Overview of Onchain Liquidity Provision - Xin Wan

noon [Music] um so topic is evolution of unchain liquidity provision presenters are my colleague Austin Adams and myself researchers at uniswap labs so I'm second time on the stage now uh quick intro so my name is shin I'm on that side and researcher here used to be at aqr which is a systematic hedge fund uh so I'm Austin Adams I have been the unit swap labs for almost a year and before that I was a researcher at the Federal Reserve in DC so former Trad five baby yep both formal chat by here uh okay so topic today uh Unison V4 which is not the topic today uh the topic today is uh uh basically the history of evolution of unchain liquidity provision going from some failed attempts at the beginning of blockchain development all the way to what we think is some promise in designs in the future so uh four topics first one is what we are observing that launching liquidity provision is getting more and more competitive I'll cover a few examples of where people are finding competition and then Austin who's the main speaker today will cover the rest of the the rest of the speech until liquidities facilitating more utility is increasingly transparent and then some future designs so uh online liquidity provision this is a very controversial topic on Twitter people are complaining that you can no longer deposit money and earn 30 annualized yield guaranteed which you would expect in any Market uh maybe not in this market without a history but uh here's how long-term liquidity has developed into units of V3 so at first uh you have blockchain and nothing on it then you have blockchain with some proposed exchange structure but they did not work specifically you have examples like Oasis ether Delta Etc and what they tried was they tried to replicate what has worked in traffic directly on a blockchain and so if you want to provide liquidity in the market uh you list limit orders and then people would execute against you and if You observe that in real life the market price has changed you then have to pull liquidity which you have to pay gas uh as you know gas price can be as high as tens to hundreds of dollars at once and so if you're just updating your belief but you have to pay twenty dollars for each order no one is going to do that to start with and so that's kind of the first lesson that people learn that on chain Central limit order books uh by just directly replicating does not work uh what did work uh is you know something that user V1 has popularized there's also bancor which I think technically is even before unit swap V1 and the lesson there is custom function market makers as simple as they seem they actually work and the main friction that they have reduced is this need to constantly update your limit order or to to update your kind of belief as reflected in the market uh that lasted a little while until we shift unusual V2 which enabled basically direct trading between any erc20 pairs and that kind of exploded uh in D5 Summer and the takeaway is very consistent with universal V1 uh whatever that reduces friction is a big big Improvement in a constrained environment like on the blockchain where any friction means you know dollars lost so the new thing that's being discussed recently is this increasing in increased competition between LPS specifically there are a couple of LPS who's been earning most of the fees and then there are smaller LPS complaining that you know they're being squeezed by more competitive competitors um which you know in the traditional Finance Market you do see a lot as you see like Citadel and XTX Etc clothes 90 of all the market depths or is counterparty to most of the flow uh and on the other hand like in DFI you are seeing more and more kind of Advantage coming from uh having a large pocket which means rebalance and gas cost means much less of transaction cost to you and then being able to actively manage your position means that you're in range most of the time you're actively participating instead of just giving up opportunity costs uh specifically we have posted a blog post on adjusting time liquidity which is kind of the extreme version of actively managed liquidity and this liquidity usually just supplies liquidity for one particular swap usually a very very large one uh and so you can think of it as kind of a sandwich but the sandwich is really you sandwich liquidity on both sides of a swap and the end result is the swapper actually get better execution and you instead of earning the differential in buying and selling you're earning the fee and you have to hedge your uh your kind of changed exposure somewhere else usually I would bet on finance or something um and this this extreme version of actively managed liquidity requires very sophisticated kind of technical knowledge and also off-chain liquidity sources uh so yeah if you're interested the detailed analysis as as well as some theoretical results are on the uniswell blog and just to show you what I meant by the competition so what I'm showing here is a Time series as demonstrated in the animation so this is like a pool's liquidity going through time the the line that's shifting around is Market mid so as you can imagine as time goes the asset price changes so the pool mid price changes and you can see that liquidity is actively being redeployed around Market mid and some of those spikes that you would see are like extremely concentrated or maybe just in time liquidity that's being put right around where Market mid is and you see sometimes they screw up right like that that tall liquidity is not being taken out so they're kind of wasting money by leaving money they are not doing anything uh okay so hopefully that gives you a direct uh intuition of how competitive the market is I'm going to hand over to Austin now so one of the other things that we've been seeing a lot of is liquidity has been used for more real world utility and applications uh so for you to swap V3 specifically we've seen a growth of LP positions being used as the base layer for new protocols two big examples or the panoptic protocol and the infinity pools who are both providing like options on uniswap assets or they're providing uh leverage on uniswap assets and they use these sort of unusual V3 LP positions as their own sort of like uh what they build on top of and then another super cool interesting like Discovery we've seen is the usage of V3 is like a price Discovery layer so two examples are the paper protocol which does nft lending they use the enoswap pools to find interest rates so they use it as sort of an example of uh like a known very well executed uh smart contract that does execution so they can trust it they don't have to deal with that they just sort of trust that the unit swap V3 protocol works and then they can build on top of it and another one is a squeeth which says leverage each perpetuals by the open team so they using a swap V3 totally and they allow you to sort of get these uh two times levered uh each positions uh just purely on uniswap only using uh unit swap v3s price discovery and another thing we've seen is FX remittances so this is like a piece that we recently put out um in May sorry in uh January and this shows a hypothetical cost of using D5 for FX and doing remittances on it so you can see that remittances are almost like 80 cheaper than they would be on like a traditional bank so what we did is we just sort of got the cost of like doing a transaction and we showed that uh like today FX transactions are a lot cheaper and so if we can bring hits more people and sort of expand it it would be very helpful um for a lot of people around the world who don't have a lot of access to like high quality capital and another interesting thing we wanted to show was like on-chain liquidity has been coming traditionally transparent and there's actually a lot of people who study it so this is a few of our pieces so we did a piece of paper a piece about V2 and V3 fee returns we did a piece about Market depth and then we did a piece about uh like I'm you know swap V3 math primer and this is sort of a few pieces that we've put out to support the ecosystem and support uh understanding of like Dex versus Dex and Dex versus centralized exchanges and uh supporting the crypto ecosystem through like three math primers and things like that we understand V3 math is confusing and it's hard so we sort of want to support people with that and this is a few pieces that other people have done so we're going to shout out some of the people who have pushed forth the uniswap and push Force V3 and we think that uniswap is uh has been a success because of the community and the community has really radar rallied around it so we wanted to shout out some people um so first we have a few pieces that people have seen on Twitter and have sort of been made like big uh splashes and so one of them is this lever paper which is a path independent LP returns which is sort of just an interesting new way to think about LP returns and then we have the markout analysis that's been really popular on Twitter and uh we refer to it as the markout incident and the unislav B3 or the uniswap research team where we sort of came out and we were like this query is wrong and it was not wrong and we were wrong and then we got ratio on Twitter really hard so we appreciate uh those people being very strong and keeping their beliefs not folding so I sort of pushed the ecosystem before it and it helps sort of the unit the whole Community understand how uh we think about uh V3 and then another cool another cool one is uh Doug from Croc Swap and uh Ox FBI femboy which I think is always funny that you have to talk to people like that uh they did some cool pieces on uh you know swap V3 flow and how you can sort of look at who's trading on uniswap what they're trading and how you can sort of build the next generation of protocols to sort of improve liquidity improve LP returns and then finally uh Charlie Marketplace at Flipside did a unit swap V3 uh retrospective according to our permanent loss and sort of put all his uh methodology made it all public and uh so yeah so it was um very helpful for sort of the community and it I was yeah as we really appreciate that and we've also seen a sort of big growth of amm Market structure pieces that have come out so xenophonk labs and panoptic and primitive have done a few pieces on um how amms can evolve into like V4 version and so uh currently they just have been sort of pushing together like pushing what a new version of a protocol could be and what how we could improve it so the Primitive team and panoptic and xenophon have been really great and then finally I wanted to shout out the thought leadership and the teams that we've worked with from Academia so we have like professors from Berkeley and Colombia and Harvard and East Chicago you Calgary and circle and they've been very helpful and they've been really great so you should go look at their pieces because they're uh they're doing some great stuff so and then finally we want to talk about like how we think about on-chain liquidity provision and how the future will be like so first we think it will we think that I there'll be a lot of rethinking of what it means to be an LP um so first there's sort of things like t-wam which is like time weighted average market makers which we think will sort of improve uh it's sort of like t-wop in uh traditional markets and then we have like the mcamm which is the mark uh MAV capturing amm which we think will be beneficial for Mev capturing in the future and then uh like cross chain and an LP position composability means that I I think you'll sort of push forward what it means to be an LP and what you can get out of LP positions and then we've seen a growth of like dark pools and RFQ on uh uh like chat pretty traditional tradify things that have come back from uh Trad fi into D5 so we've seen a growth like dark pools on uh in D5 and we've seen RFQ with like ox and I think one inch also has that and then we think that they'll be more protocol designs for like more cheaper and scalable protocols or for chains so there's like a for specifically like l2s there's mostly there's not really like L2 native uh D5 infrastructure so we think there'll be a big growth of those as well so those are the sort of how we think about the feature of amms and what that will look like so and that's the end of our talk so we appreciate you guys coming out and uh if you have any questions feel free to come talk to us foreign