Policing PropAMM Shenanigans | Will Warren - 0x | matcha

All right. Oh, it's bright up here. Um, hello everyone. My name is Kate. I will be your MC on the main stage this morning and I've been coming to East Denver since it was at the sports castle.

So, very excited to be here. So, um, up next we have policing prop AMM shenanigans. So, I will pass it off to Will Warren, the co-founder and CEO of Ox Labs.

Thank you.

All right. Happy to be here. We got some exciting stuff to talk about today. Um, before we get into it, just give a quick overview. Going to do a quick background on ZeroX, what we do and why.

We'll talk a little bit about prop AMMs and what they are. And then then we'll get into the shenanigans and we'll share some of our findings uh around prop amms kind of exploiting order flow and and more or less taking money from users. Uh so let's dive in. So why why are we all here? Uh why does any of what we're doing matter uh when it comes to Ethereum?

Uh and really it comes down to tokenization of value. Uh since we started building ZeroX back in 2017, our core thesis has been that all forms of value will be tokenized on public blockchains like Ethereum. So this includes traditional assets like stocks, bonds, currencies, as well as new forms of value that maybe couldn't have been uh expressed or uh traded in the past. Uh but ultimately we believe that tokenization combined with globally accessible markets can help disrupt a flawed global financial system uh and help us chip away at what we call the geographic lottery. So no one controls where they're born and humans are flawed uh depending upon where you grow up can really determine your economic opportunity in life.

And we believe that public blockchains and tokenization can democratize access to markets and financial services in the same way the internet has democratized access to information. So that's what we're about. Uh and how how did we try and push forward towards this vision of of the future? Uh well, we've basically just been building Dex infrastructure on Ethereum since 2017. Uh so we built the first Dex protocol on Ethereum.

Uh we built a system that uses off-chain orders and onchain settlement. Uh back when we were first, you know, starting to work on DEX infrastructure, Ethereum was the only game in town. And uh Ethereum is a very very inefficient decentralized database. Uh [snorts] every single transaction is going to be run by thousands of nodes all across the world. Uh and it's expensive.

And so our philosophy uh when it comes to how a decentralized exchange should be designed, we really think you should only be hitting the blockchain when value is being transferred. Uh and so this idea of off-chain orders with onchain settlement was a way to allow for uh market participants to signal their intent, their pricing to each other without actually hitting the blockchain until a trade is being executed. uh one of the important aspects of 0x protocol was that it was agnostic to any trade execution model. So it was really a primitive uh an order format and you could choose to use this primitive to design a variety of different market mechanisms. So you could have an open order book that for functions sort of like a bulletin board.

You could have a central limit order book. uh you could use these orders to create an an RFQ or request for a quote system. Uh so ultimately we you know believe there's a variety of ways that a decentralized exchange uh can be built and we've tried to not be dogmatic about any particular way being the best. Uh but when we first started we also had to build out a lot of the infrastructure around us on Ethereum. So just to call out a few things that our team has has helped drive.

So, [snorts] wrapped Ethereum, uh, you probably know it, you probably don't like it, but it needed to exist. Uh, our team helped put together wrapped ETH EIP712. If you've ever used intense, uh, you're probably using EIP712. Uh, and then I I, uh, am excited to to talk about it here at East Denver. Uh yeah, we back in 2018 at East Denver uh in the bottom right image here, we actually got the Ethereum community together to kind of help finalize the NFT token standard.

Uh and that that conversation took place right here in East Denver. It was a very exciting time. Uh another kind of nice nostalgia moment for us. Uh so yeah, we also can see kind of our our ZeroX booth here at ETH Denver back in 2018 as well. So, we've been we've been big fans of ETH Denver and we're excited to be back this year.

All right. So, a lot has changed since 2017. Uh we've seen that there are a variety of different ways to build decentralized exchanges and there really isn't a one-sizefits-all. Uh and so, you know, now we built a Zerox swap API. It covers a massive uh and growing ecosystem.

Uh on the EVM, we support 19 different chains, 372 liquidity sources, and over 50 million tokens. And Zerox swap API weaves all of this liquidity together to help you, you know, uh power swaps and and help your users get the best price. Uh and this, yeah, just reflects the massive growth and fragmentation of the space we've been operating in. Uh, and one of the things that we've learned is there's not only a variety of different decentralized exchange models, but really what users, what our customers care about, the people that are building applications, they don't necessarily just care about having the very best price. Things they might consider include, you know, the provider's reputation, security, track record, coverage, speed, reliability, docs, support, SLAs's.

So there's a variety of things that uh app builders really need when they're choosing a swap API. And as the decentralized exchange ecosystem has grown, so has the uh just general ecosystem of apps and builders on top of it. And Zerox is proud to powers swaps in the top crypto apps. Uh we get to work with a lot of the the top crypto companies in the space. And it's something we're we're very proud of and and grateful to to be able to do.

Uh Zerox Swap API has over 500 different uh real app integrators. Uh you know, hundreds of billions of dollars in volume and millions of wallets using our infrastructure every day or Yeah. All right. That's a little bit of context on ZeroX, what we do. Now, let's talk about prop amm.

So prop amms have completely taken over the deck space on Salana. About 90% of all DEX volume on Salana is going through prop amms today and it's about the same percentage of volume going through Dex aggregators on Salana uh that is being routed to prop amms. So these are clearly powerful. Uh and let's dig into what these prop amms actually are. Typically you can think of a prop amm as being just like a liquidity pool that's onchain with a single permissioned liquidity provider and some sort of custom pricing curve and other rules that dictate pricing.

uh it's a prop amm because it is proprietary meaning that the smart contracts are typically closed source and you might need permission to even access the prop amm uh which is very very different from the dex ecosystem that we've grown uh used to. [snorts] So similar to an AMM pool uh for a prop AMM prices live onchain. You can run sophisticated logic. The these prop AMMs can run sophisticated logic that adjusts the pricing strategy uh based on a variety of inputs that you can determine. You can express liquidity programmatically uh just like an AMM.

you can have a a d you know a dynamic price curve uh like RFQ prop AMMs are operated by a sophisticated market maker that's plugged into multiple venues uh also similar to RFQ uh the prop AMM operator is actively providing liquidity so you can't provide passive liquidity with with a prop AMM like you can with some of the kind of older AMMs uh it's something that requires a really sophisticated ated actor to you know determine the pricing uh build the pricing strategy uh logic into the smart contract and yeah I mean the people that are operating prop amms today they're the same exact market makers that are quoting on RFQ systems uh the the reason why a lot of them are choosing to use prop amm is because it allows them to exert a greater degree of control over execution quality And why is that valuable? This is valuable because propm provide these market makers new tools for fighting toxic flow. Uh and so if you're able to limit the amount of toxic flow that is, you know, arbing your prices and and picking you off, you can offer tighter spreads, better prices, and uh yeah, you can really you can really build anything into a prop amm, right? They're they're closed source. We don't necessarily what how all of them work.

But just to give a couple of examples of the types of uh tools or you know functionality you can build into a prop amm to fight toxic flow. Uh you can you know have a price curve that decays over time depending upon how long it's been since the market maker pushed the last price update. So they can provide a really really competitive price and the longer that a user waits to to fill uh that quote or to go and and hit that pool, the worse price they get. Uh there's also a variety of other things you can you can build into prop amms. You can you know essentially they give the the market maker the last look.

uh these prop amms can kind of choose who can have access and who can't which allows them to filter for uninformed flow and kind of uh you know ban the the toxic flow. You can also do things programmatically within these smart contracts like you can have the spreads dynamically adjust to volatility. You can really do anything you want. the the bottom line is that you know market makers instead of having this pricing strategy and logic that lives offchain it essentially lives directly on the blockchain. Uh I think Kyle Simone had a really good analogy uh for prop amms and it was that uh your trading strategy as a market maker it it's like instead of having it uh live in your kind of your local servers your trading strategy is actually being run on NASDAQ.

Uh so your strategy lives at the on the venue uh and and it's pretty powerful. So one thing I want to make really clear before uh you know going into some of the shenanigans we've seen is that propm are a legitimate innovation and they really are quite valuable for market makers. Fighting toxic flow is key to offering good pricing. And so prop amms really are something that's valuable for the space and you know not trying to claim that that they're not but they do create a lot of room for shenanigans or bad actors to take advantage of uh aggregators and users. All right.

So just a little bit of a little bit more context about propm. why did they first emerge on Salana and uh yeah what what is what was kind of the the reason why Salana was the the first place for them to gain a lot of traction and and it's basically because it's super cheap to push price updates to pre to to push oracle updates to the prop amm on chain so uh on Salana it's about a thousand times cheaper to uh you know update the prices or the price curve within your prop amm than it is for a user to go go and execute a swap on chain. And what this means is that prop amms the operators can just continuously hammer the chain updating their prices. Uh and on Salana blocks are built continuously. They're over kind of 40 millisecond shreds.

And so what this means is that these prop amms can extremely frequently update their pricing and keep it super fresh. Uh and there are some maybe negative externalities of of uh this. So uh Oracle updates for prop amms represent around 20% of all Salana transactions. These prop amms are hammering the Salana blockchain. On average around 175 transactions per second are going through the network to just to update these prop amm.

And during periods of market volatility, these numbers can climb into the thousands of transactions per second just to update prices, not to actually execute swaps. Uh and yeah, in this here, you kind of see uh the different prop amms kind of continuously optimizing their programs to be more and more gas efficient uh so that they can update their prices more uh more rapidly at lower cost. All right. So prop AMMs broke out on Salana. They've completely taken over the space and we haven't really seen too many prop AMMs in EVM land until mid2025.

So in mid 2025 the base network introduced flashbox flash blocks and what this did is it took their two second blocks chop them into 200 millisecond flash blocks essentially that leverage preconfirmations. So they can guarantee inclusion of a transaction within uh you know a position within the block and combining this with priority fee sequencing on base uh and with really really inexpensive transaction fees. This allowed market makers to hammer the chain with price oracle updates and it gave these market makers a great deal of degree of control over uh transaction placement within the block. And so yeah, we saw the first prop amm show up on base pretty soon after flash blocks landed, so around November. And uh 0x swap API.

Today we we currently integrate around five prop AMMs on base uh with five more on the way. and they currently drive around 40 to 50% of Zerox swap API volume on base. Uh this prop amms are are a big deal like even these very you know early niche prop amms that are just starting to merge one of them has driven over a billion dollars in trading volume through zero swap API over the last few months. So we're talking about very large numbers. All right.

So we've we've talked a little bit about what are prop amms, why did they emerge on Salana and and why are they now starting to uh come to EVM land with flash blocks. And now now we'll talk about the some of the fun stuff. So just for context, my goal here is to give you intuition for some of the things our team has seen. uh we'll be sharing more detailed explanations uh in our blog in the coming weeks uh where we'll give a lot more depth in detail. Um but I really wanted to share some of my teammates work.

Uh shout out Robert and Duncan. Uh because yeah, we've we've seen a variety of of really questionable activities in propm land. uh but one in particular we'll focus on in this presentation and this flavor of shenanigans we're calling aggregator spoofing via flash blocks. It's pretty straightforward. Uh if you look here uh let's say this is a a base block here uh two second base block chopped into 10 200 millisecond flash blocks and what we see is that uh well router dex aggregators generally they route on the end of the most recent block.

So they look at the chain state at the end of the most recent block they build their route based on that chain state. And what we've seen is that prop amm publishes, you know, prop amm operators, what they'll do is they'll publish an incredible price right in the last flash block. And so right when a snapshot is being taken by a DEX aggregator and they're building a route, deciding where to route liquidity, the prop amm shows up with an incredible price. And in the very next block, in the very first flash block, what the prop ammo will do is post an extremely bad price, a really terrible price. And through the entire rest of the block, through the first nine flash blocks, if you fill, you're going to be filling at a very bad price.

And if for some reason you're able to kind of sneak in behind uh you know, the the update in the the last flash block, maybe maybe you'll get a good price. But almost [snorts] 100% of the time you're going to get a bad price. Uh so yeah, you know, market makers or excuse me, prop AMM operators, they can modify the price anywhere within the slippage limit that the user places on the on the front end and it'll look valid to the DEX aggregator, but it's super predatory. absolutely uh spoofing aggregators in order to try and steal order flow. So, we've seen a couple of we we've seen two prop [clears throat] AMMs doing some things that are questionable or actually they're not questionable, they're just straight up not okay.

Um and yeah, you know, Zerox, we have loved doing empirical research into execution quality for years. uh we back in 2022 talked about the concept of slippage exhaustion and we've looked at trade execution for a variety of different dex models. So we love trade execution. This is the stuff we live and breathe. Uh and so when we saw that prop amms were getting up to questionable activity, we immediately saw it and acted on it.

So before kind of explaining or kind of showing a deeper dive into the prop amm uh spoofing uh just going to kind of explain how bad this is uh at a high level. So what we did is we looked at a prop AMM on a single trading pair. And what we did is we would just sample prices and and kind of simulate trades uh every 1 hour. Uh and we would compare the prop AMM prices at the top of the block, at the middle of the block, and at the bottom of the block. And we would also capture a reference price.

So we would look at the most liquid pool uh the most liquid individual pool that is competing with the prop amm. And what we found is that prop amm number one was executing trades at three basis points less than just a single reference AMM pool. So no DEX aggregation, no nothing like that. It's just a single pool sitting on chain. We're using that as a reference.

And the prop amm executed three basis points worse on average. And we saw slippage up to 10 basis points. For prop AMM number two, we saw an average of six basis points worse than the reference AMM. And that maxed out at 40 basis points of slippage. These might seem like really small numbers, but in the world of DEX aggregation, this is insane.

A single basis point can be the entire universe. And when we consider that there are billions of tra dollars of trading volume moving through uh these prop AMMs and and the other liquidity sources that sit alongside them, then the dollar value really adds up. All right, getting close on time here, so I'm going to really quickly run through the juicy bits. So what we did is we uh simulated prop amm fills at different positions within a block uh as as well as across sequential blocks and we measured the price deviation between these different fills. And we looked for uh degradation and execution quality that really can't be explained by volatility.

And so on the top chart here for prop amm number one, what we saw is that the prices offered by the prop amm between sequential blocks averaged about 4.47 basis points. So prices were drifting about a half a basis point on average. And when we looked at the price variance intrablock, so what are the prices offered by the prop amm uh at different points within a single block, we saw that the price variance was around five times higher. There is no world where it makes sense for intra block price variance to be larger than the sequential block price variance.

It doesn't make sense. Uh there's clearly something fishy going on here. We did we we found similar uh activity with prop amn number two did the same thing. We compared prices across sequential blocks. On average prices would drift maybe 1.

23 basis points. But if we compared prices within a single block uh the prop amm price variance was 8.62 bit. So seven times higher. Really funky.

Clearly there's something fishy going on here. And so why do we call this aggregator spoofing? Uh it's because of this plot right here. Uh essentially what we did by comparing the top of block price offered by the prop amm and comparing it to the reference AMM, we saw that prop amm would bait dex aggregators by quoting 100% of the time their their quote was better than the reference AMM. So here uh the the pink time series shows uh prop amm price minus reference amm price at the top of the block.

And yeah, you can see that every single time the prop amm's price slightly better. But when we compared the middle of block uh execution against the reference AMM, the equation flipped and what we saw is just massive massive slippage uh occurring at the period of time when an actual user would be executing their trade. And so what this shows is the bait and the switch. At the time that an aggregator is building a route and comparing all the different liquidity sources, uh they show an extremely attractive price. But when you're actually going and trying to execute a trade, they're going to frontr run you.

They're going to, you know, post a really terrible price before anyone else can get in front of them. And you'll end up exe the the aggregator will end up executing through them at a at a really bad price. So this uh this is bad. It's very bad. It it is stealing.

Um and why why does it persist? It it's really because there's a prisoners dilemma in in the DEX space. uh both for individual liquidity sources that are competing as well as JEX aggregators that that are competing. So if if one a aggregator tolerates predatory sources uh they can show users better quotes they can win more order flow uh and the competition faces a choice. They can either uh lose out a ton of order flow to the dishonest actor or they can tolerate these types of shenanigans themselves.

So either all aggregators police bad prop AMMs or the one that tolerates this dishonesty ends up winning. Uh so policing this you know policing this type of stuff is good and necessary for our industry. uh we are starting to see some of the largest institutions in the world be you know come on chchain and start to want to be more involved in onchain markets and they're not going to they're they're not going to tolerate this this type of crap uh and unfortunately what we've seen on Salana is that the larger players they're they're not trying to attack this problem at all uh they're allowing you know dishonest quotes from you know questionable prop amms to allow them to offer better quoted and and they're really not trying to police it at all, unfortunately. Um, but we're not taking that approach. Uh, at 0x, we monitor execution quality.

We identify and confront exploitative uh behavior. Uh, as the largest DEX aggregator on base, we cut off liquidity sources until shenanigans are remedied, even if it makes our quotes appear less competitive. uh and we also work with certain prop AMMs that are seeing their their competition do things that are questionable or dishonest. So ultimately we want to create an environment where there is room for fair competition uh where there is market integrity and ultimately where our customers can trust the prices that are being quoted to them. Uh thank you all.

That was a lot of material to cover quickly. Uh and that's it for now. Thank you.

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