DappCon 2023: 5 Principles To Start A Sustainable Market Architecture For Defi - Luis Bezzenberger

Transcript

thank you for having me yeah so I'll um I'm Lis from Shadow Network um which is a me protection mechanism using um threshold encryption um but this talk will be a little more broader in sort of connecting what we're working on kind of in practice but connecting this to the more to the broader overarching sort of um yeah why why are we doing this and why a little bit of what what's what I think is going wrong and how can we maybe address it and and how does it connect to other things um so a little a little bit broad but um it'll I'll also connect it to the more um concrete things as well um so yeah I think um this is kind of the overarching term I

kind of was uh I stole from uh actually the traditional Finance um world where they after the uh oit financial crisis they had a similar they had this these problems with um they would say the the market architecture is unsustainable and you know ponies and all these real estate um derivatives things and they said we need to change something we need to sort of um create a better um architecture right and have policy and things that that um improve it and I stole this sort of term and said maybe we need something similar for for crypto right um yeah why am I saying this I think sort of from the outside the mainstream regulator Regulators are

looking at crypto and they are fundamentally perceiving it as as un sustainable and this is a bunch of different things so from the outside people are saying is all pones um is unsustainable sort of self- referential um Revenue models um I would say so regulation so some people would say there's not enough regulation maybe some other people say is um too much regulation but clearly this is sort of like out of sync um and then for our specific sort of what we are working on we also think that the transaction supply chain is in a in a pretty bad State um briefly on this right because this is what we're working on is yeah front running um and malicious me uh causes immense user losses um more importantly we think it um deters

mainstream um and serious investors from ENT even entering crypto and it in the way we are dealing with the the way we're trying to fix it and indirectly creates these centralization and censorship vectors in the transaction and M Supply Chain um one example of this is um something that Martin from nois is saying and some some I SMG um also like displayed this a little bit that it's actually now cheaper to censor um on a theorem with PBS than it was before so we are fixing some problems with the with the way we're dealing with me currently but we're also sort of creating these longer term um dangers or these censorship um vectors um and yeah again connecting it to the bigger

picture by having this hostile sort of transaction supply chain environment how it is right now I think we're also just lower in accessibility and we're sort of favoring those very sophisticated Trader type of people who can still make money but everyone else is sort of like left out right so it's a accessibility issue as well um um sure you guys everyone should be familiar generally speaking are just reminding you so front running what is front running and how does it relate to malicious M front running is basically just jumping the queue so there's a queue front of the exchange essentially people are lining up to to place orders and and um and front running means you're somehow sort of jumping the queue

and stealing someone else's order essentially in the real world the the at least a certain subset of this is illegal so especially the ones sort of relating to inside information that's illegal actually um in crypto usually people are definitely considering as being pretty harmful um and um yeah sort of there is also non-malicious meev so it's a subset of of M and there which is malicious and the other subset of it um so the generalized Arbitrage and liquidations are usually considered to to not be um harmful um and what's the overall impact of this we think is sort of again I think in the beginning mainstream Regulators are really fed up with crypto

like you every time I'm listening to sort of Tech podcast non- crypto Tech podcasts people are laughing about it and then if you hear if you hear Regulators talk about crypto they um are also not really um looking not very favorable upon it um they think it's h hostile again sort of it's inaccessible um in its current state to most and and because of this I think we're missing out a lot on a lot of business right if we can include we can improve accessibility um and and and sustainability of it I think we could actually draw a lot more mainstream um us users to it so this is why I'm saying like we could like one idea could be

rally around this sort of new paradigm of sustainable Market architecture which is a very broad term trying to like split it up and say what what could be some of these principles um and my five principles that I came up with for now would be Basel neutrality accessibility sustainable sustain models sensible regulation and privacy um so I think if we improve these I think we can we can um have a better outcome yeah sorry for the sort of set istic um pentagram but what I'm trying to say here is that it's um sort of all related right so so for example the accessibility I think is uh connected to Bas lay neutrality the more neutral a base layer is the more equally

accessible it is for everyone right and then also I think privacy is pretty um related to regulation because there's a natural sort of um anti fight between these two yeah and this is actually what I want to zoom in on these two pairs of sub isues so first on sort of sensible regulation and privacy and just as a just want to zoom in on these two issues again they're I think they're related or they they are are kind of in in um in conflict with each other and I'm just want to zoom in into something that can help right um which sure you're all familiar with this is this cool idea from Amin um and also now Amin and

vitalic wrote a paper about it which is this idea of com um compliant essentially a compliant version of tornado in a way which is a yeah it's a ZK scheme which you can use just like tornado for unchain privacy but you can more importantly you can actually um allow users to associate or disassociate with a certain subset of Act of other depositors so you can actually prove in a way that you are not M co-mingling your funds with uh terrorist or someone on the Offa list right um and I think this is yeah just one really good example of where we can build more sustainable Market architecture and in this in this um case yeah combining

privacy and regulation um and yeah again I think it's privacy is often I think underappreciated because not only is it like a I think it's kind of like a human right but it's also is really sort of I think has a lot of value if if you think about this world where information is my Elon Musk says information equals money if um if you if there's no privacy um then information can't really be money because then everyone has access to it right so privacy is deeply connected to information equals money and deeply connected to actually value and business value yeah so there one example right and then zooming in on the other example which is sort of what we're working on a shutter is um this Duality between Bas

lay neutrality and accessibility um and and the the thing that we are doing is we're encrypting the M Pool to increase base lay neutrality and again we also think it connects to accessibility because having a more neutral playing field in terms of meol accessibility we think improves s of mol accessibility yeah um so the way we're doing it we are we have this encryption and decryption scheme it is centralized encryption decryption scheme which encrypts um transactions and have them be signed by the by the rck producer or the sequencer or The Valor wherever we implement it without them knowing what's even in the transactions so they and no one else can't um censor

or front run based on the content of the transaction so um so pretty simple on the on the surface sort of and then we need need this more complex so thresh all encryption scheme and this decentralized keeper Network to make it safe to enforce the reveal of the transaction and also to yeah decentralize this encryptor and decryptor role because if you had a centralized um encryptor or decryptor then again you would introduce you wouldn't solve the problem um at this level right um so and it's it's this scheme which um built as this encryption decryption scheme and it can be plugged into other infrastructures for example um L tools or side chains and if you do

so uh if you kind of enhance this protocol a protocol with the Cy Crypt man pool we think the benefits for users are um because it essentially then results in a quasi random ordering with um that still includes Arbitrage so we can prevent front running still have sort of the majority of the Arbitrage um and liquidations and we think this is the best outcome to or the best best situation leading to sort of the the highest kind of amount of um information Symmetry and that allows safer trading right you're not getting front run uh in in the result in the consequence of this also more profitable trading because your prices are better um and we're

adding the sort of realtime censorship resistance because yeah if you uh don't see what it's in transactions you can't sensor um was based on the contents uh yeah and overall just a more neutral um base layer what it was was the the original um goal of it yeah um even for the intermediaries that running this uh or are sort of in charge of ordering transactions even for them we think it's actually a benefit so initially you would think if you're restricting the um if you're taking away the ability for them to sensor a front run If you're sort of taking away a little bit from the from their um me income stream this initially people would maybe say well

this is actually um bad for me as a if I'm a the transaction ordering entity sort of um however we think there's actually going to be a bunch of upsides as as well so um a you can still um collect and distribute the back running ra me so you're just not going to be front running but you're actually still retaining the um the ability to ex extract this other type of me um and we think sort of by having a better more fair more neutral base layer I think is going to be an increase you're increasing the attractiveness of the whole protocol and every all all the apps on top overall we think is actually could actually even like increase your income especially in terms of transaction fees but even maybe also in

the other type the the backgrounding related me yeah because you're actually then because right now it's really unsustainable you can't really trade on it if you're actually making it like viable for normal people to trade could actually even increase your your um your revenue streams um then there's this little more complicated argument around um do you actually as a sort of regul or as someone who's operating let's say in the west somewhere where they are and sort of regulatory scrutiny do you actually want to have this outside power to to sensor a front run or metal with the transactions um or or not yeah because the regulator is looking at this and they're looking at dur ability what can you actually influence what's your

power over this this network and um if you're just a neutral technical provider then it should be fine um but the more it looks like you're actually sort of extracting Financial value from front running your users the less uh less favorable is the regulator going to look upon you and might actually want to regulate you as a type of more like a financial intermediate like a bank or like an MTF um and we're seeing The Regulators actually moving in this we're seeing them have making these comments about uh or not just comments actually like draft regulation about banning front running or even um uh yeah certain so Nika regulation and some other bank foral settlements as well made these statements um in this direction that

will also maybe ban front running in crypto just like they are Banning it in the traditional Finance World um the concrete sort of the kind of our our most um Advanced implementation of this is uh together with the nosis chain um and this is sort of this collaborative effort where we yeah we Implement we're on the path of implementing it into the nosis chain we call it shutter rized Beacon chain could also be this sort of model for even the eth L1 um and um we have this kind of practical road map towards it where we build it as an opin version initially and then again conserve as a reference

implementation for other l1s or l2s um and yeah um this is how it looks like I won't really go into sort of too many technical details but this is the high level architecture there's um sort of the sequence of contract transactions are are going in the sequencer contract while they're still encrypted and this defines them as being final and the or defines them as being in this order and sort of that that the proposer has to actually then accept this no matter what's in the transactions and only then do the keepers release the decryption key which then executes transactions and again yeah ensures the properties that we that we talked about before um briefly why are we using the special

encryption approach and maybe not something like a some other approach so we think briefly speaking FAL encryption is really the best of the best compromise between decentralization um security and Technical feasibility so you can use a sort of Hardware based appro like um trusted execution environments um like sgx or you could in the future maybe use these super Advanced Technologies like polymorphic encryption or Advan more advanced forms of MPC but um we think the hardware trust assumption the one case make it un unviable and we think the the the the level of technological breakthroughs we would actually need to make fhe um practical and cost effective with think again make it make it that

that's not really viable right now yeah um so to conclude um I think yeah this just an idea to say to help kind of the the crypto Space by saying we we should actually maybe we could maybe rally around and start a discussion around what should we change and make to make the market architecture more more sustainable again similarly to how they did it or how they thought about it after the after the financial crisis in '08 um I think it's going to be important to like not just have this be a broad this word sustainability is very Broad and and and and and non-descriptive words so I think it's going to be important to draw the draw

the connection between the the bigger words and the the more concrete implementations and and and yeah and all of all this I think is quite boring right it's just like the the architecture part in this sustainability sounds all boring and I think it is boring in a way so I think the next step would be then to build interesting products on top um but yeah again I think it's actually good to have a boring architecture a boring infrastructure because um you don't want to have ex excitement and problems on on that level right um so yeah and then um other sort of action item would be if you are building a side chain or L2 or a front running sort of prone dab um anything with defy right um would love

to get in touch and hear your sort of Demands or or um uh your requirements for this um um or yeah again a two or side building a two or side chain would be awesome to talk and whether the encrypted meol could be an addition um uh differentiator as well for that protocol um and yeah follow us on Twitter and yeah thank you so [Applause] much thank you Lis that was very insightful