DAPPCON 2024: Trading in Crypto - A Vertical Slice On Liquidity - Philipp Zentner

Transcript

hi guys thanks for coming the last talk um I'll keep it kind of shortish I hope um this is the first time I'm talking about this so this is a tryy out um I'm giving a vertical slide of the liquidity Market showing where the complexity lies in and to give you better understanding on where we are at when it comes to the space Okay so let's start with describing the asset layer first um so we have l1s l2s and l3s to settle execute and scale um what we typically minting here and let just talk about the liquid Market is essentially ec2s right um on top of that we have messaging Bridges um on the one hand it's the canonical ones like the native Bridge

that's being provided by the ecosystem but we also have um third party messaging Bridges layer zero AXA warhole and this is the point where we have to introduce additional standards when it comes to messaging because we are in the multi-chain environment and in this multi-chain environment we um want to be able to have asset representations on multiple chains and for that we need some sort of accounting right we need the ability to Mint and burn assets to make sure we don't have double spending we don't have duplicate creation of of value um and um this is what layer zero AXA and warhall and so on take care of and they all want to establish their own standards which makes it difficult um to actually navigate the space now we have

different s representations um actually each of is is is its own Bridge makes it even harder um and similar scenarios for its which is oxela NTT which is warhole um and xc20 which is a more Bridge agnostic standard an attemp that's being created by Connex which is an established um liquidity network uh and they are really concerned about uh standardization and and so if you're thinking about launching your token multichain take a look at xlc2 in the first place because you have less of a vendor logged in compared to other standards now we have a bunch of assets they all represent end like fungible um

tokens um on top of these messaging Bridges um we have liquidity networks um either the direct native ones again I'll get to that um or we have third party liquidity networks for so first of all why why do we have them messaging Bridges allow us to send arbitrary data across chains this means we have to check for a lot of things and that data verification becomes expensive and comes with a great overhead so when it comes to transferring value we want to keep it as cheap and fast as possible so instead of just minting and burning assets every time let's just create liquidity pools on both chains and then have fast um fast transfers across chains by simply

sending hey I'm sending money on chain a to the liquidity pool on chain a and then I'm releasing the same amount of money on the destination chain deducted by a fee but then send the money from the liquidity pool on the destination chain this is more efficient in a sense that it goes faster it's for the user it's better at the same time it creates a capital efficiency problem because now um we need to have liquidity on each chain right um now layer zero has their own one Stargate Axel has their own one squid um and warhole has portal and Mayan so all these established ambs arbitrary data messaging Bridges have their own liquidity networks on top of that we have third party liquidity networks again so another player that

allows us to move money connect hop seab Bridge uh back then multi uh multi-chain so there are a bunch of synaps is one there are all in all around 100 Bridges out there and um this is just for you to understand this is the lowest level that's the lowest level of which assets can the user hold and trade with and what is necessary to just understand to how to navigate yourself in that multi-chain environment on top of that the user should understand the trust spectrum because all these third party Bridges introduce different trust assumptions I'm not going to go there this is something that this could could fill a whole talk um but uh uh this something

Lei looks a lot at it's essentially which trust assumptions are being made and where are these players on a spectrum and that's why we integrate some bridges and that's why we don't integrate some bridges um on top of that asset layer we are getting to an exchange layer now we spoke about asset minting and moving across chains from here on we have the exchange layer which is separated in two pillars on the one pillar we have the decentralized exchange layer where we talk about dexes and Dex aggregators on the right hand side we see the centralized exchange layers here in the first place we have centralized Exchange changes we have players like market makers OTC and pop tests and um but I'll get to that um if you take a closer look uh this again

becomes very complex we have so many different amm designs right we have uniso V2 3 four we already heard in the last talk about concentrated versus Range liquidity um we have uh we have um uh concrete concentrated liquidity we have multi-set amm like a balancer we have aut book style and like VX we have stable coin um focus stable coins uh Focus amm like curve multichain dex's Catalyst launched just yesterday um so this is a multi-chain native Dex working with liquidity pools and price Discovery across multiple chains and they're building on top of warhole a totally new thing actually um and we constantly see new amm innovation like Iraq's new hot

amm or cowr as a coincidence of once U with um which also includes like batch transactions and new ways to actually uh trade and there are so many more like we are getting Outreach every two three weeks with a new amm design that wants to make things better and it's really hard to make all of that measurable but I'll get to that at a later point on the right side uh rfqs market makers centralized exchanges and another type of bridge centralized exchange Bridges they do exist layer swap was one of the first ones back then uh back then it meant for you as a user to generate your own API Keys create an account at layers swap add your own API Keys into it and then you could Bridge V centralized

exchanges without having to use those exchanges that has changed a lot rocket X um was then the first mover on creating um some sort of centralized Bridge um abstracting away all that API key management and moving liquidity around um and then Lop copied that so also there are alternative Solutions and it's very interesting to see what's coming and what we seeing now is that all of that becomes a bit more hybrid solver systems are coming up intense systems are coming up these solver systems and right before we saw payment for orderflow systems um are navigating trades across decentralized and Central liquidity depending on how sophisticated they are the most established ones to be

fair still are just on the decentralized Spectrum um and we have heav for order flow that work systems that work more with market makers and prop tests um but this is merging and up top of that um we um are sitting with Lei with Lei we really try to um try to aggregate everything also be fair again here right now we are mostly focused on decentralized exchanges and decentralized liquidity across dexes Dex aggregators Bridges and solvers um but VI are the solvers in payment for orderflow systems we start aggregating we are also getting access to centralized liquidity which provides the best price um the question is though do we need all of that right do we need all

these different dexes and Dex aggregators this is the swap distribution across multiple dexes on Lei um so what we can see here is how are the stops distributed across different solutions and for example while people mostly think about aggregators like 1 in and zerox and maybe Power Swap still um there are players like odos that outperform Mage quite often as we can see um this makes the case for aggregation just for exchanges not even just Bridges me when it comes to Bridges it's about pathf finding like which Bridge do I use to get from A to B but when it comes to liquidity uh on just exchanges on one particular chain is it worth it to aggregate Dex aggregators yes it is and

now with the solver systems it becomes even more relevant and this is not on one chain this is completely different on all these different chains so on different chains we have a different swap distribution just for dexes that again makes the case for aggregation um aggregation of dexes Dex aggregators and solvers if you talk to a solver system why they outperform 1 in then the answer is simply we have more liquidity sources than 1 in apparently 1 in at some point stopped implementing new dexes they were just like we can't it doesn't scale for us it's it's not worth it but apparently it is worth it because AOS now is growing very fast gets lots of um um volume there are other players like propeller hats um otex barter and so on

um many of them mostly active on L1 but this is changing fast and the solver Market is a very interesting thing I'll also dive into now um we haven't spoken about that all of that takes building an aggregator or building building a solver system that's sophisticated means addressing understanding implementing maintaining and monitoring hundreds of apis at least one RPC per chain you want to have fail safety so make it two um you need guess estimations they actually differ it it's totally different on one train where they take into account the overall payload size versus on others where they don't um we have fee markets so I have uh a DEX fee I have a bridge fee I have

the gas fee the multiple chains transaction simulations become complex um and I need that plus relayer networks to actually combine more complex transactions so if I want to go from one Sid a to any other s x on the Chain B I often need to swap bridge and swap for the user that's horrible right so with lei for example we make sure that we aggregate all of that and we connect all of this on an onchain transaction rail so we can swap bridge and swap within one signature with have one transaction and that's also necessary for the solvers but transaction simulations kind of become a hail hole because there's gas slippage just that alone is annoying and it becomes hard to make that fail

safety um on top of that we end up with lots of fragmented data each bridging transaction is not one transaction it's two it's one transaction on the source chain it's one the destination chain so you have an additional analytics overhead your bi your internal business intelligence it's just it gets messy really quickly and dune is also not of a great help because Dune doesn't support these more complex multi-chain transactions in a in a in a great way um then you have to combine the data with for example flip site need additional data sources then you have different asset representations usdc usca USC wrapped usdc in different forms this is just usdc we have the same situation with d usdt now Pi USD and other stable

coin alternatives are coming it is a very messy situation we are in um and then getting back to the apis who does all the status code mapping do you think we are getting great API responses certainly not to debug all of that is kind of hard um so status code and error code mapping just in order to provide a good experience for developers and end users is really tough yeah fragmented data across the board um and now we just spoke about evm right I don't need to tell you that non evm like exponentially increases the the complexity of this problem um Lei is now 60 people almost we are 60 people and

we're still just aggregating and I could double the team tomorrow and would still be busy it's just so much work and we don't see a close future near future where we are getting out of that mess because there are some people interested in standardization but the best funded companies are not they want to have a vendor loog in and that's what they are pitching their VCS to get huge valuations and raise a lot of money everyone wants to become the standard so no one is interested in adopting the standard right we just saw Unis SW and a cross trying to come up with a standard for cross settlement so that intents that are being fulfilled by uni could be settled by a cross we'll see how many people are actually going to

start to adopt that standard um and we still haven't talked about fail safety if th some if an RPC is not available you need a second alternative for everything um we have't spoken about high availability if you want to serve a Robin Hood someone with millions of users you need High availability um because they otherwise want redundancy and well you kind of as a solver or aggregator you want to provide redundancy right but but then what is your redundancy so it's it's diff it gets difficult for someone that has to be compliant and needs to be available all the time and then we have Global availability so then suddenly you you you realize that your API gets

really slow in certain regions of the world because just to realize oh actually zerox has their API only deployed in Europe and in in the US and in Singapore it's not and then latency comes into play so for Global availability you need another level of analytics just to understand like where where are my counterparts where are my third parties actually deployed how reliable are they and is it up to date and we haven't started optimizing yet right because then you want to optimize for API latency but also for gas costs and and all of that it monitoring analytics rate limits API costs M protection customer support it is a very messy situation we are in we want we're

talking about Mass ABD dotion we're talking about chain abstraction but we're so far away from that is the reality we're so so far away from Mass adoption um Lei tries to tackle that I don't want to talk too much about Lei this we sat three years ago someone needs to aggregate that and abstracted away and 3 years later three years later we have the narrative chain abstraction thank you um now we can talk about intents yeah intents so so let's let's historically so historically we sent the user to The Exchange and it became complex because you have different exchange on different

chains and price Discovery is a thing and the user doesn't know where does it gets the does he get the best price next thing we did is well we sent the user to an aggregator first to one in later to someone like jumper exchange because we get you the aggregation of the aggregators with jump exchange you get wage zerox Power Swap tons of dexes you also get the bridges so you don't have to think at all anymore but it doesn't scale as we have learned right all I told you about is all that mess we're in our company with 60 people and as I told you I could double the company and still we would be too busy the model doesn't scale so what are we going to do well why don't we build not just one aggregator but lots of specialized ones

so we can distribute the work so now we're sending users to marketplaces and these marketplaces collect lots of aggregators solvers solvers are mostly aggregators right and they can solve for these different things but it's complicated because you have a chicken e problem a Marketplace essentially a Marketplace uh always comes with a question um who comes first um example Amazon Amazon in the the beginning wanted to sell wanted to be a Marketplace for books it needed the merchant and it needed the consumers it went to the merchants hey sell your books at my place and the merchant were

like well do you have users no no no get your users later no we're not interested so they went to the users hey uh we we want to sell you all the books and we aggregate all the books for you and they were like can't see them yeah you need to come at the same time right this is chck an egg problem it's difficult and the on the one way to make this happen is essentially to make a one-sided Market a multi-sided market one-sided a typical way to do this is to proxy one side so you Market yourself as a Marketplace but you just fake the other side until you have enough of the other side so in Amazon's case Amazon started selling books themselves on their own Marketplace platform until they got

enough consumers and then it became attractive um to the mergence and with intens SYM it's the same the solver the intens SYM goes to the solver hey please Implement our API and and the solver is like well do you have waterflow and in is like probably not we have seen so many intense systems over the past two years Brink essential whatever you name it but it's just tough for them to to get the orderflow and then um um then they are going to the business they go to Robin Hood and they're like Robin Hood hey could you uh Implement us maybe and they like well what how good are your prices how competitive are you they well yeah we are in touch with a few solvers we're going to launch them soon so it's difficult so what we're going to

see is lots of intense systems bootstrapping their own solver system running into the same problem Lei has right now so how how will this play out distribution is King this is how it play out the system that will win are those that already have the distribution it's 1 in with 1 in Fusion it's Unis swop with uniex it's maybe us we have a decent amount of distribution but we are not building an intent system yet we think it's a bit too early um but distribution is King and we're going to see this play out here very strongly but it will introduce a bunch of problems for new ecosystems because now ecosystems need to be implemented by solvers and and these solvers are going

to be completely overwhelmed they have no interest at imp implementing a solver system that is an ecosystem that doesn't have volume yet so again a chcken egg problem between solver and E system um so this problem bubbles up um because the solver Market is highly competitive on fees it's low margin because it's all auctions right unex is auctioning that intent across uh these solvers so it's really hard to make money here on top of that it's not a venture case and because it's not the Venture case the solver system cannot take risk it's not interested in implementing mode or manle yet maybe if they believe in the high but that's like not Based on data that's

like based on faith and that's not a good business strategy you do that once or twice but there are a bunch of l2s that won't see adoption because of that scenario um and we might see a mode via specialization but again specialization means to anck because let's say I'm a Sol I'm saying like I'm going to focus on per trading and instead of aggregating dexes I'm going to aggregate GMX for example and and other Solutions right then it also means they need an intense system that brings them intense in the first place supporting this kind of thing and so can they actually speal can they actually specialize difficult

then you might argue well we're going to have someone that focuses on new upcoming l2s and skips trying to compete with existing established l2s we see this strategy with connects right now connect is a very established bridge and um they have had a hard time shipping so they got crushed by Bridges like Stargate and so on um even though they have been doing an amazing job it's it's an amazing team um but at the same time now they need to find a different strategy what they are doing now is essentially focusing on new and upcoming l2s smart will it play out well we don't know 30 ecosystem that do not enough volume will that be enough another financing round we will see on the intense side chicken and egg highly

competitive for distribution 1 in Unis Swap all of that and one swimming at the top of distribution blood bath blood bath it's like we see that now we in the same deal flow with one in and and Unis Swap and I'm just sharing here a little bit right like it is incredibly tough to win deals and there are incentives being thrown around across different personas uh and champions across uh the deal flow it's incredibly tough you have to be very very aggressive Rive um they require market efficiency to be competitive so if unop manages to ship faster and actually win more um win more um solvers fast enough they're going to be much

more competitive than the one in Fusion for example and yeah um there's a lot of stuff to talk about I'm out of time unfortunately um I think one potential mode is exclusive solving so they get solvers that are very very good and exclusively solved for them that again chicken and egg requires distribution otherwise the Sol is not interested and then um yeah specialization modularity can be another one socket used to be an aggregator or still is I don't know uh they do a lot uh but they also they trying to be a modular um uh system but yeah it's difficult and chicken egg across the board so we will see how that plays out uh that's us what

are we hard to say we're all of that it's all the Le all the defa liquidity out of one API is the simplest one I guess um thanks if you want to talk about any of this feel free to ping me uh we are talking to so many solutions every week have a very good overview um and thanks for coming to the last talk [Applause]