- The episode of Bell Curve features Eugene Chen of Ellipsis Labs and Doug Colquitt of Ambient Finance discussing the design decisions of DEX builders and the differences between AMMs and central limit order books.
- Eugene represents a central limit order book design on Solana, while Doug represents an AMM design on Ethereum.
- The AMM and the limit order book are liquidity primitives designed for different environments, with the AMM being better for retail liquidity providers and the limit order book requiring more sophisticated liquidity providers.
- The lines between AMMs and central limit order books have blurred, and the end game in on-chain DeFi is likely to be a mix of both.
- The core philosophy of AMMs is to make liquidity provision simple and low barrier, while order books require specialized market makers.
- Gas constraints make on-chain liquidity more favorable than central order books in decentralized environments.
- The gas-saving feature of AMMs is the automatic flipping of liquidity when orders are crossed.

- Gas constraints are a major factor in the design and functionality of decentralized exchanges (DEXs).
- Liquidity providers dominate on automated market makers (AMMs) and will continue to do so in the long run.
- Maverick Protocol is a suite of tools for DeFi users and builders that provides liquidity solutions.
- Gas efficiency is crucial in designing DEXs and AMMs.
- Solana offers a broader design space and more possibilities compared to Ethereum due to lower gas costs and faster block times.
- The role of latency and block times is important in determining the effectiveness of DEXs and price discovery.

- Shorter block times in blockchain networks can benefit liquidity providers by allowing for more trading and earning higher fees.
- Liquidity providers can earn more fees when there are shorter block times, even though arbitrage opportunities still exist.
- The block builder, who determines block times, can have more power with longer block times.
- AMMs (Automated Market Makers) provide passive liquidity provision, which can be advantageous for retail providers with lower capital costs.
- AMMs can still be useful even with low gas fees and reduced latency.
- Lending to market makers can be a way to provide liquidity without trusting them completely.
- XYK curves in AMMs have benefits such as bounded losses and separating capital from fees earned.
- There is a spectrum between AMMs and central limit order books, and different features can be combined.
- Passive liquidity provision is desirable for decentralized markets to avoid dependence on centralized entities.
- Market making is difficult due to competition, but it is unclear how much of that difficulty is due to benefiting end users.
- Industries with natural monopolies face similar challenges in terms of competition and market structure.

- The debate over the Lido project in Ethereum highlights the issue of winner-take-all markets and the need for regulation.
- Execution quality for on-chain swappers in Ethereum is not ideal, and the lack of professional liquidity providers is a constraint.
- Putting a limit order book on-chain can actually cause more problems and incentivize core protocol actors to get involved in the application layer.
- Moving certain components of the DEX stack off-chain can protect user privacy but may limit the builder or solver market.
- On-chain systems have the advantage of being able to introspect order flow, but moving off-chain can offer more flexibility and decentralization.
- The goal of DeFi is to move finance on-chain for permissionless innovation, but there are challenges in competing with centralized exchanges.
- Moving liquidity and price discovery off-chain can result in better outcomes for swappers but may compromise censorship resistance and transparency.
- Incorporating off-chain components and intent-based systems can help protect LPs and discriminate against toxic flow.
- The best price for swappers and maintaining equilibrium between LPs and RFQs are important for the long-term success of the ecosystem.

- The speaker argues that an intent-based architecture like Uniswap X can protect liquidity providers more effectively by incorporating more information about the order source.
- Existing architectures like RFQ systems can be centrally computed, but the speaker believes that intent-based architectures are better.
- The speaker discusses the potential for decentralized off-chain RFQ systems and mentions Suave as an example.
- The concept of Protocol Enforced Proposer Commitments (Pepsi) is introduced as a way to incorporate commitments into the Ethereum consensus.
- The speaker suggests moving away from the Ethereum transaction modality and exploring more flexibility at the application layer.
- Hooks are seen as an interesting model that opens up the design space for DEXs, allowing for programmable liquidity and a lower barrier to entry.
- The design space for DEXs is wide open, but there are challenges to address such as gas griefing and compute griefing.
- The speaker emphasizes the need for more complex fee models and the ability to adapt to market conditions and order flow sources in AMMs.

- The fee model for AMMs (Automated Market Makers) needs to be more complex and adaptable to market conditions and order flow.
- Hooks can provide the innovation needed for setting fees and the price of liquidity in AMMs.
- On-chain DEXs have the advantage of permissionless innovation, which can outperform centralized exchanges.
- Hooks can be compared to co-location in the context of HFTs, allowing for faster trading speeds.
- The convergence of on-chain AMMs and on-chain order books is expected, with potential fragmentation of liquidity on Ethereum's L2s.
- Roll-ups may not completely replace mainnet activity due to demand for mainnet liquidity and cheaper compute options with coprocessors.
- AMMs will become more sophisticated in pricing liquidity and may take market share from centralized exchanges.
- The market structure in the next few years will likely see a mix of AMMs and central limit order books, with potential for on-chain price discovery through hooks.

- The author discusses the differences between trading assets on centralized order books and automated market makers (AMMs).
- They argue that AMMs are not just a temporary solution and that different markets may require different trading methods.
- The distinction between passive and active liquidity is important, as ordinary people should have the opportunity to provide liquidity alongside professionals.
- The author suggests that long-tail tokens may see more sophisticated market makers and arbitrageurs on-chain.
- They also mention the possibility of off-chain retail liquidity provision through open source code for bots.
- Market makers are seen as bridges that solve inventory problems and fragmented liquidity in different ecosystems.
- The author believes that creating incentives and promoting competition can help solve many problems in the market.

- Eugene Chen and Doug Colquitt discuss the design decisions of DEX builders and the differences between AMMs and central limit order books.
- AMMs and limit order books are liquidity primitives designed for different environments, with AMMs being better for retail liquidity providers and limit order books requiring more sophisticated providers.
- Gas constraints make on-chain liquidity more favorable than central order books in decentralized environments.
- Maverick Protocol provides liquidity solutions for DeFi users and builders.
- Solana offers more design possibilities compared to Ethereum due to lower gas costs and faster block times.
- Shorter block times benefit liquidity providers by allowing for more trading and higher fees.
- AMMs provide passive liquidity provision, which is advantageous for retail providers with lower capital costs.
- There is a spectrum between AMMs and central limit order books, and different features can be combined.
- Market making is difficult due to competition, and the debate over the Lido project in Ethereum highlights the issue of winner-take-all markets and the need for regulation.
- Moving certain components of the DEX stack off-chain can protect user privacy but may limit the builder or solver market.
- The goal of DeFi is to move finance on-chain for permissionless innovation, but challenges exist in competing with centralized exchanges.
- The best price for swappers and maintaining equilibrium between liquidity providers and RFQs are important for the long-term success of the ecosystem.
- Hooks provide programmable liquidity and lower barriers to entry in DEX design.
- The convergence of on-chain AMMs and on-chain order books is expected, with potential fragmentation of liquidity on Ethereum's L2s.
- AMMs will become more sophisticated in pricing liquidity and may take market share from centralized exchanges.
- Different markets may require different trading methods, and promoting competition can help solve market problems.

- The speaker suggests that many problems can be addressed by assuming someone will create a profit incentive for people to solve them.
- They discuss the competitive nature of certain markets and how new participants can replace existing ones.
- The speaker mentions the importance of considering gas costs when designing decentralized exchanges (DEXs) and how it can impact volume and profitability.
- Solana is briefly mentioned as a potential alternative to Ethereum due to its lower gas costs, but the speaker believes congestion issues will still arise.
- The upcoming episode will focus on the design space and intents of the Optimistic Fallback Auction (OFA) model.

- Profit incentives can motivate people to solve problems.
- New participants can replace existing ones in competitive markets.
- Gas costs impact volume and profitability of decentralized exchanges.
- Solana is considered as an alternative to Ethereum due to lower gas costs.
- The upcoming episode will focus on the design space and intents of the Optimistic Fallback Auction (OFA) model.

Season 6 | Episode 3
Today we dive into the world of central limit order books and automated market makers with DEX builders Eugene Chen, co-founder of Ellipsis Labs, and Doug Colkitt, co-founder of Crocodile Labs. The team explores how factors like gas costs, latency, and modular "hooks" are shaping the evolution of onchain trading and DEX designs. The conversation then explores taking DEX components offchain and if it's antithetical to the point of DeFi. To close things out the team discusses the end game of DEX design.
- -
Maverick Protocol is a DeFi infrastructure provider focused on increasing industry efficiency, powered by Maverick AMM. Maverick helps token projects, DAO treasuries, liquidity providers or anyone in DeFi shape their liquidity with efficiency and flexibility. In other words, Maverick makes your liquidity smarter. 

Shape liquidity for your token today on Maverick at https://app.mav.xyz/bellcurve  
- -
Timestamps:
(00:00) Introduction
(01:57) Interview Start: Alex & Jason
(02:02) CLOBs vs AMMs
(10:17) “Maverick Ad”
(11:32) CLOBs vs AMMs
(12:35) Efficiency of Onchain CLOBs
(18:51) The Constraints of Latency
(23:02) AMMs & Passive Liquidity
(32:41) Offchain Components
(46:27) DEX Design End Game
(52:10) Market Structure of AMMs vs CLOBs
(56:55) Outro 
- -
Follow Dan: https://twitter.com/danrobinson
Follow Mike: https://twitter.com/MikeIppolito_
Follow Doug: https://twitter.com/0xdoug
Follow Eugene: https://twitter.com/0xShitTrader

Subscribe on YouTube: https://bit.ly/3R1D1D9
Subscribe on Apple: https://apple.co/3pQTfmD
Subscribe on Spotify: https://spoti.fi/3cpKZXH
- -
Resources:

Ellipsis Labs
https://ellipsislabs.xyz/ 

Ambient Finance
https://us.ambient.finance/

Crocswap Blog
https://crocswap.medium.com/

Jaredfromsubway MEV Bot Strategy
https://x.com/bertcmiller/status/1656392876438462464
- -
Disclaimer: Nothing said on Bell Curve is a recommendation to buy or sell securities or tokens. This podcast is for informational purposes only, and any views expressed by anyone on the show are solely our opinions, not financial advice. Mike, Jason, Michael, Vance and our guests may hold positions in the companies, funds, or projects discussed.

All right, everyone, welcome back to another episode of Bell Curve.

Before we jump in, quick disclaimer, the views expressed by my co-host today are their personal views and they do not represent the views of any organization with which the co-hosts are associated with.

Nothing in the episode is construed or relied upon as financial, technical, tax, legal, or other advice.

Hey everyone, this episode is brought to you by Maverick Protocol, a suite of liquidity tools built around an innovative AMM.

Maverick helps token projects, Dow Treasuries, LPs, or basically anyone in DeFi shape their liquidity with efficiency and flexibility.

Stick around and you're going to be hearing about them more later.

Welcome back to another episode of Bell Curve.

Today, Dan and I are going to be joined by Eugene Chen of Ellipsis Labs and Doug Colquitt of Ambient Finance.

This is going to be a really special episode.

In the first episode of this season, we talked about loss versus rebalancing and the profitability problems that LPs and DEXs are facing.

In this next episode, we are going to go 1 layer deeper and explore some of the different design decisions that DEX designers and builders ultimately have to make outside of just LVR.

Now, the reason we got Eugene and Doug on here is because Eugene represents a central limit order book design and Doug represents an AMM design, but also they're building on different environments.

So Eugene is building on Solana where gas constraints are much less of an issue as opposed to where Doug is building on mainnet Ethereum, where gas and gas optimization is the name of the game.

So this was a very interesting, dynamic conversation from 2 people who are building from a very different set of perspectives.

And today we're going to be talking to Eugene Chen and Doug Colquitt of Ellipsis Labs and Ambient Finance.

And what we want to do is sort of dig into some of the differences in between AMMs and central limit order books.

And what I think also will be really fun about this conversation is that Eugene, you are building on Solana and Doug, you're building on Ethereum.

So it'll be fun to kind of poke at what are some of the differences of building those different protocols with very different constraints.

But maybe to just open this up at a very high level, I think many, many folks who are listening to this will be familiar with these arguments and sort of debates that people would have back a couple of years ago, this sort of holy war in between AMMs and central limit order books.

You don't hear many of those debates going on anymore.

And I think partially that's because the line started to blur a little bit in between a classical AMM and a central limit order book.

But I'd love to, maybe we could just start at a very high level of sort of defining like the sort of value prop, right, or sort of steelman of AMM versus central limit order book.

And then if you guys think that's still an appropriate distinction, or maybe we can just take it from there.

I think that's a pretty reasonable place to start.

It's just not as loud as it used to be on Twitter.

And I totally agree that the lines have been blurred a little bit between 2 like totally separate camps.

And now you see some of the models starting to converge towards each other a little bit.

I think at a high level, The AMM and the limit order book are really just different liquidity primitives designed for different environments.

So the AMM is designed for Ethereum mainnet originally, which has a pretty high cost to update, to place transactions, update your liquidity.

And so it's very opinionated on the shape of the liquidity in the pool.

You give market makers or liquidity providers a little bit less choice.

The xy equals k example, as a liquidity provider, you only have 2 choices.

You can either place liquidity or remove liquidity with concentrated liquidity now.

So there's a few more parameters for a liquidity provider to play around with.

And the limit order book comes from the tradfi world, centralized exchange world, which is a world where the cost to update your quotes, the cost to quote-unquote send a transaction is literally 0 and generally these transactions make it to the order book in a FIFO manner, first in, first out, whatever makes it to the matching agent first.

And sophisticated market makers compete primarily on providing better prices, because you get more fills if you're closer to the top of the book.

And market makers can place liquidity wherever they want.

And I think there's still a lot of room to experiment on order types on top of a limit order book.

But it's sort of the core liquidity primitive is different because the design space is different.

And so today, I think the AMM is clearly still better for retail liquidity providers because there is fewer dimensions on which they can get out-competed.

You don't need to be running like a separate AWS box to be placing your quotes.

Whereas limit order books really require sophisticated liquidity providers.

So different types of pairs with different levels of competitiveness.

You know, do you need to be quoting less than 1 basis point wide to be able to win flow?

I think the AMM versus the limit order book differ a lot here.

But the end game, I think, is probably going to look like a mix.

Specifically the on-chain DeFi end game is going to look like a mix because the gas cost isn't 0.

So the limit order book does have some issues here.

There's like so much activity happening at the top of the book.

Maybe you can reduce the number of transactions required to have close to optimal top of book liquidity.

The gas cost is always going to be positive, even if it is pretty close to 0.

So, or maybe give a bit of an orthogonal take there.

So generally, I think regardless of the underlying mechanics, there's kind of this core philosophical difference, or at least kind of the way we view it is that the core philosophy of AMMs is to make liquidity provision as simple and low barrier as possible.

And I think, right, like the very, very classical like XYK version of that is really simple, right?

Like everyone's, Everyone kind of deposits and then everyone participates.

So like kind of cooperative, even if there is a very sophisticated player, it's hard for them to kind of out earn somebody else.

It's a little more complicated, but I think that right, that core philosophy still holds up.

Everyone kind of participates at the same time.

And with order books, I think, right, like kind of the core philosophy there is always you need various, like they've always existed.

You need specialized market makers who just do that and nothing else.

So if you're not 1 of the best kind of market making firms out there, right, you're probably not going to make any money in order books.

So kind of a very different philosophy where 2 people providing liquidity in a book can have very, very different results based on their skill.

And some of that does come from competition, which is good, but some of it also just comes from pure rent seeking.

Well, not rent seeking necessarily, but pure winner take all games, like who's in the front of the queue tends to be very profitable regardless of, you know, you're not actually improving the price, you're just competing to be the first order at a new price.

So generally, I think even outside the mechanical or the gas constraints, the reason that we're AMM Maxis is because we think it's very powerful to have anyone participate and be able to provide liquidity.

Maybe the square the circle, I think between them, I would say I consider myself a compatibilist between between central limited order books and AMMs.

And at times, having been in my life, a rabid AMM maxi, I'd say I still try and I've sort of always tried not to have too much religion about it.

And I think often the right, you don't want to be to sort of be blinded to good arguments or to good compromises or an implementation or good new features just because you think, oh, like this wouldn't be the AMM way to do things.

And I think that was certainly true with concentrated liquidity.

And I think has been with a lot of the other of the other changes that we've seen.

I think from my perspective, the core feature of what may have distinguished AMMs from central government probably is still the gas, gas and implementation.

But I think it's actually it's so overwhelming that I I do think in most environments in decentralized environments often I think on chain liquidity as an AMM is just always going to make sense or likely make sense more than central order books.

And that's just because if there's any non-zero cost of placing and cancelling an order, just orders in a central order book are placed and cancelled so often that it is just it's just much too expensive, I think, to be able to have transactions for every 1 of those.

And I think the key feature to me of an AMM that actually makes it a critical gas saving is that when orders are crossed, that automatically you flip the liquidity that you place a buy order after it's been crossed.

And I think if you had a central limit order book that does that, you may be able to actually overcome a lot of these costs.

But if you don't, then it's just going to be kind of overwhelming to have a central limit order book with multiple liquidity providers.

And you're never going to have that in a gas-constrained environment.

So that would roughly be my prediction is that I think I do believe it is primarily about gas.

I mean, you probably will still see professional liquidity providers dominating on AMMs even in the long run, ultimately.

But I think it ultimately is a very adaptive 1 for an environment like a blockchain.

Hey everyone, wanted to take a quick second to shout out this season's partner, Maverick Protocol.

Now, many of you probably know Maverick as an innovative AMM, which they are, but in reality, they're a lot more than that as well.

Maverick is a suite of tools for DeFi users and builders that allows them to put liquidity where it will get the most work done.

Since Maverick launched in March, they have been gobbling up market share.

And at the time of this recording, which is the end of September, on a trailing 7 day volume basis, Maverick is now a top 3 DEX by volume and they support over 50% of the volume on the L2ZK-SYNC era chain.

Maverick enables LPs and token pairs to process higher volume with limited TVL, which allows them to support some of the highest levels of capital efficiency for LSTs like Rapsteve.

Another very cool feature is something called Maverick Boosted Positions.

So that allows protocols looking to bootstrap their token liquidity to target the shape of liquidity of any token pair with surgical precision.

Maverick is backed by some of the leading institutions in crypto, Founders Fund, Pantera, Coinbase Ventures, Finance Lab, they are all backing Maverick in their vision to revolutionize the next generation of DeFi dApps and helping them build their liquidity in all market conditions.

Click the link at the bottom of this episode.

I don't know, Eugene, if you have a response there, but I think that was a helpful squaring of the circle because I had been thinking about them as 2 relatively separate things of kind of this idea of retail passive versus very active professional liquidity.

And I've sort of seen AMMs and central limit order books existing on a spectrum there with some of the more recent changes like Uni V3 maybe looking more like an AMM, but like coming closer and closer to that, maybe moving a little bit more to the midpoint in between AMM and Central Limit Order Book.

And then obviously gas efficiency is a massive thing.

So maybe we kind of attack those and Dan, I guess you just kind of ID that maybe gas is the most important thing there.

So maybe Eugene, if you have any response to just the long-term efficacy of Central Limit Order Book, which is entirely on chain, and even if it's whatever the fee is on Solana these days, 0.00001 cents, if you're placing and canceling hundreds of thousands of bids on a daily basis, that does start to stack up.

And then I do want to tease out the second, maybe more minor part, which is now how realistic is it that we get sort of retail passive market makers who are able to profitably make.

But maybe Eugene, if you want to respond to the gas cost thing.

So we've seen with Uni v3, the AMM moving a little bit closer to what we conceptualize as a limit order book.

Some of the stuff we're experimenting with internally at Ellipsis Labs is sort of going the other direction, starting from the pure limit order book implementation, which again is designed for a world that has literally 0 quote unquote gas costs, and figuring out how we can reduce the number of transactions required to place effective top-of-book liquidity.

And this sort of looks like programmable liquidity, different order types.

Some that you could imagine would be, as Dan mentioned, orders that, when they get filled, they sort of flip to the other side with some specified spread that you want to take.

You can also imagine orders that instead of you having to cancel them explicitly, they just widen out on their own over time.

You can also program in specific liquidity curves.

I think the design space here is super, super broad.

And it's definitely still is going to be wider in an environment where your compute budget is just much less constrained like a Solana.

Of course, there's other tradeoffs here as well.

But I definitely don't think that a pure, naive limit order book implementation is going to be the like the end state for on-chain liquidity.

1 question maybe just to help level set for the audience and for me as well is, you know, when you're talking about designing and there's sort of a spectrum of, let's say, 0 gas, which doesn't really exist today.

And then there's a very relatively cheap gas environment.

And then there's an environment which is extremely gas constrained, like Ethereum main chain, and then maybe roll up set even somewhere in between there.

What is the mental framework for If gas is less expensive, does it just widen out the scope of what you can do?

Is there just a much broader design space in an environment that's cheap in terms of gas?

Or is it sort of like a necessity is the mother of invention thing?

And actually, You have to be a little bit more creative, but you can do just about everything in a very gas-constrained environment like ETH mainchain that you could in even a very cheap environment.

Well, I think the converse is definitely true that anything or pretty much anything you can do with DEX design on Ethereum that's viable there, You can just mindlessly port over to Solana, but the converse is just not going to be true.

For example, you can't have an order book on Solana.

You can't really have an efficient order book on Ethereum mainnet.

Is the design space just much more broad?

So you can port things directly from Solana to ETH, maybe not the other way around.

But if I'm a dev and I'm sort of building on an Ambient or Uniswap, am I like, man, this is like all this stuff that I would love to do in the world of Uniswap, but I just can't do it because of the gas constraints.

And maybe I know Doug and Dan, you guys are both like, for instance, like the Singleton contract in Uniswap and Doug, I know Ambient utilizes a single contract as well.

Maybe that's an example of a way to get around some of these constraints.

But I think I'm just trying to get a sense of like, is there stuff that's just possible in Solana that's not possible anywhere else?

Or that's what I'm trying to poke at here.

My impression is you can just do way more on Solana.

For like a given dollar of gas, you get so much more compute.

The total throughput in terms of compute is significantly higher.

So the design space is just much more wide open.

Well, I'd say it's also not just necessarily gas.

So if you have a 12-second block, that means you can't update your quotes for 12 seconds.

And unfortunately Binance doesn't freeze for 12 seconds, which is challenging, right?

And kind of requires different considerations there.

And then the third thing, which is actually even true of Solana, which is not true of a traditional centralized exchange is a traditional centralized exchange, right?

There's an order gateway and I send my order and it gets executed atomically in any blockchain.

There's a block builder and that block builder has the ability to rearrange transactions.

Now blocks can be shorter and they can rearrange transactions over smaller periods, but that's just like a fundamental issue with decentralized systems that even like Solana doesn't fix, right?

Like there's less of that on Solana because there's also just less of a market in general.

But if you saw like 10 billion a day trading on Solana, yeah, you bet like there'd be block builders who start playing games with how they construct the block that create problems that don't exist in a centralized exchange.

It's a problem with leaderful consensus protocols.

But right to date, we basically only have those.

Well, there are having people working on projects to try to do, say, batch auction dexes with threshold encryption.

A penumber is 1 example of a project that does this.

But the idea, and it's still not leaderless consensus.

So I take back that as the qualifier here.

But the key idea being that if orders are encrypted and can't be decrypted except by the full group of the full validator set, and then they're confirmed before they actually get decrypted and then all executed as a batch auction, then potentially you can avoid some of the MEV that might otherwise happen.

And there are caveats to that, but I think there's designs that try to avoid this problem of having somebody who can see all the orders be responsible for arranging them all within a block.

think there are some designs that you can do.

The current paradigm in both Ethereum and Solana, I agree, has this issue.

I mean, how, yeah, the block time thing is definitely something interesting as well.

Maybe we can poke at this concept of latency, which has come up in our earlier 2 episodes, actually, which is just the role of latency just being very important for our deck.

So Ethereum obviously has 12 second block times.

Solana has, I think, Eugenia's 400 milliseconds, give or take, somewhere around there.

So can you just kind of like just talk maybe at a high level about how you think about the role of block times.

And something Dan and I were actually talking about on the last episode is, in an environment like Ethereum that has 12 second block times, that's just prohibitive.

In some instances, obviously there is some price discovery occurring on sort of smaller pairs on the likes of Uniswap or Ambient, but just a little bit tougher from some of the more popular trading pairs where price discovery happens with extremely low latency sexes like Binance.

So we'd just love to get your thoughts on sort of like how block time fits into the overall design decisions of a DEX and the role of latency as well?

I guess like a helpful thought exercise is like imagine block times were like a day or like 24 hours or whatever.

And I'm the block builder and I can go watch the price of like Binance and wherever the price of Binance, it moves up or down like 1%.

So wherever the price of Binance goes, I will just arbit for 1% and just do 1 trade, 1 big trade at the end of the day.

And liquidity providers won't earn much fees off of that.

Say the pool's, I don't know, 5 basis point fees.

And Say we move down block times are 1 second or something where price moves about 1 basis point.

On average, they're going to do like 10,000 trades.

They're still going to arrive at the same place, but they're going to do 10,000 trades Because the price is going to move, kind of bounce around during that period.

So some will be up, some will be down, even if they'd be under 24 hours, it's up, right?

Arbitrage orders will have done a lot more executions and that's just better for liquidity providers, right?

Because that means they earn cumulatively a lot more fees over that period.

And there's theoretical results that, okay, if your perfect Brownian motion and block times go to 0, all the arbitrage profits go to liquidity providers.

That's not really true because prices aren't Brownian motion.

So even if you have instant block times, there's still going to be arbitrage wars who drain capital from liquidity providers.

But in general, As block times get shorter, it gets better for liquidity providers.

We've done some research and basically if you have 100 millisecond block times in a hypothetical world, the LVR on ETHUSDC would be, I don't know, over some period, half as much as it is on a 12 second basis.

Like at 12 seconds, it's a pretty meaningful impact.

So basically the deal is just that overall, the amount of arbitrage, like move the prices roughly the same, but if block times are smaller, then just more trading happens.

So it ends up being beneficial for LPs who get to collect those trading fees and offset some of that lever.

Yeah, the block builder is basically like the dictator for the block times.

So very big block or very long blocks mean a very powerful dictator who can kind of abuse the system more than a very short-lived dictator.

So on these like L1s like Ethereum and Solana, the first sort of thing to do to reduce the LBR is to reduce the block times.

But there's also these worlds where we have the benevolent block builder, like all of the L2s today with a single sequencer.

Most of them roughly just order transactions in the order they receive them.

And so that looks a little bit closer to the to the centralized exchange world where there's going to be significantly less LBR.

Doug, I want to get back to something you said when you were introducing the topic, that you think the key feature of AMMs is that they allow for passive liquidity provision.

So if you were— Yeah, even independent of gas.

So if you were developing and I suppose it solves all its scaling problems and now gas is near free and latency is half a second, Do you think you'd still be building AMMs?

I mean, and like you can see this on the like long tail of tokens, it becomes very obvious, right?

Like market makers, professional traders have very high cost of capital.

And so, right, like at the end of the day, like Jane Street and Citadel and whoever don't really wanna be holding Harry Potter, Obama, Sonic Enu on their portfolio.

So, right, to provide liquidity on it, they're going to demand a very high return on capital and market makers do make a very high return on capital.

So I think there is an economic argument to be made that retail providers, especially the extent they're already holding these assets to begin with, have a much lower cost of capital to provide liquidity.

And that's very obvious on long tail tokens, right, where the cost to hold some very long tail chip coin is really high and no market maker wants to get involved in that to begin with.

See all Bell Curve transcripts on Applepodcasts

AMMs vs DEXs: DeFi's First Debate Revisited | Season 6 Episode 3