPs can approach this problem with. say, like, oh, I'm going to provide using this, you know, some particular, I want to provide

during using some different, like, static curve. And you can construct that with just a bunch of unistrop positions. You might want to, like, actively rebalance and you can do that as well. It opens up this, this range of possibilities and this freedom for LPs to figure out how they're actually going to, going to use the system, as opposed to we're forcing you all into one bucket. And I think, you know, that made sense in 2021, in part because a lot of the innovation that was happening around AMMs at the time was about like, well, what's the shape of the liquidity curve that I'm providing. So like curve, for example, like providing a concentrated liquidity, you know, specifically pretty opinionated, but like very much designed for pegged assets

or for stable coins. That was a big innovation in DECS because it actually makes a lot more sense for you to provide liquidity that way. So, so U.S. V3 is a way to build like your own curve like AMM, right? You can pick us whatever AMM you'd want to do, you do that. But what we saw actually in 2022 and 2023 is the innovation is moving away from just how or, you know, what kind of liquidity shape is your liquidity. It's moving toward these more creative things that actually get into how the decks is designed itself. And a lot of that is around, for example, well, what's like the initial price? What are the fees that we set? Like, can we change the fees, which is not possible to really do in V3, although you can pick, you can pick which pool to provide in.

But on like one pool, the fees are static. can we force only particular users are allowed to trade or you get to auction off the right to set the fee or to be the first trader in a block? There's a lot of different new features you might want to add that just don't fit into the V3 framework, but they do run to V4. So with V4, the idea is we add these hooks that allow people to get more creative in what kind of strategies they provide. And so, yeah, I'd see it as, you know, this is a way where if a liquidity fighter

wants to actually run a particular strategy, they can actually just build their own pool or someone can build one that they can aggregate many liquidity providers in. So getting into the details of where those are, I think, I will say, I don't think we have a solution to loss versus rebalancing, which is this general problem of liquidity providers being arbed. And in fact, I think there is no, there's no general solution. And I think, like, you can, there are ways that we think can actually minimize and reduce it.

But ultimately, and I think it's, it may also be a cat and mouse game forever. And that's one of the reasons why it's not, we're trying to enshrine this one solution. And before it's instead we're opening up this design space where anyone can. But some of the ideas, I think, that can be done. I think Alexander Nizlobun on Twitter had a neat idea about setting fees based on where the price moved in the previous block. And I'll give you just a very quick design of it. But this is an example of one of the things that can pretty easily be built using Hux, using Uniswiswap before. The idea is if the price is, you know, in block N,

Suppose the price has moved from, you know, the ETH price has moved from $2,000 to like $2,100. At this point, so then there's probably been a big ARB, you know, price move that happens in this pool where somebody arbed it basically to exactly the right point where they made, did the imagine the profit maximizing an ARB. So the price has now moved to like, you know, to $2,100. Okay. The thing is, when they were trading, they were paying a fee. And so they probably pushed the price so that not like the midpoint price, but actually like the very extreme of when you're trading up, they were paying exactly $2, $1,100. So if what Uniswop V3, you know, or V2 or whatever thinks is the price right now is like $2, $2,100 minus $30 bips, that it's actually like the midpoint price. But a better estimate would actually be exactly $2,100 because that was the final price that the Arb, previous Arb paid for it.

And so then you can adjust the fees so that actually just move the fee window so that it takes that into account. So anyway, that's like the core idea there. But it's just all it involves is adjusting the fees, which is provided by the UNICEFV-4 hook. And I think it's a clever idea. And that's like the kind of thing. You know, other ideas on it. And I think we'll be publishing some stuff later this year on some of my ideas. And I'm trying to be pretty open about what kind of ideas I'm working on with this in general.

but like in my view those are the kinds of things where you can just eke out some improvements for liquidity providers using V4 features that we may not have even imagine

that wasn't an idea that I had had which I think is pretty cool. It's been a while since I've been an LP and I've never been an LP in Uniswad V3 because I just,

it's seemingly pretty sophisticated and also intensive but the meta that I've come to understand through my conversations with people is that being an LP is losing generally.

Like you're losing money on average, especially if you're passive LPN. And so I'm wondering if like this side of the uniswap equation isn't complete yet. We've talked about uniswap X and intense. And that feels like a logical conclusion of where swapping goes. But it's, but I don't know. And I'm maybe asking you for a little illumination here. It doesn't seem like we've reached a point of sustainability for liquidity providing inside

of uniswap. Because uniswap v2, definitely. And Uniswad V3 also, from my intuition and from my conversations, people aren't making sustainable money in order to supply sufficient liquidity into this side of things. So maybe you could help kind of just like define the contours of this conversation. It's like why aren't LPs making money? Where's that coming from? And how and does Uniswot V4 fix this enough?

Or like maybe you can kind of take it from here. Yeah. So first is that. It's a very complicated question. And it's one where I've mostly just. been relying on others' work for this. I've tried to look into it a little myself. My best read of the literature on this, and I think the big focus, almost like half of uniswap V3's volume goes is the USC-weath five-bit pool. And that's like, that's just like the big,

I consider that, that's, all right, let's like focus on that pool. My best understanding is that the average liquidity provider on that pool loses money. And I'm, I don't actually, so to me, this is a weird mystery because I don't actually know, I don't know people who provide liquidity on that pool. I don't know why people do. I have a few possible theories that I can go into it a little more. But part of what I'll say is I think we design the system so that if it's, you know, you should see some equilibrium where, okay, if it's not profitable by liquidity, then there should be less liquidity. My best understanding of what people have, people have published is that it seems like liquidity is overprovided in total on that pool. But I actually, I don't,

you know, I don't know that for sure. And it seems confusing to me why people would would provide liquidity if they're consistently losing money. So I just don't have an answer to that puzzle. And if somebody has a good answer, I would actually love to hear it. Because I feel sort of dumb that I don't have a better explanation then, but maybe they know something that we don't, or maybe they're doing slain. One point is they're just lazy, not a valid answer? Yeah, I don't think so.

And one of the reasons is you mentioned passive versus active. At least one of the studies I saw says that active liquidity providers lose more money than passive. Oh, wow, really. Well, for one thing, you know, when you're rebalancing, you're paying gas, every time you rebalance. You're also probably in practice trading, maybe trading on chain. Being an active liquidity provider and also being a trader is slightly synonymous. Right.

And so you're maybe getting some slippage or price impact when you rebalance. And so I don't remember if this analysis actually included that. But it doesn't shock me necessarily that actually providing really active liquidity on a pool, like you might lose more money because, yeah, again, you're basically paying fees doing slippage every time you're. do that. But yeah, I'm willing to believe that the liquidity is overprovided on V3. I just don't have a good answer for why it still happens. One possible theory is there are people who are making, so all these results are about, are on average, basically. And I think some have tried to,

I've tried to break it down a little bit's hard to identify who liquidity fighters are. One possibility is some liquidity fighters are making just money hand over fist and everyone else is losing money. And it's a constant tournament to try to be that guy, to try to get ahead. And so people, so, you know, That's like one, sort of like the online poker theory of liquidity provision. It's like, yeah, like on average, online poker players are losing money. And yet, or in the peak of it, I think, like, there were studies. Like they were all like mostly on average losing money. But partly there was just a lot of churn and who is actually trying to be there and whoever's at the top is making money.

So that's like one possible theory. And another is just like people are dumb. But it also is weird because like when you mentioned laziness, like the people who are doing the most, like who are writing these complicated bots seem to be losing money, maybe more money than others. I don't actually have a good explanation for it. Oh, yeah. Interesting. So going back to your question, yeah, I mean, I agree. And that's why, again, I think V4 is largely focused on can we actually really address this and make liquidity more profitable.

Cool. And, of course, the beautiful thing about UNSYV4 is that these hook strategies are likely going to be built, not obviously, holistically, not as a sweeping broad statement, but a big source of innovation, demand for innovation for hooks is going to be built. not obviously holistically, not as a sweeping broad statement, but a big source of innovation, demand for innovation for hooks is going to become from LPs

trying to figure out how to fairly capture sustainable fees in order to make their activity more profitable. At least that's my interpretation. Yeah. One thing I quickly want to provide a take for you on to get your reactions to is Uniswap's own app layer.

Infinity Pools is a new app that's built using Uniswap LP tokens as assets. And also, I think, like, the success of something like infinity pools would create demand for Uniswap LP assets, which creates demand for liquidity. Is Uniswop's own app layer that has LP tokens as assets, a potential source for LP yields? Yeah, I think that's possible. From what I've seen, in general, the idea, okay, look, there are these passive liquidity

providers, there seems to be demand for this kind of exposure. Maybe they're maybe like rebalancing or hedging or something. And so like are there ways we can actually provide them this exposed? Like basically you get paid yield for holding this convex position. Or concave position, I guess actually is the term. The question is, I'm sorry. Yes, the question is like are there more interesting products that we can provide liquidity providers to get this and potentially increase their yields?

I think I think quite plausibly. A lot of the designs I've seen involve basically removing your liquidity from, like basically you borrow some liquidity and then you actually pull the liquidity out of the pool. And so it's never been that clear to me for a lot of these products why actually you need the uniswap part. Or like does it actually cause liquidity on net to be more often in uniswap? And I've seen like different answers for some of those. So I'm not as sure about any of the particular instances of these kinds of products. But generally I think, yeah, like trying to try and. to find ways to give liquidity.

There's demand to provide liquidity. As we see on Uniswvv3, there is demand to do this. And so the question is like, okay, can we actually provide them this, what they're trying to get out of this, with a better price or with better yields? I think it's definitely, I think, it's something where innovation of the app layer is awesome. Well, Dan, I think this was a fantastic first exploration

into what is a brand new rabbit hole in the world of intense and off-chain orders and Unoswap X and bridging. it seems to be that crypto always has some cool rabbit hole to throw at us. One rabbit hole that I know that's out there that we're going to go investigate is Swave out of FlashBots. We're doing an episode in three to four weeks with Phil Dianne and Andrew Miller. I'm wondering if you can just help me incept listeners' brains with Swave, why they should be excited about it, what the TLDR is, and just overall prepare them for an episode that's going to come in the future.

Yeah. So I'll give you, I think, why I'm excited about Swab. and it's maybe a, it's as a kind of like user application developer. So my perspective on what makes me excited. And part of it is, you know, we have this on-chain infrastructure, and one thing that was exciting about Uniswop V1 and V2 is that we could build these protocols, decentralized, completely decentralized protocols

that were basically everything happened on chain, and then all this stuff has done for you where you can just write your logic on-chain and basically, yeah, you know it'll be, you know it'll actually be executed. And it's fully decentralized. But, you know, there's all these costs to doing stuff on chain.

You don't actually, especially with stuff, you don't actually need, like, global consensus on. And so we now have this incredibly sophisticated off-chain infrastructure with particularly, like, you know, MVE searchers, but also, I think, a really sophisticated builders where often on Red Relays, these parties where they're doing, all these complex computations, but they're often doing it in a way where it involves points of centralization.

I think the MEV ecosystem overall is incredibly decentralized as a system, but there are points there where there's actually benefits to being centralized. I think this is a potential risk, and it's one that FlashBots has been concerned about for years. And it's also one where if you're building applications in this MEV space, you potentially find yourself, you have to, you have to find, trust somebody to run, you know, a searcher for, a, what did it called, a solver for some protocol, right? Like, you know, or our matchmakers or something, you know, there's many different terms for

this, or a relay, someone who's, who plays some semi-trusted role in this off-chain infrastructure. Again, once the stuff gets on-chain, like it's, you know, it's all non-custodial and the trades are settled or everything. But there's this point before it where a lot of stuff ends up being, you, you, you, you know, the way that things are currently designed, there are these potential points of centralization there. And what I see Suave is it's a platform for decentralizing all that off-chain meta-infrastructure,

I think, for decentralizing some of what builders do. But also, you know, if you want to run a protocol right now for matching, for doing like a batch auction off-chain, right now, probably the best way to do that would be to have some semi-trusted party. Like, you run it, right? You run a server, and I say, I just promise I'm going to run a batch auction

and I won't look at your bids and I won't bid myself. But if you wanted to do this in a trustless way, there's actually just no platform on which to build that, to build a, for example, like a decentralized batcher. And so what I'm most excited about Swave is I see it as a place where you can build. I can just like write some code, right, like maybe even just like some solidity, and they will run it for me off-chain really efficiently.

But in a way where I know that it's actually going to be executed, I can depend on untrusted hardware or on consensus or on some decentralized guarantees that it's actually going to be run in a private way. I think that just as an application designer would be an incredibly powerful thing to rely on. It's in my view, almost as big as it's just moving from like Bitcoin to Ethereum,

moving toward touring complete on-chain contracts. Imagine re-a-turing complete off-chain contracts. Beautiful. Dan, this has been a fantastic exploration to a bunch of new knowledge, and I thank you for coming back onto bankless and spreading all of this cool stuff that you've been researching on over at Paradigm. Yeah, thanks for having me back.

And just before I go, I remember, Paradigm, we're a crypto asset investment firm. We do have investments in a lot of the projects that we mentioned today. And generally, I'm here speaking on my own behalf and nothing that I said here was financial illegal advice. Of course. Thanks, Dan. And I'll give our own disclaimers as well over a bankless. Crypto is risky bankless nation.

You know the deal. You can lose what you put in. But we are headed west. This is the frontier. It's not for everyone, but we are glad you are with us on the bankless journey. Thanks a lot.