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We have this natural experiment. And because it's pretty persistent, usually the 5 basis point pool has done better over the past hour, it's probably going to keep doing better over the next hour. We can just toggle the fees in our pool to reflect which pool's outperforming. So theoretically, with pretty good chance, you get the best of both worlds, because fees adjust over time. So we kind of call that a price discovery vampire attack.

What's up, everyone? Welcome back to another episode of ZeroX Research. This show is made possible thanks to our fantastic sponsor, the Atom Accelerator. If you are a developer looking for a home in the industry, the Atom Economic Zone welcomes you, but you will hear more about the Atom Accelerator a little bit later in the show. Today is June 26th and we have a great interview lined up with Doug Colquitt, the founder of Ambient.

It's a new DEX that's aiming to reimagine the active AMM. But before we get into the interview, as always, we're joined by Effort Capital and Westy to discuss the latest market happenings. Westy, why don't I kick it over to you for your Hot Seeder cool throne?

Yeah, I can start us off. So I'm not sure if this is a HotSeedr cool throne yet. We have a lot of time for it to figure that out. But basically it's a new proposal to make the current Polygon proof of stake chain into a Validium. So for those that need a refresher, Validium is similar to a ZK rollup where proofs are sent to the L1 for verification.

However, the transaction data itself is not actually posted, but is instead kept on some like internal data availability layer. This means like a lot higher scalability and lower transaction fees because you don't need to pay to store that data anywhere, but it sacrifices a level of security and censorship resistance because if that data availability layer gets compromised, whoever's in charge of those funds can just freeze them and not allow users to access it. And the reason why I'm sort of back and forth between whether this is a good thing or a bad thing is because, you know, I think it does solve a lot of the issues that they've had in the proof of stake chain. But they've had a ton of reorgs basically every day and this sort of solves that issue where they're no longer required to look at a validator set for consensus. But I'm also pretty cautious about having a generalized chain with a lot of native value and native applications, sacrificing a level of censorship resistance and security, and leaving that power to potentially, like, a few people.

And that was another thing with the proposal itself, is that there is no detail on how the data availability layer would be managed, or what that would look like. And so we don't know whether that's going to be through a committee or maybe they're outsourcing that to avail, we don't know the details. And so there's a lot we need to see. I think it's going to take, I think, 8 to 12 months for them to develop this thing. So yeah, I wonder what you guys think about them switching the proof of stake chain to a Validium.

I think it's a good move personally. I mean, if you look at the chain today, you're relying on a whitelisted validator set. So, I mean, I don't think anything really changes from Polygon as a sidechain to Polygon as a Validium. And I also think they did mention in the blog post that Mahalia posted on the forum that the Matic token would be used to secure the data. And I don't think Avail is actually even under Polygon's umbrella anymore.

And that was a really under looked at thing, actually. I feel like no 1 even talked about that, but I'm pretty sure Polygon's like completely removed from avail, so I don't even think they have really their own DA layer. So I do wonder if that's kind of their plan for Matic is to have like a DA layer that kind of starts with the proof of stake chain in the form of a Validium. And then it kind of exports its services to other chains in the future. Not really sure, but I think in general, it's a good move.

I personally use Polygon a good bit, regrettably. And I absolutely hate the experience. So anything they can do to make that chain actually work, I'm all for it.

Anything for your precious unicorns. But I guess I'm just confused by the end game of polygon here. Like, it seemed I like I thought for sure they would have been leaning into the zkvm and like, just focused on promoting the popularity and usage of that. And if not just transporting everything over from the proof of stake chain, like why? Why do we still have that chain if the end goal is not to be, you know, Surely the end goal is not a Validium.

So like, I guess this is another short term solution and to Westy, to your point, like, yeah, it's probably an upgrade, but it still doesn't feel like it's the, the end game. So I don't know. It's interesting to see. Uh, they're like, they seem like they're focusing on too many things at once, to be completely honest, like, I don't know, they said, now their competitors are doing really aggressive things and like promoting their brands, like the OP stack starting to take off. Arbitrum has been pretty up into the right in terms of like ecosystem growth recently.

You got ZK Sync that just pushed live the ZK stack. Like everyone else's seems to be really honing in on their expertise. And then Polygon just got like fingers in random jars like totally kind of lost. That's just the way I'm perceiving it, at least.

Yeah, I think it's also pretty annoying how they're doing this whole announcement, this whole transitionary period. Why can't you just say, here's our endgame, here's our roadmap? When Ethereum puts out a roadmap, it's extremely detailed. You know what you're getting. You'll read a 10, 000 word essay by Vitalik, you'll probably have to take a few days to actually digest it.

Like Polygon's breaking up, they have this whole Polygon 2.0 vision that's a complete rethink of their architecture, a complete rethink of Matic's, the tokens utility in the entire MADX or Polygon ecosystem, and they're kind of doing like announcements of announcements over like the next 4 to 5 weeks. Obviously, I'm sure there's some type of marketing reason to do that. They're trying to like dominate the social media airwaves. So I understand that, but at the same time, you just tell us what your vision is. Can we get actual better user experience in the proof of stake chain or at least in the Polygon ecosystem?

I'm sure it's great that they're trying to iterate on their product, that they're trying to push this ZK narrative because ultimately it sounds like the end game for on-chain infrastructure is 0 knowledge proofs. But I would just like to see in 1 cohesive, 1 nice blog post, What are you doing? What is Polygon

2.0?

Yeah, the other thing here is, if you look at market caps between Optimism, Arbitrum and Polygon, Polygon is insanely expensive. Arbitrum's around 1, 1 and a half billion. Optimism is about 800 million. And then Matic Polygon is trading at around 6 or so billion. So it's just way overvalued from a market cap perspective.

But if you start looking at FDVs, it's very in line with optimisms and Arbitrum is actually the 1 that stands out looking expensive. But I don't know, just another observation is it's trading quite richly.

Yeah, Sean, I agree there. I think that's a pretty good point on the valuation. But I guess that's good if they're going to be using a data availability committee with the Matic token as like a proof of stake model. So I guess we'll give them that. But Efrain, who you got in the hot seat or cool throne this week?

Yeah, So on the Cool Throne this week, I actually have the Cosmos Hub, no surprise being the Cosmos Bull here, the Cosmos Hub and the Atom Economic Zone. So you've seen a couple of chains become consumer chains over the past month or so since replicated security went live. You saw Neutron, which is this Cosmos and generalized smart contract platform, which is like the execution layer for the hub. You saw Stride recently get approved to become like a liquid staking provider of the entire Cosmos ecosystem or predominantly the Atom economic zone surrounding the Cosmos Hub. That's I think going live in I think the third week of July.

And most recently this past Friday, you saw Duality Labs post on the forum, the Cosmos Hub forum to become a consumer chain and launch sometime in August. So with Duality Labs is building, and I think the Duality Lab team's like super giga brain. They're on the forefront of MEV research. Duality is building a fully on-chain order book decks that is fully aligned with the Cosmos hub. So stride has their own native asset.

Neutron has their own native asset and they're doing some type of revenue sharing agreement with the Cosmos Hub for leveraging the security of validator set. Duality Labs is saying let's we want to become fully aligned with the Cosmos Hub provided using Adam as the gas token. 100 percent of me being transacted fees going back to Adam Stakers. The only fees on chain that wouldn't go back to Adam Stakers are liquidity providers. But a part of this proposal is actually having the hub provide 500000 Adam which is approximately 5000000 dollars today of hub protocol and liquidity to LP into duality to kind of jumpstart the economic activity in the ecosystem.

But I think it's interesting that duality lives doing is something called like replicated market making. So what they're able to do is they're able to use contrade liquidity to actually produce any AMM invariant. So typically how this work with, let's say Curve or Uniswap, If you want to have a stable swap pool or for like state ETH or ETH USDC, the ETH portion of the LP pair is like split up into those 2 liquidity pools. So that creates liquidity fragmentation. With replicated market making, what this allows is actually have a 1 liquidity pool for each asset.

So it's all unified into 1 liquidity pool. And then each type of pool, like stable swap or a regular concept product AMM curve, The liquidity from that unified liquidity pool can actually be used in each liquidity pool as it's needed. So it kind of creates additional capital efficiency. A couple other advanced things that I think Duality is supposed to launch with come August is advanced orders like limit orders or fill or kill, dynamic routing to prevent front running. So the way I think about this is if you're trying to swap like USDC for Adam, let's say there's probably multiple different routes that your USDC can take to be converted into Adam.

And because your trade is being posted to the public mempool, there's obviously going to be MEV searchers looking to front run your order. And what this does is actually it finds multiple ways to get you your end requested asset and for the best price possible. And by doing dynamic routing, it's actually able to really calculate at the moment of execution, like what that best route is, and what is like the least likely to be front run. Overall, it really sounds like a really interesting proposal. This is like the first consumer chain that's going to be fully aligned with the hub.

This is probably the first time you're actually going to see Atom being used as like the native gas token for a chain in the Cosmos ecosystem outside of the hub itself. And this is really starting to... You're starting to see the narrative of Atom value accrual, the thing that I think has prevented the hub from or the Atom asset specifically to really gain, I guess, price appreciate accordingly with Solana and Avalanche and Ethereum over the past cycle was the fact that it was kind of like Cardano where you just stake it and it doesn't actually do anything. But you're really starting to see a full economy start building around the hub. And I think if Duality Labs is actually able to create a legitimate product and able to gain market share in the Cosmos ecosystem, that this could be a really good way for Adam, I think, to, I think overall, like a really good story for Adam and the Adam Stakers.

Charles Hawkinson's coming for you for that comment. Not worried. No, I think that's, that's a really interesting proposal. The idea of a fully aligned consumer chain is exciting. I guess you got to wonder like what's the value proposition for the builder in this case?

But nonetheless, it's a really interesting development to see. And The first thing that came to my mind was like a more technical question. So because the hub does not have smart contracts, how is the $5 million of Atom deployed as protocol owned liquidity?

Yeah, that's a great question. So I think initially, you actually saw a very similar ask from the Stride proposal. So when Stride wanted to become a consumer chain, they're like, we'll become 1, but we want

450, 000

Atom of hub-owned protocol and liquidity to be liquid staked on Stride and then deployed on Neutron on Astroport to create like a deep liquid market for staked Atom or Stride's version of staked Atom. How that's going to be done is through a multi-sig. So I think the Atom accelerator team, at least in the interim, is going to manage that atom on behalf of the hub. And I think the same thing is gonna be done for duality, but the longer term or mid to long term solution to this is the interchain allocator that I know TimeWave Labs is building. And this is going to be essentially like a module written in Go, deployed on the hub that allows the hub to trustlessly deploy protocol liquidity really wherever it wants as long as a governance proposal says on behalf of the community, like, yes, we want to deploy this amount of Atom to a certain community pool or certain liquidity pool in the interchain.

So right now it's gonna be more of a trusted setup, but I think the interchain allocator is supposed to go live sometime in Q3 or Q4 this year, and then that'll really be the solution to do this moving forward.

Sweet. Okay, that's really interesting. Yeah, because like this, Stride's use of interchain accounts I find really fascinating because like that way they can still control EOAs on the Cosmos Hub to like stake and unstake their assets. But yeah, going the other way is much harder, right? You can't make sense you need the trusted setup, just given the lack of a better solution and just really the inability to have smart contracts on the network.

Yeah, my 2 takeaways from this are, I mean, the first is the Cosmos Hub is kind of back. Like, there's a lot of momentum for the hub and its economic zone. Like you said, Neutron and now Duality, like a lot of people are choosing to build within that zone and I think yeah the momentum is building. We're going to see a lot of other cool projects continue to build there and it's super exciting to see because you know Adam's had that sort of existential crisis over the last couple years and it's good to see it sort of forming itself and like you said competing with the likes of other layer ones and whatnot and then the second is that osmosis has some like really really tough competitors coming. Duality like you said has a great infrastructure, Astroport as well building on Neutron.

There's a lot of decks that's being built within the Cosmos ecosystem that are going to give them a run for their money. And I'm excited to see those wars begin to see what are users using, where is liquidity going. I think that's going to be a really exciting area within Cosmos over the next year or so.

Yeah, I think just to, I guess, end off, I think 1 of the things that have held back the hub over the past cycles were this meme of like, you got to be credibly neutral. This whole Gravity Dex debacle that happened where the hub had a dex, but the hub didn't want to provide liquidity to the dex and it created this whole cold start problem where it was not able to create liquid markets and ultimately Osmosis won that. And then the Gravity Decks moved off-chain, off the hub. And I think this existential crisis, especially at the Atom 2.0 failing, the community really looked themselves in the mirror and was like, well, we can't just be staking out of all the time and the hub actually has to have a purpose. We love to talk about sovereignty in the Cosmos ecosystem, but it's funny that we love sovereignty, but at the same time, if the hub doesn't actually start not being neutral, And if it doesn't have smart contract capabilities, it needs to actually be subjective.

It can't be objective. It needs to start picking winners and losers in order to actually maintain its own sovereignty or else it's going to fall to the wayside, fade into irrelevance, and then ultimately go to 0, even if the Cosmos thesis is right, even if the Cosmos SDK and the tech stack is the best out there and can compete with the OP stacks of the world and arbitrums. So you're really starting to see the community kind of take initiative, try to drive value back to the hub, actually throw this idea of credible neutrality by the wayside and start to just have initiative in building an economy around the hub.

What does this mean for Osmosis with Duality coming online, taking a very innovative approach to what an AMM is and moving towards that order book model and neutron coming online and bringing AstroPort and getting that initial allocation from Stride to get their liquidity going there. What is the outlook for Osmosis in your opinion?

I still think the majority of this space is still brand and like whatever is Lindy. So I think the best tech doesn't always win. I think we've seen this time and time again, not just in crypto, but I think technology in general, Betamax versus DVD. People say that we're experts back then, Betamax is better tech, but DVD had better distribution and ultimately everyone used DVDs. Obviously, we don't use either of those anymore.

But Osmosis still has the most IBC transfers, still has the second largest user base in crypto. It is still the thing everyone thinks of. When you think of Cosmos DeFi, you immediately think of Osmosis. They're kind of growing beyond the decks at this point. They're becoming a full-fledged DeFi hub with lending markets and I think decentralized stablecoins launching in a couple of weeks, a perpetual futures market.

So there's a lot of good things to look forward to Osmosis and they're launching concentrated liquidity themselves in their next upgrade. So I think it's healthy competition. It's good to see DeFi starting to potentially flourish in the Cosmos ecosystem. I still envision Osmosis probably being the dominant player, at least for the foreseeable future, But it's really their game to lose. But even if liquidity does migrate to other DEXs, I still think like the brand and the overall, I think, lenientness of Osmosis as a community, they have a really strong community as well.

I think, again, they're probably going to be the market leader for the foreseeable future.

Yeah, that's pretty interesting. It's going to be fun to kind of watch this play out. It feels like, you know, there's finally a battle for Cosmos DeFi and competition tends to be a good thing, so it'll definitely be a fun 1 to watch. But I can go next here. And I have a cool drone from late last week, this came out after our last episode, but massive news that I felt went really like under the radar.

And it's that SAP is testing their SAP digital currency hub as they're calling it. When this thing like allows customers to make international payments using USDC or the Circles Euro version, Euro C. And this, their blog announcement directly calls this the future of cross-border payments and cited expensive, slow, and non-transparent as issues with the current accepted infrastructure in the cross-border payment space today. This is exactly what we've been yelling about and how blockchains can be used to solve these problems and how real stable coins that can be reliable are the perfect solution to the problems that we're dealing with today. And no 1 like there's not a better possible company to be leading this charge than SAP.

And the reason why that is is 9 out of the 10 companies in the Fortune 500 use SAP software already. So they're already ingrained in some of the most important players in the space. And their customers actually generate 87% of total global commerce that equates to around $46 trillion annually. So there's not a better player in the space of the modern world today than SAP to kind of be taking the position of, hey, cross-border payments suck today. Blockchains and stablecoins are solving this.

We're going to be the ones to integrate it. So it feels like this is absolutely a massive news. And what's pretty interesting about this is they're still in the test phase and they're currently integrated with Ethereum's Gurley testnet, which allows people to send like essentially play money back and forth just so users can see, oh shit, this used to be a 7 day process that cost me $75 to wire from bank account A to international bank account B. Now it takes a matter of seconds and finality in a matter of minutes. And how cheap is it to send an Ethereum transaction compared to that?

This is a monumental upgrade in my current infrastructure. And so they haven't released exactly where they're going to go live and fully integrate with when they move out of this testnet phase. But it is very, very interesting that they are appearing to be Ethereum aligned. So that's kind of a huge upgrade. Usually, I feel like last bull run, we'd get these types of announcements where like, wow, this is like a major player investigating the space.

And then it'll be like integrating with random blockchain a instead of like, you know, the market leader, Ethereum. So this is like a really exciting development in my opinion.

Yeah, sure. I agree. I think this 1 went way under the radar, honestly, because like they have such a sticky software amongst like some of the biggest companies in the world. Like I remember using some of their products in college and undergrad like 5 years ago and just thinking, man, this tech is absolutely terrible. But then I think back to like Microsoft and Microsoft Office and how slow moving I felt like they were as a company.

And now like, I love Microsoft Office. Like, I don't know, I think there's interesting parallels to draw there. And just the fact that they touch so much of the world's global commerce in some kind of way is very, very exciting. And the fact that they're actually using curly, Like, that's just wild to me.

The interesting thing to be, we'll see if they launch on an L2 or Ethereum mainnet right out of the box. Like, I already know what Effort Capital's chomping at the bit to say here. Hashtag build on base. I mean, that could make sense. You got the USDC alignment from SAP.

I just like it's crazy to me that we can say they chose USDC and they seem to be choosing Ethereum like that is electric news. But let's hear the let's hear the base theory.

Now, I was gonna say, imagine they announced like they were using Tether. That's crazy. The market would be like, what? What do you mean using Tether? No, I think if Coinbase announcing their base L2 that's going to go live at the end of this year.

I'm hoping as a coin shareholder that they learned their, you know, they took lessons learned from their NFT marketplace. You're seeing the same applications, the same DEXs and lending markets and Ponzi schemes launch on every single L2, every single Alt L1, and what is going to make Coinbase's base different? I sincerely hope because obviously nothing made Coinbase's NFT marketplace different. It was just an NFT marketplace. It completely flopped.

It was a really bad look on their overall product strategy and roadmap. And I'm hoping with L2, with BASE that they come to it guns blazing. They come to it with partnerships, from legitimate industry market leaders like SAP. And ultimately, Brian Armstrong's original thesis for crypto was to really be like a global remittance platform, get rid of the bank, get rid of the Western unions of the world, like let's just make payments easier. It's like so simple.

The economy runs on B2B and B2C and P2P payments. And I think SAP would be a ideal partner for Coinbase to launch when BASE goes live later this year. And BASE is currently running on Gurley Testnet. That doesn't mean SAP is going to be using base. Obviously, I'm kind of like, I guess, hoping that they're able to launch on base.

But I think it'd just be crazy if they... This is incredibly bullish for on-chain rails. Imagine the amount of interest income that Circle would get. If $46 trillion in B2B payments are using SAP, how much money is Circle going to print? And I know that they're still moving forward with their IPO plans, hopefully either end of this year or early next.

But I think this is incredibly bullish for overall on Chainrails. And I think that the next obvious step is once you get businesses comfortable paying each other in USDC, the next obvious step is, well, as a major business, I'm okay with getting paid in USDC from consumers. So the next step is B2C and then eventually you're going to see P2P. So I think it's going to start with the businesses and then kind of trickle down to personal.

I mean, even if Coinbase doesn't necessarily have a partnership with SAP yet, Looking at the blog posts from SAP themselves, they say that these payments are expensive and they cite up to $50 per transaction fee. And as we know, using Ethereum in a bull run, transaction fees can get much higher than $50. So I'm sure even if they test out Ethereum mainnet, they realize at some points the fees can get pretty high. I think they probably will migrate to an L2 and the most likely I think is base just given that they're going to have that strong corporate relationship.

All right. I feel like that's a good time to transition over to my hot seat for the week and Effort's going to be on cloud 9 here after that talk. We just had on cosmos, but I've got a theory ml2s copying cosmos's original vision of app specific chains, but now called roll apps. So basically the reason I bring this 1 up today, and honestly, deserving a cool throne, because I'm really excited about what ZKStack is, but ZKSync, as Dan alluded to earlier, is kind of ZKSync's OP stack equivalent, but obviously with ZK rollups instead of optimistic rollups, and it's like a modular software stack to build chains with different security assumptions and hopefully baked in interoperability thanks to shared proving sequencing designs. But yeah, I just think it's kind of wild that we sit here and Cosmos has been working on this vision for literally 4 or 5 years now.

And it seems like now every single Ethereum L2 has a modular strategy trying to encourage applications to build app specific on rollups. You know, we have Arbitrum Orbital announced a week or 2 ago. We've had OP stack for a while. We have StarkNet L3s. That's just definitely the way the future is going.

So yeah, I just had to the cosmos being so early on that thesis. And it's really pretty impressive. Aira now has over 600 million in TVL in the bridge contract. But if you look at DeFi Lama, there's only like 100, 130 million. So obviously a lot of people bridging over there, but not a ton of people actually using applications.

So again, another kind of factor that puts ZK Sync in the hot seat could be just airdrop sliders, kind of parking capital into the zk-sync bridge and not actually using zk-sync itself. So in 6 months if the token's out and there's not that many people using Aira, I'm definitely going to have them back on the hot seat because that activity will proven to have been non-organic and quite honestly like that's a serious threat like it's definitely something that could happen. I mean Arbitrum and Optimism have seen a lot of activity remain robust but at the same time Blockspace is becoming more abundant at the same time when demand's really not there right now. So yeah, I guess I'll leave it at that. I'm curious if you guys have any thoughts on the ZK stack.

I mean, it's my thesis that a lot of these tech stacks are going to look very, very similar within 5 to 10 years, because they're all essentially building the same thing, which is the ability to create many chains, each with their own design, optimized for the specific use case, and that are interoperable with 1 another in a seamless way. And Cosmos obviously had that vision many years ago and are continuing to build that out. But we're seeing that with the OP stack, we're seeing that with CK Sync stack now. I mean, eventually we're going to agree on some interoperability standards. I think that's going to most likely center around CK proofs.

But eventually a lot of these tech stacks are going to look exactly the same. And so a question I sort of have is, what do the winners look like? Does it make sense now to try and capture market share, to capture builders on your stack, such as the OP stack, partnering with Base and WorldCoin, because eventually if all the stacks are the same, what's the differentiating factor? There really is none. And I know EFRA Capital says this a lot, but infrastructure is going to get commoditized.

So in order to sort of stay ahead of the game, you need to make sure you're capturing market share now. And so, yeah, as these converge, I think it's going to be exciting over the next 5 years to see which of these stacks gain the most momentum. Right now, it seems like it'll be stacks in the lead, but CK stack is probably going to give them a run for their money. But again, we'll see. And Cosmos as well.

There's a lot of exciting things there. And yeah, I think it's going to be an exciting race.

The interesting thing to me here is there's 1 group of blockchains that is making a very different approach. That's the high throughput single shard maximalists led by the Solana people. And you got to think like with everybody converging on this 1 idea and these like there's just seems to be this 1 small camp of like, hey, we're going to do it differently. And for better or for worse, that's going to be our MO. And I kind of fucking love that.

It just gives you this different type of energy. It's like, It's hard not to bet on that. It's the people going against the grain. And the more time you spend with the modular stack, you're like, I don't know. To me, it starts to feel like a bunch of hocus pocus.

Although we do have a bonus episode coming out this week with the ZK Sync Matter Labs team that kind of highlights what the ZK stack is and I was thoroughly impressed. So this is the first time I felt like the modular stack, like all the pieces came together. Like you have rollups that can be designed on a spectrum of centralization to fully decentralize like a ZK rollup. You have the ability to have L3s. You have native communication that does not rely on trusted validator sets and it's specifically based on cryptography and mathematics.

It seems to have all the elements that you're looking for. But again, it starts to get frustrating when you're thinking about DA layers, settlement layers, where's execution happening? How do I decentralize a sequencer? Now I have a prover and that needs to be decentralized as well. Or if you just have 1 single damn shard.

I don't know. It's hard for me not to love that thesis.

I agree. I mean, the best returns are made for non-consensus picks. And that's why as much as everyone likes to shit on Multicoin, you really got to give them credit. Everyone is digging and Solana just zagged even since 2019, 2020 when they were first launching, growing their brand. And Multicoin is still as steadfast as ever in their Solana thesis.

And With all these new L2s launching, I'm honestly sick of L2s launching. I'm sick. We have Tyco or Tayco coming out. We have Scroll going to be launching in the next few months. I guess airdrops are cool.

We're all in it for the money and not necessarily the tech, but I'm in it for the applications. I want products. Nothing in ZK Sync and ZK Stack. It looks like it's really solid tech. I'm sure it is.

I'm sure they're on the cutting edge of ZK proofs, just like the Matic team is. But is it going to give us new applications? Probably not. There's probably a lot of other things like decentralized identity solutions, and I'm sure the listeners are probably tired of me talking about that at least every single time I come on here. But until we have a good decentralized identity solution, you're probably not getting real world applications.

And until you get any real world applications, you're just going to get the same pile of shit. A DEX, a lending market, a really interesting way to lock up tokens to earn more yield. But I agree. I think Solana needs to lean into this further. They need to start...

I'm interested in seeing the first real-world application built on Solana because all it takes is 1 application. 1 application on Solana that gets a million real-world users or

10

to 50 million real-world users And the modular thesis, I wouldn't say it's dead, but you're going to see VC money shift from the modular stack to 1 single shard and just go ham back into the Fon ecosystem.

So the guy who just shilled the newest decks in the cosmos is screaming for new applications. Okay, got

it. What I will say, you're right, but what I will say is, we have an abundance of generalized block space. We need more application specific block space. And I think that's going to unlock the next iteration of product UX and potentially capital efficiency. 1 cool thing that ZK Sync has is Maverick.

Maverick's been dominating the Airwaves and the ZK Sync ecosystem. Because I think they're able to do high compute on ZK Sync, they're able to have higher capital efficiency and you're seeing them grow their liquid token market share. There are benefits to launching a new ZK roll up. I don't want to say there isn't. But I think for 0 to 1 innovation we need to see more real world applications, and you're just going to see small iterative improvements from there.

And duality might be 1 of them, to be completely honest, like it might just be small improvements that ultimately no 1 cares about. But For the sake of my bags, I'm still putting them on the

cool throne. Fair enough, fair enough. And 1 thing that I think is interesting about the zk stack is they haven't really announced anyone that's building in the space like building a hyper chain, which a hyper chain in the zk stack is just a roll up that's connected to the same prover. So it has the cross communication with the other rollups in the ecosystem. They haven't announced anyone building a hyper chain yet.

And I'm very excited to see who those players are going to be, because if I have to guess, and I don't have any information or insights here, this is just purely speculation. I think it's going to be 1 of those big payment processing companies, like a Visa type company, because we've seen Visa make splashes in this space. Now you have other players kind of entering the cross-border payment space like SAP. If there really is an initial wave here of we need to get blockchains into our payment processing platform, I would imagine that ZK Sync, like, you know, they've raised a lot of money. They are a very smart, well put together team.

Like getting that first major client and user is pretty important. And again, like they of course have done that. So it's going to be very exciting to see you announce the launch of a hyper chain over the next couple of weeks or months.

Yeah, I strongly agree, Dan. And you mentioned Visa. So this is maybe an honorable cool, cool throne for the week is at Digital Mustafa on Twitter. He actually works at Visa and he put out a really good thread over the weekend of modular versus monolithic. And I was like, damn, like, this is Visa.

Like they're talking about these things internally. So I hit his DMs and I was like, yo, really good thread. And he was like, thanks, man. Like we've decided to start sharing some of the stuff we've been researching internally. So it's like Visa's been looking at this stuff and it's just really cool to see it come to fruition.

But anyways, we're running up on almost 35 minutes here for this intro segment quotations, I guess, at this point. But Dan, you wanna tell people what's good with Atom Accelerator?

Yeah, for sure. As always, we'd like to give a shout out to the to our wonderful sponsor, the Atom Accelerator. So if you're a developer looking for a home in an industry, this is just the place to be. You know, we just talked about duality and all the very cool things that they're doing and their native hub alignment is nothing to be you know, look past. That is a very exciting development And the first time we've seen anything like this, you know, as we always mentioned, you know, we have the interchange security that kind of enables these things, IBC giving you the flexibility of interoperability and connecting with these other chains in the Cosmos ecosystem.

You know, We see teams like Polymer building out the next wave of what IBC communication will look like and trying to get more non-Cosmos chains involved. We talked about Neutron kind of always bringing that next wave of innovation as this permissionless way to launch smart contracts in the Atom Economic Zone. USDC is inching closer and closer to launching through Noble. And of course, liquid staking is supercharging the Cosmos DeFi. So if you think that you have an exciting way to build out or develop anything related to the Atom Economic Zone, be sure to reach out to the Atom Accelerator.

We will include their link in the description and the show notes below. And they're doing grants on a rolling monthly basis ranging from $10, 000 to $1 million. So again, we'll include the link to their site in the show notes. But now onto the interview with Doug Colquitt.

All right, everyone. We are joined by Doug Colquitt, the founder of Ambient Finance, formerly known as CrockSwap with an R. I saw that 20 years, Doug. I thought that was hilarious, but thanks for coming on, man. We really appreciate it.

Well, thanks for having me. Really excited to

be here. Nice. Nice. So I wanted to start out just by giving, from your perspective, a high-level overview of just how you see AMMs today. What specific problems do you think Ambient is solving and how is Ambient differing from the competition?

Sure. So yeah, I think AMMs have been really successful in actually bootstrapping on-chain markets and more critically, actually bootstrapping markets where you don't need you know a small handful of trading firms to actually like make those markets run. The problem with order books has always been that there's what 12 maybe 12 firms in the world that can actually run an order book. So in crypto especially this has been a problem for a long time where if you have a new token you have to get liquidity and often times that comes at a very steep price to get 1 of these firms actually creating liquidity. So obviously I think AMFs have been huge in terms of this aspect, right?

Like getting liquidity today for tokens. Simple, right? And anyone can participate and I think that's really important. Also from like a decentralization standpoint, right? Like We can have markets where we don't require giant firms to actually create those markets.

Anyone with a wallet can just go and connect and provide liquidity. So that's been where AMMs have been super successful. And even on relatively high throughput chains like Solana, right? Like even today you see most of the most liquidity is in AMMs, not quarter notes. Where AMMs have not been successful, right, is like the underlying economic problem.

We've done a lot of research around this and others have done a lot of research around and people are kind of becoming more aware of the problem where liquidity providers don't necessarily get a great deal, where the fees don't necessarily outweigh the quote-unquote impermanent loss or divergence loss as we call it. But liquidity providers are kind of always short gamma or short this option where heads I win or heads you win, tails I lose. But right then the swap fees are supposed to compensate for them. Market makers face the same problem, but they have kind of more flexibility around pricing. But so the problem with AMMs is like kind of the deal isn't great for liquidity providers.

Things have been fine now and we have kind of a lot of really interesting stuff like liquidity mining incentives that fix that. But those aren't necessarily sustainable for the long run. So like our goal with Ambient is we want an AMM that's good enough where Microsoft or S&P Index futures will trade on it and actually compete against anything in the future. And the question is, how do we get there? So our goal with that is really, well, number 1, to fix the poor economic problems around it, which we think We don't necessarily know the exact solutions to but we're trying to build a platform with enough flexibility and enough primitives that people can build the solutions and number 2 is kind of to make the experience in general a Lot more user friendly a lot more like what people expect from a centralized exchange.

So a lot of DEXs today feel more like a client system, like a full-fledged trading application. So we're trying to make things faster, easier, cheaper, and just generally more fun to use than what most people are used to in AMMs, especially on the liquidity-provided side. So that's high level.

Yeah, super, super helpful. Would you say the latter is kind of something that stems from your previous experience as an HFT trader?

Yeah, I'd say, you mean in terms of like the usability? Right. Yeah, exactly. Yeah, yeah, I'd say definitely. I think most people the kind of the old-style XYK full range v2 liquidity was relatively simple.

I think v3 liquidity is gonna get more concentrated liquidity or like what you've seen in uni v3 is definitely a lot more complicated and I think things are only gonna get more complicated from here because now we have hooks, We have different types of pools, limit orders. So like how you provide liquidity, there's a lot more dimensions to it. And I don't think it's necessarily intuitive. Isn't right when people go and participate, right? It's not it's not a great experience.

They don't really understand where they should put things. Place liquidity, they don't really understand how to evaluate the trade-offs. And so if you want to keep things decentralized where, okay, it's great, a winner understands like where to place liquidity or how to, you know, what feature to put it in. But if you want to keep things decentralized, you need to make sure that even like the average guy maybe does this once a month or still still can compete kind of these games. Awesome.

Yeah, I love that perspective as well. And before we kind of jump into the meat of what Ambien is doing, I want to get your take on active AMMs, like that concentrated liquidity range where LPs have the flexibility to actively manage their positions over what range they're kind of supplying to versus like this passive AMM model, like just a good old XYK or something a little more intelligent, maybe like the Curves V2 models. There seems to be this convergence of ideas around more of the active AMM side where Ambient, Uniswap, Trader Joe, they've all kind of been pursuing that more active model. I'm curious, do you think this more passive AMM is a thing of the past where you just supply liquidity to a pool and let the algorithm kind of do its job?

It's a good question. I think there's still a big range of spaces for that kind of very passive liquidity. We still see like the longer tail of tokens trade on a uni v2. So if you actually look and see where things trading, Unib3 does very well with the majors, Unib2 does very well with like the longer tail tokens even like Pepe which got very popular I think now more traded on v3 but for a long time even like when it was you know very popular was still primarily a V2 token. We've built Ambient so that we support both styles within the same pool.

So kind of we imagine that there is a life cycle where when things are very early, that very, very passive liquidity is important because people just don't know the price, right? Like things change around a lot. And there might not be a ton of liquidity, so people aren't going to go in there and manage it every day. So we support that V2 style full range liquidity and also another aspect of it can be wrapped in, right? So that increases composability, you can do stuff where it's a lot easier to stack liquidity mining incentives on top of it, which is super important for long-haul tokens.

A lot easier to do other types of incentive schemes with that ambient, well, that's actually where the name comes from, we call it ambient liquidity. But yeah, with that ambient style passive liquidity. And then, I think over time as a token becomes more liquid, just naturally the liquidity is going to be more active or more concentrated because just more capital efficient, right? Like kind of the nature of passive liquidity is you're providing, you're using capital to provide liquidity all the way from 0 to infinity. Ethereum is probably not going to go to $50, hopefully in the next 24 hours.

So you're kind of wasting capital to provide liquidity there. So we think both are important and then kind of that full life cycle is important and to have that in the same place without fragmenting liquidity.

Right on, right on. So let's start jumping into this thing. So I think 1 of the more interesting things from a technical perspective is Ambien was the first single contract DEX. So why the design choice to make everything in a single contract? And what is this unlocked for you as the developer?

Right. So the big deal with it is that in previous Dexys, every time you had a new pool, you had to stand up a new contract. And it meant that every single contract was individually managing its own collateral, right? So, you know, out of the box, right? What that first thing that's really hard is like standing up a pool is like pretty heavyweight, right?

Because you're deploying a pretty big contract on mainnet. It's not cheap. You're talking about a few hundred dollars so like you know for whatever if you're a decent token that's not like gonna break the bank but if you want to do like a very cheap and easy experiment that's not that's not great. But more important right kind of when you have everything in 1 contract, it's more like 1 market, right? Because I'm trading between different markets.

Let's say I'm going from, you know, shitcoin A to ETH to shitcoin B in my route, right? And traditionally what would happen is ETH would have to move from pool contract A to whatever router contract you were using and then back to pool contract B. And that's pretty heavyweight and unnecessary because at the end of the day, ETH just winds up back at the market. So when everything's in 1 place, right, you don't need to worry about moving the tokens around. The tokens are all in a central location.

The pools are separate, but they're just lightweight data structures inside this larger contract. So it just makes reduced restrictions between trading markets easier. I think it's going to make markets more efficient over the long run. And then also you can do interesting stuff with flash accounting, where you can even start trade, you can do trades, you can trade on 1, you know, in 1 pool, and you don't actually need to fill in like those tokens until the net, the end of the trade. So also makes like arbitrage a lot lower cost.

So technically, you could would be able to do arbitrage even without a full cycle and atomic arbitrage without even starting with any tokens.

Yeah. So that gets pretty interesting by reducing the ERC20 transfers between pools, right? Because if you look at like, you know, a Uni swap or a curve swap just straight through the front end, about 50% of the gas is actually the token transfers themselves. So I find that super, super interesting to be cutting that down. And I guess with, I'm just trying to work through what are the implications of having cheaper swaps?

Because the arbitrage orders still need to pay the same amount of gas as each other to arm the pools. So really, the benefit comes down to the decks being like the arbitrage transaction happening more often. So you're essentially getting a better price as a DEX. Am I thinking through that properly?

Yeah, I think that's right. Like you said, the arbitrage orders are still competing with each other, but the threshold to where they're profitable is going to be lower because the gas costs are lower, which just means that especially for smaller pools where there's not a ton of liquidity and the arbitrage profits are not that large, they're more likely to stay. Those prices are more likely to stay in line with markets efficiently over time just because it lowers the arbitrage where it's been called kind of add smaller discrepancies.

Okay. Okay. That makes sense. And so would that be like increasing the amount of toxic flow that would come through the pool? Or how do you think about toxic flow in general?

Like, yeah, we've thought we've thought a lot about toxic flow. So specifically for this question, it actually, if you lower the barriers to arbitrage, it actually decreases total doesn't necessarily decrease the total amount of toxic flow but it increases the number of trades that happen to get to the same place and so ultimately it is better for LPs. So 1 way to think about it is assume that you know an arbitrage were only came in when prices got out of line at 1% or whatever. And this might be within our decks, it might be even more, the prices in our decks are a little bit of Binance, which to be honest is where most price discovery happens in the crypto markets. So if your cost to come in is certain, you're not going to arbitrage until you're 1% out of line.

Arbitrage is going to come in infrequently, but ultimately the price is going to move the same distance over that timeframe. So arbitrage orders come in less frequently but they make bigger trades. Now let's say the price, let's say your barrier arbitrage is only 1.1 hundredth of a basis point, right? Arbitrage orders come in much more frequently, but to actually get, but some of those directions are going to be wrong, right? Because the market's going to bounce around over time, right?

So ultimately what happens is you get the same total toxic flow, but you get a lot more arbitrage trades and therefore a lot more fees you collect over time. So actually lowering the barriers to arbitrage results in a better deal for LPs.

Okay, I'm following that then. So right, like even if we get that 1% move in the cheaper pool to ARB against, you know, you could get like a half percent up and then a quarter percent back down and then get the 1%. So that extra trade is extra fees.

Quarter percent up, quarter percent down, quarter percent up, quarter percent down, quarter percent up, quarter percent down, maybe then maybe 3 quarter percent up. So you end up getting whatever 9, you end up getting 9 quarter percent, 4.

Right on. Okay. Totally following there. That's really interesting. And I guess that's a great segue into kind of how you think about LP wellbeing in a pool.

And like a lot of that does stem from the fees that they earn to be from these trades. So how do you think about the, I know you guys are employing dynamic fees. So talk to us a bit about the dynamic fee algorithm that you guys are going to be using and kind of how it uses that to price the current fee.

The way we think about it is ultimately, right, like the really nice thing about AMMs is like you have this concept of IL or divergence loss or whatever you want to call it and the really cool thing is that's not past dependent. So if you don't think about fees like just how much IL do I eat sitting in this pool relative to holding a 50-50 portfolio is just a function of how much the price moves. So if I join the pool and I leave, let's say a month later, how much ILL I ate, how much it cost me, it's just a function of where the price ended up at. So it doesn't matter what happened in between, it just matters where the end is. So the interesting thing is that makes it kind of simpler to think about because where things are going to be in a month is just going to be a factor like exogenous market forces pretty much.

So your IL is kind of fixed for any given market. There's not much you can do about it because you can't really change where the price are going to be in a month. But what the goal is, is should be I should be collecting enough fees over that month that I'm adequately compensated for it for the IL. You know, it might not always work out that way but in expectation. There's some amount of volatility in the market.

There's probably gonna be, it's probably gonna move X percent. Sometimes it might move less, sometimes it might move more, but like with a given amount of volatility, right, I probably have like some expected IL cost and I want my fees to compensate that. So given that you can't really do a lot on the IL front, what you can do a lot on is on the fee front, right? And this is like, you know, this is the same concept how market makers work, right? Like, market makers don't charge the same bid ask spread every single time, like period every single second of every single day, right.

And that's how amms have worked up till now there's fixed fee even if there's multiple fee tiers on, right, like in uni v3, they're still fixed, right. So if I'm in the 5 basis point, cool, I'm in 30 basis point, cool, I'm only collecting that for the entire period. Some sophisticated players might move between the tiers, but that's pretty few and far between. And again, that kind of gets away from decentralization where just 6 packs and going to be doing that. So the goal is right, like I should be charging adequate, like relative to the, you know, toxicity of the flow, which ultimately determines kind of this IL on a macro scale, right?

I should be charging that flow for its toxicity, right? So I should be pricing it correctly. So we have this concept of dynamic fees and kind of the first step to that is like on a regime based. So there are certain periods where usually when like volatility is high, liquidity is scarce, it's highly in demand. Liquidity is scarce, highly in demand.

So you as a supplier of liquidity, i.e. An LT, should be charging more for liquidity and vice versa. There are periods where the market's pretty placid. There's a lot of liquidity. There's not much demand.

People aren't really trading. The price of liquidity should be lower. We have a pretty clever hack where because you have at least for pools where we have this like ETHUSDC, you have these unique pools where you already have different features. So you're like running a natural experiment. I can look at the at least I can look at the 5 basis point pool, I can look at 30 basis point pool and I can just look back over the past hour, which pool has been outperforming in terms of collected fees.

So because we have this natural experiment And because it's pretty persistent, usually the 5 basis point pool has done better over the past hour, it's probably going to keep doing better over the next hour. We can just toggle the fees in our pool to reflect which pool's outperforming. So theoretically, with pretty good chance, You get the best of both worlds, right? Because fees adjust over time. So we kind of call that a price discovery vampire attack in the sense that like the uni markets are doing the hard work for us there.

So That's what we're going to have out very soon. That's kind of phase 1. Phase 2 is we want to actually start looking at where does order flow originate from and not all sorts of order flow are equally toxic. So for example, liquidation bots tend to be very, very non-toxic because they're not usually trading to like capture a small ledge. They're not usually trading like against the Binance price.

They're trading for different reasons. So to the extent that that order flow is coming against non-toxic. Another example of non-toxic order flow is the anything coming off like the MetaMask router or the Coinbase router, because a very sophisticated trading firm is never ever going to send their trading flow through the MetaMask router because it charges whatever 1% fee on top. And so right, like just the fact that water flows coming through there is a credible sign that it's non-toxic. You can get into other stuff, right, where you can even start saying, you know, you can build your own mechanisms, you can say, okay, did someone go in and voluntarily accept like a 2 block delay or something.

That'd be a credible signal of non-toxicity. But what we ultimately want to do is start saying, okay, we can start dividing up order flow. And what we do know from our research is actually toxicity really only comes from a very small subset of wallets. So once you can start dividing up order flow, you can start giving very good prices to incredibly non-toxic order flow and just start charging successively higher prices to the most toxic order flow.

Okay, so it sounds like there's 2 pieces here. So let's dive into the first 1 first, which would be the pricing models based off of the uni pools and how I kind of called that a price discovery vampire attack. So this seems like a great starting point, but if it really does become such a better, way more less hostile environment for LPs, then it would... In my head, I'm seeing it attract, successfully vampire attack those pools. And so at that point, you know, it would probably not make sense to leverage these lower TBL pools.

It's not the long term solution. It's a clever act to get us and obviously, right people might tokens on us and we hope that the tokens trade on us and not Uni. For example, we'll be on other chains where Uniswap might not necessarily be. So yeah, you're absolutely right. We have other models.

We have an alternative model that doesn't leverage the Uniswap. So you can look at things like volume, volatility. We try to do as much calculation. I actually think we do all the calculation on chain. So you can deploy these models that look at certain, you can look at your own pools, how fast have you been at cumulating fees.

And you can kind of do this adjustment process where you can say, okay, my fees are 20 basis points in the past hour, but relative to how much the price has changed, or relative to the rate of change in the prices, relative to my volume, these fees are probably too low or too high, right? So you have kind of this control, control like this feedback loop where you adjust relative to that.

And does the user deploying the pool have the discretion of what the fee algorithm is used for that specific pool?

Yeah. So we never really anticipated that hooks would be so popular on day 1. So we call on permission. Adaptive hooks are way better. So we always anticipated that we'd have canonical pools, like kind of our main pools, and that we'd run it.

We never anticipated hooks would be so popular in day 1. We thought we'd have to actually convert people to do it. So we haven't just running with our canonical pools now. Turn on the user defined hooks, you know, within a matter of within less than a week. So yeah, I mean, Hooks got very popular.

So, we're going to make sure it's supportive. And if it's a user defined pool, yeah, same thing. Users have total freedom to define. If they define a given pool, right, what the algorithm is there. We want people to experiment, right?

Like we, we, we have a visual, we want to build stuff, but we also want to experiment. We're, we're platform.

Okay. And I had this question later towards the end of the conversation, but now seems like a good time to address the elephant in the room. Like What was your reaction when you saw the Uni v4 announcement? Are you excited to see things moving in this, like I said at the beginning, this seems to be this concentration of ideas towards this more active AMM. How were you feeling when you saw that announcement?

I think it's good validation that the stuff we've been working on is important. A lot of these ideas, when we started working on them, people were like, for example, the Singleton contract, people would say, oh, is that a good idea? Should you put everything in 1 contract? So at least never have to answer that question again. So yeah, no, I think it's a good validation of where we're going.

We're, I think, have a lot of things where Uni isn't necessarily doing it, or they're doing it in ways that I feel like is less efficient than how we're doing it. So it's good that they have their own vision, they're building on it.

Yeah, strong agree there. And I have a layman's question for you, but I just hear a lot of concentration from your end on making the LP experience a lot better and increasing fees and revenue generated for them to kind of make up for some of that IL that they experienced. So this has to be coming from somewhere. Is it all coming from gas optimization or is it increased fees that traders are paying? How do you really balance being a protocol in between 2 customers as the LPs and the traders?

No, it's really tough, right? Because you really have 2 separate customers. For us, we think LPs have not had a great deal. We think also depending who you are we can do have a better deal for swappers. I mean the reality is I think uni is the existing AMMs or uni or whatever is a very very good deal for a very very small percent of swappers that probably don't look like your regular swappers.

I won't say which firms, but right there, there are a very small number of firms that are generating a lot of money from this broken AMM model. So I don't even know how much of the benefits accrue to regular swappers. They're mostly, you can look, you can see which wallets are really accruing money. It's not many. And it's certainly not the guy at home.

So I think, right, like it's a good deal for a small percent. It's probably a good deal for Ethereum itself. So it does hurt me as an Ethereum holder because right at the end of the day, this kind of liquidity that's not being charged correctly ends up really people pay a lot of money for the top of the block and burns a lot of gas and generates a lot of MEB fees and block inclusion fees and so kind of juices Ethereum yield and increases the burn but yeah in general I'd say it's pretty bad for LPs and even for regular swappers. I don't think fixing things really changes a lot. If anything, discriminating against opposite flow will eventually allow us to give better prices to most of the ordinary users.

No, Sam, I love that angle there. And I feel like an example of this, of favoring the LP over the trader in some regard, is not allowing for JIT liquidity, right? And you can't have a deposit come in and supply to the specific range where the trade is happening. And ultimately, that would benefit the trader, right? Because you'd get a better price, whereas the LPs get hurt in that scenario because they don't accrue the fees.

Is it possible to over-optimize for the wrong party, I guess?

It is possible. I think though, especially with JIP liquidity, the issue is that you're right, the swapper can potentially get a better price. Not always actually. So that's the other thing about it. Because nobody's giving you JIP liquidity unless the market's moving in the right direction.

So as in against you as a swapper. So you're depending on like where your limit, like where your slippage is, but like the point is if you send uh like if I'm an MEV searcher, would I provide JIT liquidity? I'm looking at the price of Binance right, so your 12 second block time um and price of, you're coming in and buying and the price of Binance has gone up, I'm not gonna provide you JIT liquidity because it means I'm getting filled at a bad price. If the price of Binance has gone down and it's a bad swap, I will provide you JIT liquidity But that's exactly the time I don't want to be filled. So I don't know, it depends what your slippage is, you might get filled regardless.

But the point is, right, like, JIT liquidity also comes with adverse selection to the swapper. So there are times where it is better, but like often, and like going back to TradFi, like we've seen like these types of these types of systems like flat flash orders like I don't know like 15 years ago and 15 years ago and like equities market like last look in FX markets and And they always inevitably lead to like really low market quality over time. Because what happens is even if you have JIT liquidity, eventually the LPs, the regular LPs leave. And then as a swapper, you're back with, uh, less passive liquidity, less firm liquidity and, uh, some JIT liquidity that's unreliable.

Okay. Yeah. Super interesting perspective there as well. But 1 of the other interesting things you guys are doing is the idea of like surplus collateral or the idea of having like an account within the Singleton contract. So walk us through what that is, why it's important.

And I'm really curious about how like the the accounting of it like how does the system actually keep track of the user balances?

Yeah so basically the way that works is because all the collateral is held like all the tokens in the decks the collateral is held in a single place What makes sense is that the user can hold a balance just directly at the exchanger. And really under the hood, what that looks like is there's a map. It maps users to the amount of tokens they own, they hold on their DEX balance. But what's interesting about that right is now I can swap, I can provide liquidity, I can do anything, and I don't need to actually even move tokens in my transaction. So it's really useful and like you said a lot of the gaps cost are token transfers.

So if I'm an active trader I'm gonna hold a position for you know a few hours or whatever. Probably doesn't make sense for me to you know take the tokens out pay that gas and then go back, send the tokens back in. I can just hold this surplus collateral position. What also is interesting and that it opens up is we want to move in the direction of quote unquote gasless transactions and that's built into the protocol. So anything in the protocol can be done through these gasless transactions which are really ERC EIP 712 signatures happen off chain.

You pass it to a relayer. It can even be you can specify which relayer I trust to execute it. You can specify a given global condition that has to happen. That can be arbitrary. So it becomes possible to do things like stop losses or only trade if certain conditions are hit.

But this surplus collateral balance actually enables that because the way the relayers get paid is they get paid out of this surplus Collateral so and then now also you can pay if I'm trading I can pay just with whatever tokens I want I don't have to pay You know the cost of the I mean ultimately it's the cost of gas right Because the relayers themselves have to pay the gas, but I can say, hey, I'm willing to do this swap. And whoever executes it for me can collect $2 of USDC at the end of the trade, $10 or whatever of USDC at the end of the trade. And now I don't even need a wallet anymore. So it makes it really interesting. I don't have to manage wallet.

I don't even have to manage key. I can just trade on this thing. Technically, I could go to another chain. I don't even need to connect to the chain anymore. I don't need to worry about what the token is, all that stuff.

So that's also kind of like why it's there to enable that kind of longer term.

Yeah, so 1 thing I'm curious about is more on like, I guess the the gas side of things is like, you know, sex to decks are accounts for a large portion of decks volumes today. But these entities, as you mentioned, are like large players that have very strict internal compliance departments. And like, I'm curious, you don't generally see these guys LPing as much as just pure trading and they like, you know, these guys won't even approve tokens to pools. So do you think that like using these accounts is for them or like really who is this for?

It could be for them. Right. Yeah, it is a question like how long does it take for them to get comfortable using it? It certainly will reduce their cost, so I think there will be some competitive drive to use it, because even if Firm A doesn't use it, Firm B can use it and can trade for half the cost of Firm A. Well eventually Firm B is just going to win those ARBs.

So I do think there will be some competitive drive for it, especially on the stat ARB side. So if you're doing like an Omnic ARB, especially if you're ARBing between us and like another deck, you have to take the tokens out. But especially on the stat ARB side, I think it should get more common but I think even for like regular traders, you know a lot of people will go and buy a token, they don't necessarily, if I'm buying something in coin I'm not necessarily buying it, if I'm holding it for a long time, putting it in your wallet, if I'm buying it because the price has gone up I want to hold it for a few hours I use the DEX balance so I think there's a range people super interesting yeah do you uh this is a little more off-topic but now

it just came to my head is when he comes to retail flow do you think that will exclusive like do you think it'll exclusively just flow through DEX aggregators at some point in the near future?

It's tough. Um, maybe, But I think people have been saying that thesis for a while and it doesn't seem to happen. So I don't know, maybe not. So yeah, it's a good question. I think maybe sometimes people overemphasize with retail how much they care about getting like you know 1 basis point or whatever a few basis points cheaper and a lot of people just care about a better user experience so I think DEX aggregators obviously can get cheap prices but they may not necessarily be the most fun app to use.

I mean, like what's 1 of the biggest companies in crypto Coinbase. It's not like Coinbase is known for having the lowest fees, but they have a ton of users just because it's kind of a better user experience.

Yeah, I think that's a super fair point. I always think too with the L2 conversation, it's like, at what point do users not care that much about a 50% reduction in fees? Apples and oranges, but same takeaway. But I do want to pivot the conversation a little bit to governance. That's kind of a facet of crypto that isn't necessarily fully figured out yet.

So I'm curious your takes on governance and exactly what aspects of the protocol will be governance controlled.

Yeah. So the protocol has a fair bit of power on the governance side. And that's partially just to reflect that, again, we don't really know what the right answers are. We don't necessarily think exactly the protocol as it stands today will be the same protocol that ends up being the right thing. So, you know, 1 big difference between us and Uni is we're upgradable.

So, we do think, right, there will be changes probably over time. Kind of the architecture we have is super backwards compatible. So, any, like, way people are using the protocol, always very, very backwards compatible in that aspect of it. But there are things that we think we want to add in over time. On the governance side, you know, because those powers kind of exist, and also to define pool types, protocol fees, to define what are the JIT thresholds, especially on the pools that are canonical.

So on user-defined pools, technically the governance could override it, but we'll defer to if it's a user defined pool, what whatever, however they define the pool is or what mechanism they give. But that being said, right, Because the governance is powerful, we're really cognizant of being careful around that. So everything is carefully gated by long time locks, and obviously, red people, multi-stakes for now, and then with decentralized going forward. And then the other thing I think that we've done at least fairly innovative on the governance side is we've divided out into this, headed this layer in between implementation and governance that we call like the policy layer, but that's where certain aspects that might be governance related, for example, the creation of new pool types can be offloaded to, you know, offloaded for that just 1 specific governance responsibility in 1 very narrow context to another smart contract or another system. And then that makes it easy for people to call it, but call those powers in a very limited, predefined way, if that makes any sense.

Okay. Super interesting there as well. And so when it comes to things that governance has control of, it's 1 of those things as permission pools or as hooks as they're being called as well.

Yeah. So, yeah, right now to actually create a new type of pool template, it is governance gated. And so right, we create a so so the basically the way it works is there's there's pool templates, each template, a template defines the parameters of template defines the parameters of like, what's the permission Oracle, which is basically the hook contract and dynamic fee stuff. The template defines stuff like what's the tick size in the pool, what are the JIT thresholds. Other SQA.

Yeah, stuff like that. So the pool templates kind of define these pool parameters. And then anyone can create and also gate whether the pool can be created on any given token pair or maybe be restricted to certain pairs. So there might be a pool template. It's only applicable to certain tokens or whatever.

So we have pool templates. Governance technically defines which templates are instantiated. But going back, this policy system is actually how we make that permission list where we say, okay, we have a policy where somebody calls in, calls it, it creates a pool template at like a hash. So, right? So, that's how you avoid collisions.

So, you say, okay, you define this contract. The contract defines cryptographic hash. You create this template. You can set the parameters. You set the Oracle, the permissioned Oracle contract, all this stuff.

And now you can permissionlessly, anyone can come and permissionlessly create these pool templates through which normally a governance function, but through a policy has a very defined way to do it in a specific context.

So this is definitely something you've been thinking about for a while, so I gotta ask you, what kind of hooks do you think, or permission pools do you think will be super exciting and you just can't wait to see people get their hands on?

It's a great question. I'm really excited to see, again, like as you can tell, what we think is important is like, talks of flow and the economics. I'm really excited to see kind of how people start thinking about the economics. I think in the AMM space, a lot of people have done a lot of work on what's the shape of liquidity, like what type of curve is it, is it a custom product curve or like this different shape. They haven't done a lot of work on adequately pricing liquidity.

So obviously like that, we're super excited about. So I'm really excited to see from a protocol. So the example I always use is like Olympus DAO, like owns all the liquidity in their pool, right? But like, start seeing like protocols can say, okay, maybe you can only swap in this protocol, this pool, if you hold X amount of a certain token, or you can only provide liquidity if you're a part of this DAO or whatever. So it's also interesting to see how these quasi private markets fall, I think will be really interesting.

Okay. That's pretty exciting as well. Because yeah, I was actually thinking about something similar for DAOs as well. Just so many tokens sitting in DAO treasuries sitting unused that like, all right, it's time to deploy, get some liquidity back on chain. But 1 of the other things we haven't talked about is knockout liquidity.

And this is something that's like native to every pool and is not reliant on like this external permission pool idea. So can you walk us through kind of how knockout liquidity effectively becomes like an on-chain atomic limit order in some way?

Yeah, yeah, definitely. So what it actually looks like is under the hood is it's a standing range order. So unlike a traditional limit order, which is just at exactly 1 price, what it actually is, is a range order from a very, very small range. So right now it's 16 basis points. We might be able to make that small.

But the idea is okay, I meant to range order on the range order starts out of range. So let's say you're buying, right? So let's say I want to, you know, in a limit order for E at, you know, whatever, I think it might dip to, what's that now?

It's 1730. I think it might dip to what's that

now it's 1730 I think it might dip to 1700 so I want to put in you know a buy order I'm gonna buy the dip um so let me let me put in a limit order here it's gonna mint it's gonna mint not exactly 1700 it's cuz gotta go on this it has to be on a valid tick in a range, but it might be like 1698 to 1702 or something, right? So it's a range order, it provides liquidity like anything else in the curve. But what happens is when the price of the curve dips below the end of that range order, which is pretty close to your limit order. When it dips below that range order, it calls this function that basically takes that order, atomically pulls your liquidity out. So now you've put in USDC, you've been fully converted to ETH.

What happens is that the liquidity gets atomically pulled out of the pool. The fee accumulation gets snapshotted. And then when you can go back and you'll claim the filled limit order as well as any fees that the liquidity position has accumulated. So unlike a traditional swap where you're paying liquidity, In this case you're actually receiving liquidity fees. It's the same as any other liquidity provider.

So you know if you're a patient, if you're a patient directional trader I think it's a very useful way to trade. And that happens all within the same curve. So traditionally the problem with like kind of on-chain limit order implementations is if stuff moves fast, you probably don't get filled. In this case, even if there's a flashlots bundle, if there's a sandwich account, you still get filled, right? It doesn't matter.

As long as the curve touches your price, you're atomically locked in and filled in and it helps the health of the pool itself. Now these limit orders are all providing liquidity into the curve, which makes it a better deal for swappers and everyone else. You don't have to worry about all this complicated routing.

So 1 of the things there is, like, I think this is an adjustable parameter, but what's the minimum tick size? Because isn't there a world where you get like partially filled?

Yeah, you can you can get partially filled. So you could get until you're actually at the end of your range order and fully filled, you're not atomically locked in. So that would be 1 difference between like a traditional limit order where if you get half filled, right, like your price moves back, you don't have that locked in. So You have to touch the end of it. We think if it's thin enough for most users, it's probably close enough.

But you're right. Obviously, smaller kick sizes make that less of an issue. And when lower gas environments, we're definitely going to run at smaller kick sizes. But for most ordinary users, we think it makes sense. If you're a high frequency market maker, it's not as good as an order book.

But a lot of times, high frequency market makers make a lot of money because they're playing a PVP game. So the distinction here, right, like from an order book is that traditional order book, like limit orders are like, it's very PVP, like who's at the front of the queue, who's getting filled, right? That makes it bad if you're another liquidity provider. So like, to be clear, like these limit orders participate pro rata with all the other liquidity in range in the pool, which we think is, you know, critical to keeping, keeping the core dynamics of an AML.

What would you say Doug, like in 2 years, like would make you look back and be like, man, like ambient has been a huge success. Like what is the the end goal for ambient?

Yeah, I think the end goal. So 2 things. 1, I mean, 1, obviously, like we talked a lot of fixing, fixing the economics. I wanted to be clear that, you know, LPing is not there shouldn't be a debate like LPing. LPing can be profitable it's a useful way to use your money may come with some risk but but it's a good way to deploy deploy capital.

2 would be right if price discovery moves on chain or at least starting to move on chain. I would hope price discovery is still not happening at Binance 2 years from now and nowhere else. So I definitely want to make kind of these on chain markets efficient and liquid enough where, you know, where, where their actual, actual markets and not just, not just following along wherever finance goes.

Interesting. So I'm sure there's more examples, but 1 of the largest examples, And quite honestly, the only thing I can think of off the top of my head right now, where price discovery happens on chain, I believe, is staked ETH, right? Because the curve pool has a 2% depth of a couple million bucks, and I don't know if there's anywhere else even remotely close to that. How does that change the dynamics of A, LPs and B, arbitrageurs? Well, the

first thing is I think it's straight up better for LPs, right? Because you can do a thought experiment where let's assume you have a liquidity pool where there's just no endogenous users, right? You just have a bunch of liquidity and it's just sitting there and you don't have any organic users all you have are arbitrage wars who come in and hit that an arbitrage wars aren't in the game to make or lose money right like they're not losing money So at the end of the day, right, like, especially for gas fees, like LPs have to kind of lose money, at least an expectation in that thing. So to the extent that way more price discovery happens outside the market, like that's just bad for LPs. So flip side of that is if you can move price discovery on market or on chain, then it's better for LPs, right?

Because it's actually means that you'll want more activity that feeds into the fees. You do kind of see that another example is like meme coins before they're listed or actually like we've done some research on this Oh, actually, that's a pretty profitable. Oh, that is like 1 thing that's like pretty profitable from very volatile But um, but there's definitely alpha there. I'm L peeing early on meme coins, especially before they're listed on exchanges Um, So yeah, that would be that would be like a pretty important like they kind of go hand in hand. The other thing is you start flipping it where like you kind of hit this cycle where the more price like the less toxic flow there is or at least the better you are segmenting it the lower the cost for non-toxic flow which attract I mean obviously there's barriers to trading on chain but it attracts more non-toxic users right because you're looking what's the price to execute a Binance versus what's the price to execute at Ambient.

And hopefully Ambient is eventually cheaper than Binance. And you say, right, okay, maybe I'm going to route my order flow to Ambient instead of Binance. And at that point, right, like that makes the market healthier. And then, you know, also then less toxicity, then you can lower prices more and so on and so on. So that, you know, that that would be the dream, right?

That we can actually start replacing not just AMS, aren't just things on chain, right? Like we can start competing with off chain exchanges, you know, long term. Like I said, I want Microsoft to trade on AMS.

Very, very interesting. And how does latency come into effect? All this, right? You get a block every 12 seconds on Ethereum, whereas Binance is quoting you every microsecond. So how does that affect price discovery again?

I think there's good and bad to it, right? Obviously, faster price changes are better. The flip side of that is very, very low latency markets become very PPP, right? You have a few players who are really, really skilled at executing really, really fast, which means if you're not 1 of those players, you're just at an inherent disadvantage. So 1 thing that's like interesting about like on-chain stuff is that when you know when prices move instead of a latency game it becomes a top of block right.

So instead of who's gonna fire off a packet fastest to the network gateway or the exchange gateway, who's gonna who's gonna land top of the block. So we have some interesting ideas about kind of changing that dynamic to where Instead of whoever's paying the most to get top up lock, it's whoever's kind of paying the most to LPs in the pool. So I think like kind of long term, it almost looks like a batch auction system where you're saying whoever wants priority can pay the most LPs to get priority, right? But like kind of the surplus of those positional rents start accruing to the LPs in the pool, which I think is healthier than even order books.

Okay, now that's super interesting. And Could you do that in such a way where, like, obviously you have to work around the base layer in this in this case, like, can you build that batch auction system where it works on Ethereum?

You can you can definitely build a system like that. So like rough sketch of it would be something like anyone can participate in the pool. Anyone can go in. Pool is permissionless, composable, all that. But the price you pay to interact with the pool is, you know, might just be higher.

It might be 100 basis points or whatever. But that still means the pool is fully composable. No 1 can get in. The way it might work is like with this order flow segmentation system where I'm saying there's certain ways like I can credibly signal my order flows non-toxic. You know maybe I accept an arbitrary delay, maybe you know I'm a larger trader and I have accumulated reputation.

We talked about relayers and also the system where you have relayers and the relayers themselves are responsible for policing order flow and they have a reputation score over time. And then in between, right, you might have people are toxic flow, but you start saying who's willing to it's kind of been a meme. I don't know. I saw like in the uni before white paper where they had the donate function. We have a similar thing, a tip system.

So it's kind of mean, like, oh, this is how we fix LP profitability. You just call it a different function. But yeah, we have a similar thing, we call it a tip where you can voluntarily pay a higher fee. And that's not just for me reasons, it's because you might have certain players who over time consistently donate whatever x percent of their outflow into the pool. And right now with permission pools, you can build a reputation system.

You can say, okay. And it's easy. It's on chain, right? So, like, well, it's not easy, but, right? Like we have a Merkle root.

We can look over the history of the chain. You can make assertions about it in some way or another. It's probably the hardest engineering standpoint, but it can be done, right? We can look at a given source of order flow, we can say how toxic has it been, and how much of the toxicity did it donate back to the pool? And right now, now you can start saying, okay, we have 3 classes, We have people who just don't want to participate at all and are going to pay a lot and they're going to be at a natural disadvantage with people are very non-toxic who are going to Naturally pay low fees are credibly non-toxic or at least could be pretty sure they're not toxic They're gonna pay low fees and We have people in between who are kind of able to get priority in this system.

But only to the extent that they're willing to share a large fraction of the alpha with the LPs. So similar concept to flash bots, right? Where you have players who have alpha, but a lot of the value of that alpha goes towards the block build, the relay, or the validator, or whatever. In this case, hopefully the alpha goes to the LPs. So That's kind of a very high level overview.

So nothing bold to fix, but super optimistic on that.

That is wildly fascinating. I have like a million more questions, but we might need a whole nother podcast for that, to be honest with you. So I guess let's zoom out here. When we look at the DEX market today, Uniswap by far and away is just dominating everybody in volume. What's the reason for that?

Why are they crushing everybody else?

I mean, I don't think there's been a ton of innovation on the mechanism. So there's been a lot of innovation on Ponzi nomics, how things have been stacked on top of anything else but I don't think there's really been a lot of innovation in the core mechanism of how an AMM actually works I think most things are either most things are still b2 forks right so you need on b4 and like most of these other AMMs are just v2 forks still. Yeah. And just volatile pairs. I mean, it is, right?

Like, the reality, I hate to say this as a competitor, but the reality is they have a pretty different position. Uni pool is almost like the analogy is like aspirin, right? Where the brand name has almost become synonymous with the entire product category. So people just use it as like shorthand. I'm going to create a UniPool.

The other thing is, right, and we're still trying to see, like, oh, they have a lot of LPs that are super loyal, because it's pretty clear that certain LPs aren't, aren't necessarily great, making money, and they've been there for years. So, um, you know, have it, I mean, very loyal piece, I guess, is a certain, certainly pays pays off, or at least hard to, hard to peel away. Um, I guess the other thing though, would be like, the reality is like, from like an on chain activity perspective, we've kind of been in like a 2 year bear market. It's almost like from like May 2021 on ChainX, maybe a peak, like a little bit more later 2021. But like activity has kind of been down, right?

So before that was like kind of exponential up until like mid 2021. And that's just kind of been down from now. So it's probably easier to distend a dominant position when like the market's kind of shrinking or in like secular contraction. So it'd be interesting to see like, can they hold that dominance when the market's like, you know, in exponential growth mode, right? Cause it's easier to hold onto people, you know, still win over.

Yeah, I think that's a very fair point and makes a lot of sense, but I am curious to like you tease a little bit earlier that you guys were planning on launching on other chains. So do you have any details you can share on that front?

Nothing specific yet. We should have should have some details soon. Ultimately, we're chaining, not we're EVM based, obviously, but pretty chain agnostic. I have my own views about different chains, but we want to be where users are at. With the caveat that we're a small team.

So trying to support everything on day 1. So we'll be kind of selective about where we roll out to see where we can make the biggest impact.

Awesome. That sounds great, Doug. And I like that analogy of UniPool's kind of becoming synonymous with DEXs, just as escalators and moving stairs and Kleenexes and tissues. But thanks a lot, Doug.

That's a good

example. This has been such a fun conversation. Really enjoyed having you on today. And I guess there anything you want to leave the audience with where they can find you, where they can learn more about Ambient?

Yeah. Check us out at Ambient.finance or follow our Twitter at Ambient underscore finance or follow my Twitter at ZeroXDoug.

Awesome. Thanks a lot, Doug. And yeah, to the listeners, Doug's a great follow. So definitely be hitting him with a follow on Twitter.

Thanks guys really appreciate it. Thank you.