Dan Robinson is GP and Head of Research at Paradigm. He, over the years, has done a lot of deep thinking about markets, auctions, and liquidity in DeFi, with a particular focus on Uniswap and Uniswap V3. Recently, Uniswap Labs released UniswapX, a new dutch auction mechanism, that Dan thinks changes the meta for swapping assets in DeFi, MEV, chain interoperability, and much more. 

The last time Dan was on Bankless was September 2020…almost 3 years ago! If you have ever heard Ryan or I say the phrase “Ethereum is a dark forest”...it came from that episode.

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TIMESTAMPS

0:00 Intro
6:00 Why UniswapX is Needed
11:09 What’s New About UniswapX?
14:00 Intents 
16:25 The Magic Behind MEV Reduction 
20:00 Order Flow Auctions 
26:25 It’s Still Early 
33:05 Who Are the Nanobots? 
37:42 How Rollups Will Change 
42:22 How Bridges Will Change 
49:55 UniswapX Complements Uniswap v4
53:30 What Uniswap v4 Do for LPs? 
59:15 LPing with Uniswap v4 vs. v3
1:04:11 Uniswap’s App Layer & Yields 
1:06:05 Why Be Excited About Suave 
1:09:55 Closing & Disclaimers  

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RESOURCES

Dan Robinson
https://twitter.com/danrobinson
https://twitter.com/danrobinson/status/1681061703818305536 

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Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research.

Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures⁠

Welcome Bank of the Nation to State of the Nation where we dive down into a topic that is currently floating around the world of crypto.

This week on State of the Nation we are talking with Dan Robinson, head of research, GP at Paradigm.

And recently across my Twitter feed I saw a tweet thread from Dan Robinson about how there are 5 big ways that Uniswap X changes the game for swapping in DeFi swapping in crypto and I learned a ton in this tweet thread and I thought it would be super useful if Dan Robinson came onto the show and explained each point himself here.

And so that is what you are about to get here today.

Because Uniswap X doesn't just stop at Uniswap X, it also brings with it a bunch of new changes for the DEX landscape that impacts so many other things across DeFi, across Ethereum.

It impacts bridges, it impacts roll-ups, it impacts MEV, it impacts market makers.

And so there's about to be, perhaps, if you believe, in this new intent-based paradigm, which is something that we will define in the show, it flips a lot of what it means to be a dex, or to be a dex swapper on its head.

So you're going to learn about all of these details in this coming new meta for DeFi, as well as what it means for you, the user, you, the swapper, and also perhaps you, the LP, if you are an LP in this world of DeFi as well.

And then we also open up some other doors as what does the future of Lping yields in Uniswap look like?

Well, Uniswap X is focusing on swappers and why swappers and LPs are the 2 parts of a DEX that need to be held in the highest regard and why everything else is secondary.

And then also we open the door to what Flashbots is working on with Suave, which is at the very end of this episode.

Overall, you're going to learn a ton about the DEX landscape that is changing quickly, both with Uniswap v4 and with Uniswap X, as well as some other things in the intent-based world, which is a hot topic in the DEX and dev landscape.

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Bankless Nation, I would love to introduce you to Dan Robinson.

He is GP and head of research at Paradigm.

He, over the years, has done a lot of deep thinking about markets, auctions, and liquidity in DeFi with a particular focus on Uniswap, Uniswap, and Uniswap v3.

Recently, Uniswap Labs released Uniswap X, a new Dutch auction mechanism that Dan thinks changes the meta for swapping assets in DeFi and also MEV, chain interoperability, and many more things.

The last time we had Dan on Bankless was September of 2020, almost 3 years ago.

If you've ever heard Ryan or I say the phrase, Ethereum is a dark forest, it came from that episode.

Dan, you recently wrote a thread which triggered my imagination and was the impetus for bringing you onto this podcast that was titled, 5 Reasons I Think Uniswap X Changes the Game for Decentralized Exchange, MEV, and interoperability.

And this already kind of gave me a model, an agenda for this episode, which we want to get into, but just I really want to start at the highest of levels.

Can you maybe define the landscape for why something like Uniswap X is needed in the DeFi sphere?

What are the current variables or the current things that are producing this need for Uniswap X?

And I think it'll also talk a little about Uniswap V4 and where I see that fitting in.

So from my perspective, decentralized exchange research, which is where I've spent a lot of my career and my research focus has been at Paradigm and with Uniswap, decentralized exchange research, in my view, has to be about reducing the amount of value that leaks out of the system, the decentralized exchange system.

And so, when you're in a decentralized exchange, particularly with automated market makers, you have on 1 side liquidity providers and on the other side swappers.

And swappers are coming in because they can get the most liquidity or the best prices from your decentralized exchange.

And liquidity providers are hoping to earn the best returns from trading fees being paid.

And a lot of what I would say in research in decentralized exchange design that I've seen happen elsewhere has been focused on trying to tip the balance 1 way or the other between, take money out of the swappers' pockets and put it in LPs' pockets or vice versa.

And I think when you see a lot of reactions to decentralized exchange research is often saying, oh, you know, this hurts LPs to benefit swappers or this hurts swappers to benefit LPs.

And in my view, I think sustainable DEX research is going to be about reducing the value that leaks out of the system entirely.

It's not going to be about, you can't just benefit swappers by making LPs make less money.

You can't just benefit LPs by having swappers get worse prices.

You actually have to find where are the parts of the system where you can benefit both or reduce the leaks that come out of the system.

And so I think the types of DEX research, the valuable lines of DEX research correspond to different types of MEV that come out of the system.

Now I think there's 3 kinds of MEV there.

1 is just EIP-5059 burn, just ETH that's being burned, gas cost from the transaction.

And that's being paid by both swappers and LPs effectively.

And Uniswap V4 and Uniswap X both address that 1.

But for the other 2, 1 is loss versus rebalancing.

And that's losses that liquidity providers suffer to arbitrage.

Someone's coming in and they're trading on this pool at a better price than the liquidity provider maybe should be giving them.

So the liquidity provider is losing money to ARBs.

And that all goes basically to MAV in the modern system.

And so Uniswap V4, and I can talk later a little about how we think about that, is about addressing those losses to arbitrage and opening up new ways for developers, for AMM designers to reduce that.

But Uniswap X, in my view, is largely about the other side, is trying to help the swappers.

And 1 way that, a couple ways that swappers lose money, they can be sandwiched.

You can have your transaction actually executed at a worse price because somebody traded ahead of you.

You're trading at a price, and the price has moved away from you on the DEX, and so you're getting a worse price than you expected.

And you could just be getting a worse price than is available somewhere else.

And in my view, if Uniswap, the system, is not providing swappers with the best possible execution they could be getting anywhere, then what are we even doing here?

And so that's the motivation for me with Uniswap X is how can we actually protect swappers, the swapper side of this from getting worse prices than they could otherwise.

I think to reword what I heard from you, research in AMM and just, you know, DEXs on Ethereum and in crypto broadly has 2 players that you think need to be held as first-class citizens of the highest regard, and everyone else should actually be minimized.

And these 2 players are swappers, people that want 1 token and have 1 token and want a different token, And then liquidity providers who are providing liquidity.

And I think what you're saying is that research in the realm of DEXs in crypto needs to figure out how to optimize for retaining value by the net between these 2 players.

And anyone else, MEV arbitrageurs, the Ethereum protocol with EIP-1559, needs to be minimized while these 2 players are maximized.

That's how I would reword what you were saying.

Yeah, I think that's basically how I think about it.

And then Uniswap X is specifically a technology that benefits swappers the most.

Yes, largely focused on benefiting swappers.

But I think, again, in a way where you're benefiting primarily retail swappers, right?

It's not about helping arbitrageurs trade against Uniswap LPs more effectively.

It's the people who we care most about actually helping here.

OK, so I'd actually like to take this opportunity to start with your tweet thread, and number 1, because I think this is where this goes.

Your first tweet in your thread goes, the architecture of Uniswap X opens up a vast design space for DEXs.

And so maybe we can talk about, like, I think the secret sauce that Uniswap X is bringing to the table.

We might actually need to define what Uniswap X is for people that didn't listen to our episode with Hayden, but I definitely recommend that as well.

So what is the new thing that Uniswap X is bringing to the table?

Yeah, so first I'll say, I don't like to use the term new because I think a lot of, as many people have pointed out, A lot of the ideas in Uniswap X have been around in Ethereum, Dex space, actually some since before Uniswap.

And I think some of the concepts, especially around signed limit orders, I think are You can trace back through 0x or even before.

And so I think Part of what Uniswap X is about is, are we actually at a time when some of these concepts that have been around for a while really make sense and start to be worth integrating into how DEX is actually done on Ethereum, which right now, again, is dominated by just on-chain flows on AMMs.

I think actually that there's a lot to be gained from digging up some of these rich old ideas.

So yeah, so the key idea for me of Uniswap X is that we're moving from a system where all transactions created by retail users are expressed as transactions with a specific path.

Imagine just like an itinerary of here's, I'm going to take exactly this route on the subway to get from point A to point B to an intent or a limit order.

And an intent, if you think about it, is just a statement like, I want to get to point, I'm at point A, I want to get to point B, but I don't necessarily care how I get there.

And there's been a lot of discourse on intents, and I think, and a lot prior even just on the more general concept index of limit orders, but I think it's very important that we start actually operating with user intents.

I think they're incredibly flexible and powerful.

And Uniswap X, the main thing to me that it achieves is starting to move toward users expressing their trades as intense, as limited, or saying, I'm willing to, I wanna trade at the best price possible, no worse than this particular price, rather than expressing I wanna trade on this exact AMM.

So people who have swapped on Uniswap before, you open up with the asset that you have, you open up the asset that you want, and then you click confirm, and then you approve that transaction, you're metamask, you're ledger, whatever.

And then you go to Etherscan to watch that transaction get verified.

In that, what you're saying is that is a specific, the user has chosen their point A and their point B, and then the app, the web app, actually codifies that into a specific transaction, and then the user commits to that transaction, and then that is committed to on-chain.

And then a bunch of MEV happens in the background that the user doesn't really see, but definitely does happen.

And so I think that's the current meta of swapping.

And what you're saying is there's this new alternative called intense, which is, can you explain like how that actually gets expressed and then how that actually turns into the outcome that the user wants?

How is that different from an actual codified transaction and how does it actually achieve the same result?

So, the way it works is the user still sees a similar interface on the web interface.

And when they go to sign their trade, instead of signing an Ethereum transaction that is, again, constructed by the interface, they sign just an off-chain message.

They sign a message in a particular format, but it isn't an Ethereum transaction.

And then it's the job of the entire MEV superstructure out there to get this, turn this intent, somehow package it in a transaction that somebody creates and get it included on chain.

But this can, you know, intents in general could include anything.

It's a more general format than an Ethereum transaction.

And the Uniswap X uses a particular format where the user commits to a particular price that they're willing to trade at.

Uniswap X supports the ability to do a Dutch order, which is a kind of off-chain Dutch auction where they sign this order.

They say, here's my decay rate, and basically it's going to change the price to make it more Basically, get a worse or worse price the longer it goes on until you hit some limit.

And that's in order to do it to facilitate some off-chain price discovery for it.

And then it also allows the ability to pick a particular filler who gets exclusivity on the trade for a couple blocks.

And that's in order to enable them to potentially through a request for quote like system off chain, find someone to fill this quote better.

But all these are details about how this particular transaction format works and it's I think how we see sort of the initial way that USOPX helps find users the best price.

But again, to me, the key is you're moving into, now I'm signing a message that just says, expresses my trading intent.

And it's up to the system to try to find the best price for it.

So in the example that say, just for round numbers, Ether is $2, 000.

And in the old way is you would have 2, 000 USDC and then you would say, hey, give me 1 ether.

And then you would ultimately get like 0.987 ether for a number of different reasons.

1 of them would be gas fees, 1 of them would be slippage, 1 of them would be front running, and a bunch of different participants, both humans and protocol, eat away a little bit at that.

And I think the way that this intent system works is, you actually, since you don't broadcast a transaction, you actually, excuse me, you do broadcast a message, but you do not make a transaction.

And so I would guess maybe this, like this package that you're talking about, you're just saying, hey, I have 2000 USDC.

The minimum price that I'll take is 1 ether for that.

But if anyone can give me more than that, then you are allowed to fulfill this order.

And then Dutch auction is, just to define a Dutch auction, is you set a high price and then over a period of time, that price comes down little by little by little.

Can you elaborate on why that's so magical for how that actually reduces MEV?

Yeah, so the idea there is, but when I want to set a, if I want to discover the price, suppose I don't know at all what the price is.

And this, by the way, I use Dutch auctions all over and like every mechanism I know, because I think they're just a fantastic way to get decentralized price discovery.

But I think this is what, it's 1 component of a piece of USWebEx.

But the way it works is, if you publish this order to the world with some particular starting price, if anyone in the world can actually fill that, they're incentivized to do it as fast as possible.

And so you'll actually get included, if they can fill that profitably.

So you'll get that included as quickly as possible.

If nobody can fill that, then okay, maybe that price is too high, I'm going to start lowering it.

And as soon as, if the system is sufficiently competitive and there's enough potential bidders out there and people aren't censoring multiple blocks at a time.

And again, I think these are assumptions that are worth questioning.

But in that case, basically as soon as this order becomes profitable for anybody in the world to fill, they'll fill it.

And we have the assumption that basically once you hit that point, that's the right price to actually fill it at.

Now again, there's some possibility you could lose a little of the slippage from the system.

Like if the price moves in the other direction at the same time that your price fills, you maybe don't get the best execution possible.

And I think that's why there are these other systems as part of it.

And to me, Uniswap X, again, is not about just the Dutch order.

It's about this general concept that we actually get a lot more flexibility from Intents.

But that's 1 mechanism that Uniswap X uses to try to make a competitive market for filling orders.

I think another way, the way that resonates with me and my brain is that the Dutch auction mechanism, say ether is $2, 000, give or take.

But like you said, you actually don't know.

In 1 single moment of time, you actually don't know what the fair price of ether is.

So you start at like $2, 010 and this Dutch auction mechanism lets that decay, you know, 10 cents every second until someone fills it.

And I think the idea here is that the most profitable person who can make that trade profitable first at the highest price possible will fulfill that because they can squeeze a profit out of it.

And it allows the margins of what you call the system, like this MEV system, the market maker system, it allows the first reasonable, rational person who can make a profit will fulfill that order first.

And that's how you're coming to the conclusion that, well, yes, that was the best possible price for the swapper, right?

Okay, And so I think this is why you come into the second tweet saying, it's a better foundation for order flow auctions.

Order flow auctions versus, what's the opposite of an order flow auction?

Well, So backing up a little about order flow auctions.

So I think we've seen some systems, and Flashbots has 1 called MevShare, and I think there's some others out there, where the idea is right now when users trade on decentralized exchanges, often they may get sandwiched, they may get front run.

And 1 way that you can potentially just make the user strictly better off than they otherwise would be, assuming already that there's so many in a transaction, is instead of just letting anybody in the world front run this transaction, or even maybe instead of just letting this transaction get included and see what happens.

We can auction off the right to back run your transaction.

And a back run happens because, you know, when if I trade on an AMM, I might push the price.

It might be such a large trade that it pushes the price to a level where it's profitable to trade after me.

And so I could potentially get a rebate on my transaction by, if my transaction gets included, by basically selling off the right to say, you're allowed to trade immediately after me.

That's a right that I, in some sense, have, although it can be hard to facilitate this market between me and somebody who might want to background me.

And so if I can get someone to pay me for the right to background me, I will get a rebate effectively on my transaction.

So this is how order flow actions have been implemented by Flashbots and others with the transaction model.

Now the thing is, it's sort of a hilariously inefficient way to actually pay somebody for the MEV that's being created by their transaction.

Because what's actually happening there is I'm trading on the AMM at a worse price than I actually want to trade at.

I want to trade maybe at the current price or at a better price, but I'm trading at some bad price on the AMM, such a bad price and causing so much price impact that actually it's profitable for somebody to pay me to be the trader afterward to trade the AMM back in the other direction.

And this involves at least 2 transactions on chain.

It involves fees being paid to liquidity writers who haven't actually really done anything because what's happening in this transaction is economically is that I, the user, am actually just trading with some back runner.

I'm buying a token that they are selling, and I'm buying at such a bad price for me that they can sell it back to the AMM at a price that is profitable for them.

And so we should just cut out the middleman here.

We should actually just have the user and the backrunner basically trade with each other.

But the transaction format doesn't allow this kind of order flow auction.

And so that's why when you move into an intent, suddenly, you know, all I'm saying is I want to actually trade.

I'm not saying it has to be on this particular AMM so that you have to extract this money from me, by back running and then making a side payment to me.

You can just come in and trade with me at a better price.

The metaphor that I'm getting here, maybe you'll like this 1, is like it sounds like we're trying to build a ship, design a ship that doesn't leave a large wake.

And it sounds like in this, the current paradigm of Uniswap trading where the reasons why the pools get balanced or who we're trading with is because in order to fulfill that order, there needs to be enough wake for arbitragers to come settle the waters.

And right now, with this off-chain intent model, we actually are just designing a ship that doesn't disturb the waters that much.

I think that's the idea, is you're ultimately getting more efficiency from doing it this way because it's just a more flexible format.

And so these things that people are, it's so needed that it's actually getting hacked into the current model.

And I'll give you another example, which is just-in-time liquidity or JIT liquidity, which I've been going on like a rampage about for about a year, partly in preparation for anticipation of Uniswap X coming out, talking about how I think So JIT liquidity, the way it works is when somebody's trading and they're going to trade at a bad price, someone can come in and provide concentrated liquidity right around the current tick, right before their trade, and then withdraw it right afterward.

And what they're functionally doing is they're improving the user's price impact.

They're actually helping the user a little bit by trading against the user.

And it's not, in this case, like not actually going to liquidity providers.

It's basically just being wasted, or it's going to gas costs, all the inefficiency of the system.

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DeFi 2.0: How This Changes Everything with Paradigm’s Head of Research, Dan Robinson