Compiled & Translated by: TechFlow

Dan Robinson is the GP and Research Director at Paradigm. Over the years, he has devoted a lot of thought to the DeFi market, auctions, and liquidity, with a specific focus on Uniswap and Uniswap V3. Recently, Uniswap Labs released UniswapX, a new Dutch auction mechanism that Dan believes will change the patterns in the fields of DeFi, MEV, and chain interoperability.

The following is a summary of the main points from this conversation, translated and organized by TechFlow:

Host: David, Bankless

Presenter: Dan Robinson, GP and Research Director at Paradigm

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

Video Attribution: Bankless Podcast

Episode: Link

Publication Date: August 3rd

The Importance of Decentralized Trading Research

• Dan mentioned a recent tweet he made on Twitter about Uniswap X. The tweet, presented in a research format, outlines the five main reasons why he believes Uniswap X is changing decentralized trading, MEV, and interoperability.

(TechFlow Note: The tweet includes a link to a whitepaper. Interested readers can click here to view it.)

• Dan emphasized the importance of decentralized trading research, especially in reducing value leakage from the system. He mentioned three main forms of MEV: EIP-559 burning, hedging and rebalancing losses, and price changes before and after a trade.

• Uniswap V4 focuses on reducing the losses suffered by liquidity providers due to arbitrage, while Uniswap X primarily focuses on protecting traders and ensuring they get the best execution price.

• Dan emphasized that the core of decentralized exchange (DEX) research should be the two main participants: swappers and liquidity providers. He believes that research should focus on maximizing the value between these two parties, while reducing the value obtained by other participants such as MEV, arbitrageurs, and the Ethereum protocol itself.

"Intent" Model & Dutch Auction Mechanism

• The core idea of Uniswap X is to shift from specific trading paths to user intents. In traditional trading methods, users choose a specific trading path and then submit the trade. Compared to traditional trading methods, Uniswap X offers greater flexibility and better price execution.

• Dan further discussed the advantages of the "intent" model. In this model, users no longer submit specific trading paths, but rather submit their trade intents. In Uniswap X, users only need to sign an offline message indicating their trade intent, and the entire MEV structure handles this intent, packages it into a trade, and includes it on-chain. The advantage of this approach is that it provides greater flexibility, allowing users to get the best trade price instead of being restricted to a specific trading path.

• The Dutch auction mechanism is a key component of Uniswap X. In a Dutch auction, the price starts from a high point and gradually decreases over time. The advantage of this mechanism is that when the price reaches a point where a buyer considers it a profitable trade, they can immediately purchase it without having to wait for the auction to end, ensuring that users can trade at what they consider the best price.

• Dan mentioned that he frequently uses the Dutch auction in various mechanisms because it is an excellent decentralized price discovery tool.

• Dan also mentioned that Uniswap X opens up a new frontier for exploration. This new design space requires further infrastructure and tools to achieve its maximum efficiency. He mentioned several possible innovations such as batch auctions, circular trades, and encrypted orders.

• Dan continued to discuss the advantages of the "intent" model. This model offers higher flexibility and expressive power, allowing users to define the scope of trades they want, rather than specific trading paths. Since this model is off-chain, the computational cost is zero. This means that a large number of order matches can be conducted without being limited by blockchain computation constraints.

• Dan described MEV (Miner Extractable Value) as a natural force that, although it may lead to certain unfair trading practices, can be used by protocol designers to improve and optimize the trading process if understood and utilized correctly.

• He likened MEV to a group of robots that automatically and intelligently search for trading opportunities that can bring additional benefits to miners. Dan mentioned several possible innovations, such as using sealed batch auctions and encryption technology for trading.

(Deep Tide Note: "Sealed batch auctions" means that within a specific time window, all participants submit their buy and sell orders, but these orders are kept confidential. Only at the end of the auction are all orders revealed and matched and settled according to certain rules. The advantage is that it can prevent certain market manipulation strategies, such as front-running, as participants do not know the orders of others when submitting their own orders. Additionally, by centrally processing all orders within a time window, it can improve market liquidity and efficiency.)

The Importance of Cross-Chain Technology in Uniswap X

• Dan discussed the importance of cross-chain technology in Uniswap X. He believes that cross-chain transactions will be revolutionary. He mentioned the cross-chain exchange functionality that Uniswap X plans to launch later this year.

• He further explained how cross-chain technology works, particularly how assets are moved from one chain to another using cross-chain bridges without the need for intermediary representative assets. (Representative assets: typically referring to creating a token on the target chain that represents the original asset on the source chain.)

• Dan pointed out that certain cross-chain technologies may create representative assets, which could pose a security risk. For example, if you move Ethereum from the main chain to Optimism through cross-chain, you may receive a representative Ethereum instead of the actual Optimism Ethereum.

• He believes it is best to use official cross-chain technologies created specifically for a certain chain, as these cross-chain technologies will create genuine, official assets instead of representative assets.

• Dan predicts that future cross-chain technologies will be more efficient and secure. He believes that cross-chain technologies will become an important part of the cryptocurrency ecosystem because they allow assets to freely flow between different chains.

Innovations of Uniswap V4, Suave's decentralized off-chain solution

• Dan turns to the discussion of Uniswap V4, emphasizing how it benefits liquidity providers. He mentions the background of Uniswap V3 and how it improves capital efficiency. He explains that Uniswap V3 allows liquidity providers to select the price range they want to provide liquidity for, thus enhancing capital efficiency. Uniswap V4 further extends this innovation, allowing for more customization and strategies.

• Dan mentions some possible innovations of Uniswap V4, such as setting initial prices, changing fees, or restricting trades for specific users.

• Dan discusses the profitability of liquidity providers (LPs) in Uniswap V3. He mentions that despite providing higher capital efficiency for LPs, most liquidity providers in the pool are experiencing losses, based on his knowledge. He mentions several possible reasons, including excessive liquidity provision, liquidity providers trying to earn higher returns, and liquidity providers potentially not understanding their true profit and loss situation.

• Dan mentions some possible solutions, such as adjusting fees, utilizing new features of Uniswap V4 to enhance the profitability of liquidity providers, and developing new product functionalities to attract liquidity providers.

• The host mentions the application layer of Uniswap, specifically Infinity Pools, which is a new application that utilizes Uniswap LP tokens as assets. Dan believes that this application could increase demand for Uniswap LP tokens, thereby creating higher returns for liquidity providers.

• Dan introduces Suave, a platform aimed at decentralizing all off-chain infrastructures for decentralized operations that currently require some form of trust.

• Dan emphasizes the importance of Suave, likening it to the significant leap from Bitcoin to Ethereum. Suave provides similar capabilities for off-chain operations, allowing for the execution of complex operations off-chain while maintaining decentralization.

• Suave's emergence provides powerful tools for application developers, allowing them to efficiently and privately execute code off-chain while relying on decentralized guarantees.