Can Aerodrome Become Ethereum’s Dominant Spot Exchange? | Alexander Cutler

Transcript

Nothing said on Xerox Research is a recommendation to buy or sell securities or tokens. Hey all, welcome back to another episode of Zerox Research, joined today by Alex Cutler, the CEO of Dromos and core contributor to Aerodrome and Veladrome. It's been a while since we've had you on the show, Alex. Um, a lot of things have changed, but also a lot of upgrades on the time horizon to to be excited about. So, how are you doing today?

>> Doing well. And yeah, thanks so much uh for having me and and yeah, lots of exciting stuff to talk about today, I'm sure. >> Yeah, absolutely. Perhaps one that's top of mind for me and for you as well, is the coming uh Metadex 03 upgrade. um you've described this as you know perhaps one of the most ambitious and and significant upgrades in the protocol's history. So curious at a high level if if you could talk us through all the different line items that are being bundled into this upgrade.

>> Yeah. Uh yeah thanks for the question. Um yeah this is a really exciting time for us. You know, we got started about four years ago when we launched uh Veladrome on optimism and the foundation of that was our Dexos uh metadex01. Um we found significant traction, right? We knew the model worked uh very very well. But our big upgrade came about two years later with uh Metadex02 and the launch of Aerad Drrome. Um and if you kind of look at the charts of uh DEX market share right that is when um Belladrome and Aerodrome became the dominant dexes on their given ecosystems

uh capturing you know more volume uh than even some of the largest multibillion dollar incumbents and really dominating these ecosystems. So with metadex03 what we are doing is taking um what I think has proven to be uh you know the most efficient um dex model and dexos uh currently on the market and we are giving it a substantial upgrade um which I'll speak to some of the details of here in a moment but importantly uh we are expanding it um across EVM so not only will aerodrome and drrome be coming together into a single exchange united around a single token. Uh but we are

expanding the all new era built on Metadexo3 to the birthplace of DeFi, right? And still the most vibrant um DeFi ecosystem and DEX ecosystem in mainet Ethereum and very importantly we're going to be on uh circle arc on day one as well. But our intention is very much to be the definitive onchain spot exchange uh across all of EVM. So if we want to talk about some of the really exciting things that are coming in uh the all new Arrow and Metadex03 uh we're making some significant um economic upgrades. Uh we have the rev engine which is allowing us to

internalize additional revenue streams like me capture u crosschain bridge fees right and direct that value right back to the token. Um and then we have the air engine which allows uh our token emissions and this is how we incentivize and attract liquidity providers to be more dynamic and responsive and to bring down the overall rate at which uh you know the token emits or align that emissions rate directly to the productivity of the pool. So if that's uh you know too in the weeds for anybody listening, you can just think of it as more value is coming in and less value is coming out of our of our system. And this is a system that is already the most efficient. Um you know we have done

more revenue in the last uh 6 months than any other uh exchange. Um and that's both an absolute terms and relative to emissions and this will just supercharge I think this already core competitive advantage. Um we've got our new AMM in slipstream v3 and uh that's bringing things like uh institutional grade uh uh pools uh you know plugging into different verification stacks and things like that. But importantly the all new mev auction which is I think something that you'll want to get into here as well. We've got an entirely new crosschain um system um the core of which is MetaSwaps which is the first combined crosschain swapper bridge and

uh aggregator allin-one product. So uh very simply you know you don't need to worry about bridging anymore. You don't need to worry about what token is on what network. It's just one single unified interface. Um and you don't even need to worry about having gas on the destination chain. Right? We want to abstract away what has become this sort of fractured experience across networks and just uh give every trader access to the best most efficient pools anywhere on chain. Um and there's a bunch of other things in there. I mean we we've basically revisited every part of the stack and taken the best model and uh made it even better. But we're very excited because we think we've shown right in our dominance on uh optimism

and our dominance on base that you know we've got a model that has a right to win and we think there's a tremendous opportunity um to uh grow the total addressable market by going to chains like ARC and going to chains like mainet uh Ethereum and you know we very much want to do for spot markets what Hyperlid did you know for uh derivative markets. We want to be that single exchange that redistributes 100% of its value, you know, back to the users of its token and use that sort of maximum value distribution to be the dominant player because I think with the wave of tokenization and everything that's coming, um spot exchanges will continue

to be the most some of the most critical onchain infrastructure that exists. >> Fantastic. a lot of very exciting things um all all bundled into one big upgrade. Um perhaps touching on the multi-chain expansion uh yesterday circles arc announced plan mainet launch for September 16th with a drrome named as a day one partner. Um kind of my read looking at uh the blockchain space right now is perhaps there might be like an overupp of block space and you know new new issuers and entrance and suppliers of block space. It's it's kind of a crowded market. So I'm curious from your

perspective what are you most excited about as the new unique opportunities that circles arc will host for you all? >> Yeah I mean that's a great question. Um and you nailed it right. Uh we have just gone through a period of you know two to three years where every other day you had some sort of new chain launching creating more and more block space. Um but it did not seem like the issue for chains you know at least since you know the old one sort of explosion uh happened and certainly since the uh layer 2 Ethereum explosion happened the issue was not lack of block space right

the issue is what is that block space being used for um so our thesis has always been that um uh there will be a degree of consolidation right within chains right and especially consolidation within any chains that you can describe as their fundamental value proposition as being a generalized type chain. Right? What we saw in the layer 2 expansion was, you know, basically copy paste of the same type of ecosystem that you've seen on Ethereum over and over again, right? You need a DEX, you need a lending protocol. Um, you need uh uh perh tokens incentivizing liquidity to build a certain amount of infrastructure. But

fundamentally there's nothing that differentiates you. There's no reason for that activity to maintain once the incentives end. So we bet early on base for instance because we thought that Bass had a reason to exist that was differentiated uh from the broader landscape right and that was Bass's vision of building a vertically integrated um uh ecosystem from Coinbase their core product down through the onchain economy. um they could attract builders, they could build activity by basically turning themselves into the distribution vehicle for onchain products. And you know, I think that thesis has played out really well,

right? You've got a Bitcoin uh lending product on Coinbase.com today, right? That is just Morpho u base under the hood. Uh today, any token that launches on a drone trades instantly on Coinbase.com, right? we have access to millions and millions of users and uh that gives you a reason to build on base and that creates of course a growth flywheel and a flywheel of sustaining and enduring activity. So when we look at this uh next wave of of change you know we are looking for similar types of uh clear value propositions. I think when we look at circle it is a few things. Um one is obviously uh circle is one of

like Coinbase is one of the most significant right traditional companies that is building in crypto and they're also one of the uh most institutional aligned companies uh building within crypto and so I think you know when you hear them talk about the vision for ARC they talk about it as a place in which they are they are going to be able to bring in and onboard institutional partners and uh new types of assets and RWAs uh and these are the types of institutional partners that even Ethereum might be a bit too much of a uh while out there proposition and uh they're going to bring them onto uh ARC um they're going to help them to

bootstrap access and then they will be a bridge because they are fundamentally still EVM compatible uh between those folks and like the broader onchain economy. So like one of the areas that we're very excited about uh specifically is uh FX on on ARC. So uh Aeromerum today of course um uh you know many weeks this year right we've done more FX volume than every other decentralized exchange combined on every chain combined. Um and we see FX as a major growth area. And I think the big issue in scaling FX onchain uh has been the quality of of uh the representations of

the underlying assets, right? Uh ERC USDC is an incredible pair and that is getting actual organic uh usage that is getting payments rails plugged into it. Um, you know, we can give better execution today on Aerad Drrome than you can get on Wise and certainly far better execution between those two assets that you could get via your bank who's going to take multiple percentage points of fees to convert between those things. And uh, this is one area that I know that they're going to be very focused on and they're going to want to build a robust FX economy on uh, ARC. And I think they're going to be able to work with the issuers um to bring, you know, versions of those assets that are much

more um uh easy to work with and then allow the network effects to grow. Um because of course the more of these you have, the more of a true FX market you have and your ability to move between all the different assets and then the more uh composability with lending markets and things like that to build really advanced um hedging strategies and all of that sort of stuff. So, um, that's where we think, you know, Circle's going to be differentiated. We think they're going to onboard a a set of, uh, institutional players that others won't and they're going to be able to build a robust ecosystem, um, of things that I think have been very difficult to build, um, uh, in other ecosystems. Yeah.

>> Yeah. Absolutely. So the proximity to institutions and the distribution that they can bring coupled with uh the quality of assets they could issue is really big value ad for for aerodrome deploying there. Case in point is just the the success you've all had with uh the Coinbase base and Aeradrome partnership. >> Yeah. >> Then another exciting one is the Ethereum mainet deployment. um perhaps it's a more established uh onchain financial system with um some incumbents there as well. So I'm curious what you see as um Aerodrome's technical edge or or wedge to win market share against

incumbents on an Ethereum mainet deployment. Yeah, you know, it's it's super interesting because um I think a lot of people forget that uh Veladrome and Aerodrome were not first in their ecosystems. um uh Veladrome launched and you know unis swap and curve you know had been on optimism mainet and I can't remember if balancer came later or if they were already in the mix but uh these were wellestablished um uh exchanges and uh these are exchanges you know valued at multi-billions you know with some of the u most powerful sort of uh supporters

uh who have an interest in in seeing their ongoing dominance. Um, who were we? We were just like, you know, five guys, uh, almost all anons, you know, who met in a discord, um, didn't raise any capital, um, and thought that we had a model, uh, that could win and disrupt even uh, the biggest, most well- entrenched uh, incumbents. [clears throat] And so it was, by the way, the same on base. We were not first there. Uh, we we were quite a bit late. um uh for that launch. But if you watch the progression uh from each launch of Veladrome and Aerodrome, you can see the way in which we just take more and more share and then we establish ourselves as

number one. And that is a position that those dexes once they pay them, they never lose. So how do we do that? Well, it's actually I think quite simple. I mean we have a ton of things, a very efficient AMM. We've got an incredible economic model. Uh we focus a lot on incentive alignment uh between the three critical groups of traders, liquidity providers, and token holders. But if you want just the like rawest argument of it, uh dexes depend on one thing, liquidity providers. If there isn't a party that is willing to take two assets, pair them against one another on your exchange, take on the risk of doing that because it is a risk activity. you

know, you are um risking potential losses as the two assets change in price. There's also an opportunity cost of that capital and things like that. Um liquidity providers demand just one thing. I want the best reward in exchange for that service. Um and if you do not give them the best reward, they are highly mercenary group. They will go to any exchange that does uh better. So, how did we win against these like massive players and and eat away share and become, you know, the second or third largest decks in the world? Um, uh, you know, without any any VC funding or anything like that, we can just pay liquidity providers better. Um, and how

we do that is that we wrap the full um, current and future value and revenue that the DEX produces in the form of the token. Right? you can take Arrow uh lock it and earn 100% of the exchanges revenue um at any given time. And that means when we give out Arrow to a liquidity provider, we are giving you a claim on that collective value. And by the way, that collective value isn't just swap fees. Um it's liquidity payments uh or incentives. It's launch payments and and incentives. So it represents a justified sort of premium over swap fees alone. So if you're a liquidity provider and a venue is offering you a dollar and another venue

is offering you a buck 50 where are you going to park your liquidity right and what is the flywheel effect that carries right more liquidity providers come in so you've got deeper liquidity so you are now attracting even more volume which is creating even more fees which is driving even more value back to the token which is now being given out to the liquidity providers themselves. And so uh this is fundamentally how we've gained share. This is why even as we've had some very fierce competitors, they they've struggled to push back. And uh this is what we will bring to Ethereum mainet. And I think um the best analogy to think about here is and and one that's guided our strategy from the very

beginning. Um for anyone who's been in DeFi for a moment, you probably remember the sushi swap vampire attack, right? This is one of those quintessential exciting moments. Um, uh, Sushi Swap, all they did was offered LPS a premium to what they could earn on Uniswap and within one week, uh, you know, unis swap had lost 50% of its TPL. Um, and so you can look at the Sushi Swap vampire attack. You can look at how we gain share on optimism. You can look at how we uh gain share and maintain share right on uh base and I think you can graph that very easily onto mainet

Ethereum and I think you could have a belief that we are going to replicate the same playbook even if it wasn't paired with you know one of the biggest upgrades to our underlying model um that we've done to date. Yeah, there's lots of great research already on the uh impermanent loss and loss versus rebalancing that legacy pool LPS might be eating on classical pool types. So, you can offer those L LPS higher expected value liquidity migrates that liquidity begets more volume.

There's a pretty clear wedge there for for winning market share. Um >> yeah and and you know I think philosophically this is one area that differentiates us from some of our competitors. Um, I think focusing and building the DEX and the economic model at the same time with the goal of focusing just on ensuring that we are always the venue that will reward liquidity providers the highest um is is a big part of our edge, right? And uh we are now seeing right in in some of these competitive dexes that they have to actually decrease or pull away the amount of value that is flowing to liquidity providers. So, you know,

across uh UNIV v2 and UNIV v3 now um you know it's like up to 25% of the fees a liquidity provider is is earning might be redirected back to uh Uniurn. So, uh we can certainly offer you more than 75 cents on the dollar. Um and you know we are just now seeing the impact of the uh progression of the fee switch across UNI v4 and you know we shared some uh data the other day that showed like on the USDC and USDT pool on uh on base on UNIV4 this tax that they have put on the flows that are coming in resulted in like a 70% drop off in the amount of flows flowing through that pool which is

of course 70% drop off in the fees. And where did those flows go? Right over to Aerodrome. And so I think um we've been competitive against a model that was redistributing 100% of its fees um for a very long time. And I think we will be even more competitive against a model that's like sharing 75 cents on the dollar. >> Yeah. So you you really need to see proper incentive alignment across the whole life cycle of a swap from traders to the LP to the token holders for it to be a viable implementation.

>> Exactly. >> Um on this point I guess you said previously and perhaps in other podcasts that 100% value redistribution is like the only sustainable moat in onchain finance. So, I'm curious how you might frame the the trade-offs or tensions between value redistribution, buybacks, or perhaps reinvesting in growth. >> Yeah. Yeah. So, you know, it's funny. We've been saying this for years, right? And I think we have been like living breathing proof of a validation of the thesis, right? to the degree to which um we have been able to uh gain and maintain

absolutely dominant share in the ecosystems in which we compete against uh almost any other venue. Uh but I think you know people still uh maybe assumed that you know that there was a fluke here right but I think the other example right where this idea is I think now far more mainstream than it used to be is the fact that uh hyperlquid for a long long time you know was just one of many um you know derivative exchanges competing for share you know we had GMX DYDX um Hyperlid many other players in the mix and one of the things that they did right which I think is uh one of the most powerful things that that has

allowed them to become almost the the definitive venue um uh in its category is they distribute I think 97% or so of all the value captured um by the exchange back to the token and that does create um incentive alignment and things like that they also forewent like us uh any sort of VC funding um or any of the the ways in which people traditionally do these types of things. Um so I do think it's it's we've got living proof now us hyperlquid that uh if you aren't redistributing value maximally um you're going to have struggle you're going to struggle to compete against somebody who is. But in terms of the tensions right between

uh buybacks and uh you know taking that money giving it to a team who may in theory reinvest in the growth of the protocol. I think the history of crypto is they won't they'll reinvest it in growth of maybe their own personal [laughter] life and uh you know slowly exit the stage uh later uh and something like uh revenue distribution. Um, in our model, uh, there is no tension here because we're not buying back and burning the token. Um, or at least that's not the the primary mechanism of value redistribution. We do buybacks and locking, but we buy back and lock because the token represents a claim on these revenues and these revenues are

passed through the system in the form that they acrew. So uh we are incentivized to use the revenue that that we make through using the token to uh fund the continued growth of the protocol. So we can both distribute 100% of it. Um we have no more or less claim to that share of the pie as um you know a DGEN who farmed their arrow position as you know somebody like Coinbase Ventures who went on the market and they bought uh what was at that point and may still hold the record for their largest liquid investment in their in their history and they locked those tokens and they participate each week. Um, we get to take the the revenue that our

position produces and we are incentivized to reinvest it if course in the growth of the protocol into things like a massive upgrade into things like a cross-chain expansion into uh growing our uh share and that is by the way the exact same incentive structure that Coinbase has, right? When they are um uh looking at issuing new products on chain um you know where are they going to do it? Well, they're probably going to do it on the venue in which they control a giant economic lever and they get a cut of the activity that they help to create. And same thing for token issuers um and just for your your run-of-the-mill uh dgens.

>> Yeah. And we've been seeing it play out over the past year where the market is just increasingly self- selecting and sorting uh for the projects that that do maximally align value accretion with the token. So >> yeah, and and by the way, you know, when we talk about this as being the only um competitive moat, I think we're not just even talking about uh in the context of those of us who are fighting for share of particular verticals in the onchain economy. We think this is the onchain economies moat against traditional systems. Traditional systems are the ones in which uh you know since the invention of the firm uh new

technologies, new efficiencies, all these things increase the amount of value that a firm or a platform uh can capture. But uh that additional value rarely gets redistributed through. gets to a a sort of selected share of of insiders and executives and it just leads to these sort of very bloated complex things and you know the this is like you know when you see the drifting of the the gap between the halves and the have nots you know I think it's all related to these types of things so for those of us who are building onchain systems I think our intention has to be to build something better not just recreate um inefficient firms on chain

not to issue like assets that you know look worse than any traditional asset you could uh uh access in a traditional market. We have to build things that are better and things that would not be possible to be built um outside of onchain systems and that's how we beat Trady and we bring uh the world and all that capital onchain and I also think that is what the winning products onchain will do and we'll win share because fundamentally every bit of margin that's extracted is is a bounty. It's an opportunity for somebody to come in and give a better offer. Um and so that's why we are so focused on this as uh our our core competitive mode.

>> Yeah. So the the incentive alignment isn't just a wedge against competitors, but it it's a wedge that crypto instruments can offer against legacy incumbents. So it's a it's a much bigger vision there. um that I certainly love. >> Um perhaps picking into one of the more uh nerdy components of the Metadex 03 upgrade is uh the MEV capture solution. >> So you know historically mess uh it's a difficult problem to solve. Um, so I'm curious to hear how uh you all are going about, you know, me mechanistically implementing a solution to this and also just how big of a line item you think it

could be for arrow holders in in terms of um the value it captures. >> Yeah. Um I mean starting at the top uh you know when we looked at this last year you know hundreds of millions of dollars are are spent and captured um around [snorts] ME across uh different different chains. So it is it is a massive addressable market um for anybody to uh tap into. Um so how do we do it? Well, first let's just talk about, you know, what MEV is at its simplest form, right? You know, you've got uh uh two tokens paired in a pool and you're the liquidity provider.

You're taking on that that risk. Um and of course, you want to be rewarded maximally for the service. uh there's a dislocation between the price in the AMM uh that you are a part of and a centralized exchange or maybe another pool you know in the onchain uh economy somewhere and so somebody wants to come in and get to the front of the line to capture that this location of value and the delta between you know the price in that pool and the price in that other venue and so you can basically uh arbitrage the two and make a uh a hefty amount of money. And so you pay the sequencer right now generally auctions

at that level like a priority fee to jump the line. I want to be first in here. I want to grab that value. I want to get out. Um and that is a very good business right for the sequencers um than themselves. uh but paradigm wrote a paper um I think this is now like two three years ago where they basically described uh that you know this is a little bit of this is a little bit off right because if fundamentally uh the value is actually being given out by the liquidity provider um uh you know there's a degree of value being pulled out of them um each time shouldn't the uh bidding war and the value being

created about around this. Shouldn't some of that value go back to rewarding and compensating the liquidity provider for that um risk and for the value that is um in theory being uh extracted from them. And the answer is actually I think very very simple to uh understand um what an AMM can do with dynamic fees right and we've got an amazing dynamic fee module um in slipstream v2 today that can react to different volatility conditions top of block trades and things like that to ensure that we are balancing uh the rewards for liquidity providers in all these different types of trading environments. Um but what you can do with that dynamic fee module is

it can detect um at the chain level that priority fee auction um on the underlying chain. So you know basically how much how aggressively somebody is going to be bidding uh to jump to the front of the line. And in doing so, you can then raise fees dynamically and proportionally to that onchain signal to ensure that um some of the value that is being created or the the overall like auction value is being redistributed back into the system that is rewarding the liquidity providers uh to be there.

So this is I think a very very elegant uh uh solution. Um and really we see it as one that it isn't harming any any particular player in in this uh system. It is just balancing the flows of value now across the chain across the liquidity provider and the trader itself. And in doing so, I think you get second order effects of even deeper liquidity um because they're being rewarded better, which means even more arbitrage opportunities and all of these types of things. Um if it's all just value being sucked away from the pool itself, it can create sort of a negative effect. And this is a way

of um really I think growing the pie between all and aligning the incentives between all a bit better. exciting stuff. So, I guess would you expect the um the the searchers or the MEV boss to be the the primary impacted parties while uh while the rest uh reap the benefits? >> Yeah. I mean, I think um I think you could see it not as necessarily disrupting them because if if they're going to say, "Hey, you know, I think I can make a $100 on this arbitrage trade and uh I'm going to bid $10 uh to the sequencer to get to the front of the

line uh to capture this." If there's now kind of two simultaneous auctions going on, um then uh the market will calibrate to both of those auctions and they'll still probably pay in uh something like $10, but maybe now 20% of it is going over to the AMM and and the rest is going to the sequencer. Um and so in that way like uh I think it will feel very similar for the searchers and for the arbitrage folks but they will have the benefit hopefully of um growing opportunities for this because the liquidity now is being better supported and growing and such that there are even

more and larger like uh arbitrage opportunities over time. Um so yeah that's how we would see it. >> Interesting. So, zooming out a little bit, looking at the onchain financial system, uh we're we're in the depths of a very classic bare market right now. Tokens are down and to the right, people are less interested in trading cryptonnative assets. But at the same time, what we see for spot volume on RWAS, be it equities indices commodities um in addition to perpetual futures volumes on RWAs, those are compounding at incredibly fast rate and are making new all-time highs on a month- over-month

basis. So I'm curious what you see as the opportunity in RWAs then particularly um how how aerodrome can fit into that that picture. Um, yeah. So, I think it's like it's a massive opportunity. Um, and I like to frame it as this, like I am not surprised that trading volumes on digital assets, you know, are at some of the lowest, you know, they've ever been. Um, and why is that? Well, we don't really have a lot of very good tokens, right? um you know it's been years and years of of kind of extractive

you know lowflat high FDV or or sort of um you know uh scams and things like that or basically you know assets that outside of trading narratives and outside of just looking to capture edge if you're in a particular group right these aren't really good assets to trade so I think it's more remarkable that we were seeing types of volumes um onchain trading these assets that we have historically than it is that they have seemingly quickly run to zero. Um and so I mean one I think we're already seeing a shift here right that there are increasing numbers of uh high quality digital assets that are being issued

onchain and you know that goes to things like the revenue distribution. Uh you know these things are actually uh they have utility. It's not just like a you you can go to a snapshot vote and and make your voice heard kind of thing while the VCs uh sell on you and all of that sort of stuff. So I think we will continue to see growth of really amazing digital assets, but I think you'll see a ton of consolidation because when we looked last year, it was still like 90% of the tokens in the top 100 didn't redistribute any value at all. And I think we'll see increasing consolidation like we did around hype uh for tokens that do actually represent um something that uh people would see as valuable in

a traditional investor sort of um uh mindset. But what's so exciting about RWAs tokenized equities uh currencies uh you know FX trading coming on chain all this sort of stuff is that fundamentally what we offer on chain is better infrastructure. uh for facilitating uh global access to these things, 24/7 real-time markets, uh permissionless and composable uh infrastructure that allows unlocking of new and interesting primitives and things like that. And so if you bring these traditional assets onchain and you give them what is just better infrastructure to run on, I think

you will see these things representing a larger and larger share of the overall onchain economy. And by the way, like things like um equities and things like uh currencies, some of these things are counteryclical, right? uh this is activity that if you bring onchain and it is flowing through spot exchanges um you're seeing a type of activity that won't follow you the four-year cycle that will continue to sustain value into these onchain systems in new ways. So we're really excited because uh Coinbase of course announced their own version of tokenized equities and we think uh from what we've seen this is the definitive version of them. I mean it's it's uh

what uh they did like with uh CBBTC but now applied to um uh equities and uh we we are excited for the launch. you know, I think Jesse said yesterday they're very close, maybe weeks away. Um, and so we will see, I think, a chance to continue to grow usage of those, adoption of those on chain. And basically, our hope would be just as we are the definitive venue for trading the top digital asset in Bitcoin today. Um, doing more volume than every other DEX, every other chain combined. We are the top venue most most weeks, right? 40 to 60% on onchain FX volume. We want to be the number one onchain venue for for

tokenized uh stocks because we think that these will be a major growth area and that there's no way that you can win um onchain spot exchange markets without dominating in the biggest growth verticals uh that we're calling out here. >> Yeah. Um I'm also curious to hear about how you think of the role of AMM liquidity specifically for uh tokenized RWAS um particularly compared to um something like prop AMMs order books RFQ style.

What we've seen on Salana so far is perhaps the prop AMMs can quote the best top of book but then the AMM still play a pretty large role in resting deep liquidity. So I'm curious how you think about the the more nerdy technical trade-offs there and >> market structure. >> Yeah it's a great question. I mean I think if we look at like the RFQ side of things like like these are uh very much synergistic right in the sense of uh AMMs will continue to be a source at which any sort of like RFQ is either you know accessing or in the end is going to be balanced against uh what whatever is happening um within those systems. Um, you know, centralized order books have

existed for, you know, a very long time. Um, they continue to to be huge. But, um, what we're seeing is a, uh, continuous, uh, erosion of share from centralized exchanges and centralized order books and towards decentralized ones. So, I think we know uh, where the puck is going on that side of things. And I think if you had any degree of skepticism, you can just look at the fact that centralized exchanges are increasingly shifting to distributing the permissionless pools and permissionless infrastructure of decentralized exchanges like aerrome. Um the propm side is very interesting. um you know and if you know you're not

familiar you know it's it's kind of a uh you know private book and they're going to keep that price the exact same between you know something like a Binance and the underlying AMM and as of right now they have found success uh you're correct in in one ecosystem in in Salana um and I think there are some very specific things about the nature of Salana that have helped them to to gain that uh type of uh foothold there, but it's still primarily just around, you know, a handful of the the most um blue chip types of assets. And then we have seen in uh big uh you know, kind of black swan market events uh a phenomenon which will I think forever cap their

ability to dominate things which is all the liquidity on those platforms disappears the minute it is absolutely needed. And you think about onchain systems that depend on an ability to price assets, access liquidity, um balance all of that. Uh they cannot uh rely on a system whereby you know that liquidity can't be visibly observed. It's going to be there in real time and all that sort of stuff. And I think the other big issue of course that they um are going to face and I think we we've seen face is uh many voices have called out the spoofing issue and right now there is a degree to which um it is

unknown um and being refined by aggregator sets and uh you know large uh takers and things like that. the degree to which they can even trust those books to give the quote that they are promised at any given time and how much of the volumes they are seeing are perhaps based on misqued um uh volumes um that in the end will will not like sustain over time and you know frankly you know it'll be interesting I think the benefit for them right now is that uh they are still relatively niche but you know if you know anything about spoofing in traditional markets the moment they are not niche uh that is going to be

something that I think regulators are going to take a very very close look at because uh there's no ambiguity on uh you know what happens if if you're kind of caught um running a centralized product that may not be surfacing real prices you know um to to its users so I think there's like a lot of headwinds um you know against prop amm um but the arg argument for AMNS generally you know um in this world is that uh you can't compete with the network effects of composable DeFi of these permissionless uh building blocks of the transparency um of these systems and uh

permissionless access of these systems and all of that sort of stuff and there's a lot for instance that AMMs can do and some of this is very much uh stuff that we uh are continuing to look at with regards to our dynamic fees that we can do to calibrate those dynamic fees to basically more fully match um orderbook-l like experiences to pull the prices from uh centralized venues and redistribute more of that value to the underlying LPS. And so um I think as long as we can continue to optimize the the price and ensure that liquidity providers are going to be maximally

rewarded for that service, it's very difficult for a propm to say, you know, we've got a uh service that is going to ever, you know, overtake something like the size and scale of a permissionless AMM market. And the one proof point I have here um just to demonstrate it and we actually heard it from uh somebody a party who who I won't name who runs one of the biggest you know prop amms across a few different networks. Um Bass is actually the ecosystem where they have struggled most to find any traction. Um, and uh, they, you know, I think begrudgingly

said to us, you know, it's because we're up against you and you guys are able to reward these liquidity providers at such a rate um, that you are still just capturing way too much flow for this to be economical um, to us. And so we're going to stay focused on capturing more value within our system, redistributing more of that value to uh LPS on permissionless infrastructure that's composable to everything else. And we think the future is going to be very very bright, you know, for spot exchanges for AMMs. Uh on that basis, >> yeah, that's a very very sound argument for the role AMMs can play within this opportunity.

Um, we are recording this August 7th, which is, I believe, the day before uh the Senate recess. Um, Clarity Act odds have fallen down to uh 13% as of this morning. So, it's it's looking a little bleak. Um, I know Dreos Labs has come out come out and backed Clarity Act, particularly the developer protections component. Um, so I'm curious from your perspective as a builder, what are the the line items or carveouts in the Clarity Act that that matter the most to you and your business case?

>> Yeah. So, I'll I'll separate it um because I think you know on a personal level um you know I started building in uh 2022, right? um heck of a time to uh decide to quit your job uh build a DeFi protocol as a doxed American, right? And so I had to spend uh years of my life um you know explaining to uh my now wife, explaining to my uh parents and and my sister and my friends that um no matter how hard we try to do this the right way um you know we've got

a overly zealous um uh set of regulators uh who may come knock on our for um and say what you're doing is wrong. And by the way, at that point, we're not making any money either. We don't have money to fight a lawsuit. Um I'm not even really making more. I'm making less for most of these years than I made in my my prior jobs. And you know, at that point, it it seemed uh hard to believe we we would ever get there. So, I think it's incredibly important um that we protect developers. And I think uh you can also look at this in terms of uh the brain drain that we saw out of the United States of of some of

the best builders over the period where they you know did not feel like they could build um in this new emerging technology safely and that is very bad for the United States. you know we have generally led every single major technological revolution right it it's built in in in America by uh primarily you know Americans but also folks who come to America to be here and be a part of that opportunity and so I think it's a very very important that we we lead here um so that is definitely just one component that I think is very important it's important for me personally as a builder I think it's important for the industry um and I'm very very glad that uh you know we saw uh folks like uh Fairshake and the Defend uh

developers pack and and others take a lead in ensuring that uh portion remained uh in the bill and it remains like in the draft uh today. Um, and I also was a believer, by the way, fully support, I know it's still controversial, but you know, when when Brian Armstrong came out and said, "No bill is better than a bad bill." I agree. Um because there are certainly things that we can do um in putting laws on the books that would have been very destructive to builders, would have been very destructive to D5 protocols um you know could have resulted in um uh uh you know kind of capture by certain players uh in the space like I think you

know the type of legislation that was developing in the preft collapse era was was uh legislation that would not have been good for DeFi. It would have been very good for Sam Alman and F FTX and uh all that Sam sorry Sam Bakeman Freed um and uh FTX. Um so look I think for us um clarity is not going to be the end of the world if it passes this this year or not. Um uh I'm I would like it to and I think if you look at the way the uh stable bill initially got through, it was seen as dead and then it sort of came through um on the final line. And so I think there will be hope um you

know once folks are back from recess and before the new Congress is seated that something could potentially uh get done here. But in the meantime, if we don't, you know, we've got regulators, uh, you know, at all levels right now that are incredibly friendly to the industry. This industry is not going anywhere. You know, it's like few years ago, we were fighting Black Rockck. We were fighting, you know, uh, some of the biggest banks and institutions and now they are here building on top of it. They're supporting the bill. They're hiring people. Um, so we will eventually get clarity. Um it might not be before end of year, but uh we're gonna keep building anyways.

>> Yeah, BS business as usual in the meantime. Not this year, then >> hopefully the next and and markets are forward looking. So >> um perhaps building off of the clarity theme. Uh Aerodrome has filed on the token transparency framework. Uh one of the earlier ones to do so. Um so I'm curious from your perspective uh as the asset issuer perhaps um did this materially change any of the nature of your conversations with be an institution in exchange for listing or a public market investor. Yeah, I will say I think for us

I'm not sure it changed anything because the the values and the transparency that you guys brought into the report like if we're talking about just perceptions of our protocol and and our token uh they are the same values we've tried to live since day one, right? Um there are no team allocated uh liquid vesting tokens, right? Um there are no tokens that we've sold to third parties. Uh we don't pay for marketing or influencers or um exchange listings. Um every wallet, every token is able to be tracked fully on chain. Um 100% of the revenues are redistributed through the

system. limits enforced by immutable code. Um same thing for all of our token emissions controlled entirely by the voters and operators of the protocol permissionlessly transparently onchain. So from day one we've tried to operate in this way but we were so excited about being one of the first participants in the the framework because uh the framework was now going to create a platform by which we could be evaluated against you know folks who have taken different paths on these types of things. Um and so uh what we have seen though for instance is tokens that are issuing on aerome for the first time right we have got an amazing product in

a ignition which allows uh projects to you know forgo the traditional like exchange listing process that is usually very extractive takes 10% of the supply and things like that issue their token on chain um build liquidity organically and uh find a market you know for for their token. And I believe almost every since the launch of it, almost every participant in an ignition launch has participated in the token transparency uh process. And that means when the initial auction for that token goes live and uh VE arrow voters are trying to decide are they going to allocate towards this new token launch right and

then receive back a portion of the the supply in exchange for that. They get to read that report and know exactly what they are getting into, right? They get to kick the tires um and all that stuff and then uh make an allocation decision with far more transparency into what it is, how it works, where they're allocating tokens, who's invested, the unlock schedule, and things like that than they've traditionally uh been able to have before. Um so in that way it has been huge for our platform because it is basically something that we encourage every issuer on our platform to adopt uh and to use uh on regular and I think

it's also just a massive net good for the industry because when you force people to write these things down um and make clear uh commitments you then have the ability to go back can evaluate whether or not they are meeting them in real time. And if you've been on chain for a while, you know the level of shenanigans uh that that folks can play. But you know, if if they said, "Hey, we've got uh 10% of the supply. It's locked in this wallet and then one day it flows to Binance." Well, you know, it wasn't supposed to. And uh then, you know, the market can evaluate uh the token on the basis of of that. So

I think it's a massive massive net good and I want to see every single token um participating in things like uh this framework and you know for me personally you know if I'm looking at a token and whether or not I will ever participate in uh acquiring it using it things like that um I instantly just remove from the list anybody who hasn't participated in something like this and I think our industry would be better if every speculator uh took the same approach. >> Fantastic. We we appreciate you for the um the ignition pipeline and uh yeah with more transparency and disclosure the the discount rate we need to

evaluate any of these opportunities is lowered. Um it could be win-win for the issuers and win-win for the investors. So >> yeah, and I do want to give a shout out because I saw you guys recently added a new section of the report which was uh forcing folks to say when they are paying for engagement um or or marketing or you know kos. Yeah. Um, it's been one of my pet peeves, of course, the since the earliest days of being involved in crypto. And I got started, you know, before I knew what I was going to do.

And by the way, I never expected to be a builder. I just um started falling down the rabbit hole and wanted to learn as much as I could. But I started writing threads, right? I was writing threads about curve. I was writing threads about convex um analyzing you know bribes and fees and revenue and then writing about solidly which was of course the precursor to um Aerome and Veladrome that Andre Crona launched. Um, and even with my relatively limited reach, you know, I got no idea how many followers I had back then, but my threads would get traction because I was like, uh, looking at economics and things that others, you know, had not yet looked at. Even back then, relatively small account, I would get DMs with offers for paid engagement.

Um, and I never ever took any of it. uh never ever was I even tempted to to take any of it, but that is how the game is played. And I think we've seen even in the last few months um what are what appear to be very obvious coordinated chill campaigns around particular tokens. I think you you know the difference because if there has been a thesis or conversation that has been bubbling, you can like watch the rise of it very organically and then more and more people pile in and bigger accounts and so you'll watch the sort of trend.

If all of the sudden, one week, every single big account you see and a bunch of small ones too all start talking about a thing that nobody was talking about before, you have to assume it's uh paid or at least that's that's my assumption. And so you guys right forcing this level of disclosure I think is such a good thing because um folks should know if somebody is telling them to buy a highly speculative asset because they are being paid to tell them to buy a highly speculative asset. Um, it's a I love that addition and you know I love that you guys are working to with like centralized exchanges. All of these

parties kind of make this table stakes for projects and uh you know uh I I hope it I hope every project adopts it and every project that doesn't goes to zero so we can have a real industry. >> Appreciate that. Yeah, too too many such cases of K getting to clip out of a a private token allocation uh into a big audience. So, doing what we can as we um look to wrap up here. You know, we're in the depths of a very classic bear sentiment is low washed perhaps highly disinterested. Um, I'm curious like what are the opportunities on the board that that keep you here that you're most

excited about over the coming years? >> Yeah. >> Yeah. Yeah, I think this is such an interesting question and this is like um something I I talk about a lot and you know in the the rare case that I'm talking to folks who are just about to start building um or like actively building um like one giant piece of advice that I uh I give is that you need to treat crypto Twitter as a lagging signal, not a leading signal. And I think the biggest dissonance you'll experience

on this is if you go to something like um DOS, right? Uh which is a wonderful, you know, uh institutional focused uh conference uh you know, put on by by y'all. Uh but you will go and you will have been reading all week um every single major voice on crypto Twitter talking about how horrible things are talking about how the industry is going to zero. I mean you've even seen some of these large voices saying oh I'm entirely out. I'm pivoting to AI. You know it's it's just like ultimate low on vibes. Uh but when you are at these conferences, you are increasingly

meeting like some of the biggest banks, some of the biggest institutions, trady players, uh issuers and things like that. They don't read cry crypto Twitter. Um you know, they have no idea that the vibes are down. Um they have just started the process you know uh or are pretty advanced down the process of accepting that this is this is going to be the dominant infrastructure that powers like not just the onchain economy but a large proportion of the economy in aggregate. So they are wildly bullish, right? Um they uh are moving as fast as they can. They are hiring aggressively.

Um they are moving these products on chain. They move slower than most for obvious reasons. Uh but there's no hesitation. There's no doubt anymore in their minds. And you know Brian Armstrong has said that like Coinbase's bet is that uh in the next 5 years 10% of 10% of global GDP comes on chain. And uh that happens when all of these different institutions and assets are coming on chain increasingly transacting on chain. Most of this will be invisible to users. Um it's just going to be the better infrastructure uh behind all of it. And so if you believe that I don't know how you can get the the

vibes down. I mean, this is like I've spent, you know, this is my second, you know, bare market and I've like just never been more excited, more bullish. It's so easy to kind of like uh not pay attention to the crypto Twitter signal and focus on the giant uh opportunity that you can see being realized in in real time. And I mean there there are just two things here. I mean obviously it's a a maximum of price lead sentiment. So uh you know the minute uh more and more of this activity is coming on chain the minute the cycle reverses um you know sentiment will follow and suddenly you know all the vibes will be

very very happy but I do think that there is going to be a group who is a very very loud group on crypto Twitter um who were here for the easy money era right uh whereby you know you could buy you know the worst the worst tokens, pair them in a liquidity pool uncorrelated, earn 8,000% APR while they're both 10xing at the same time, or just get your way into the right alpha group that's going to tell you, you know, when you buy this token and then someone's going to shell it and then you dump on them. I do think that era is quickly coming to a close. And I do think there's a set of people who will be

disappointed as you know the types of uh the way in which you evaluate and participate in the trading of assets looks more like traditional markets. Um it's not going to be easy money. It's going to be a bit more complicated and maybe not everybody um that we've known from these previous eras uh will be happy with that. But it will be the kind of thing that if you're an infrastructure builder um you will be very very happy because that's going to mean more users, more activity, more value being redistributed and all of that sort of stuff. So I like for me it's why we've stayed 100% focused on capturing what we know from the last year is the single most highest value

producing uh vertical of the onchain economy outside of stable coins which is spot exchanges did $5 billion in fees last year. Um you know derivatives did about three billion lending you know I think or chains did like two something like that lending did one to two something like that. So this is the most valuable uh uh vertical of the onchain economy and we believe everyone's going to come tokenize, everyone's going to use these types of markets. So we're going to focus on capturing that and uh that means I'm very very bullish um uh you know on uh our ability not just to win uh but for the pie to grow substantially you know over the next few

years. Lots of very grounded optimism in there and uh couldn't couldn't agree more. So, I think that's a good spot to wrap. Uh Alex, I want to thank you a ton for coming on and thank you to our listeners for tuning in. >> Thanks so much. >> Nothing said on Xerox Research is a recommendation to buy or sell securities or tokens. This podcast is forformational purposes only and any views expressed by anyone on the show are solely our opinions, not financial advice. Luke and our guests may hold positions in the companies, funds, or projects discussed.