Hayden Adams: Uniswap – An Automated Decentralized Exchange for Ethereum (#292)

Transcript

[Music] this episode of epicenter is brought to you by Microsoft Azure do you have an idea for a blockchain app but are worried about the time and costs it will take to develop the new Azure blockchain dev kit is a free download that brings together the tools you need to get your first app running in less than 30 minutes learn more at a kms slash epicenter and buy Trello fits don't leave your project security audit to just any firm trust a team with decades of experience at the forefront

of blockchain security research go to trail of bits calm to learn more hello and welcome to epicenter my name is grandparents crane and my name is Sonny yogoro so before we go into our conversation we just wanted to let you guys know about a conference or some events that are coming up actually both Sonny and I will be there so this is this conference called Biddle which is you know it's kind of the etherium huddle right the Biddle which is taking place in South Korea and so on July 22nd and 23rd so you know both Sonny and I are gonna be there and I think we're

both going to give talks at the conference so I'm super excited personally to like make it I've never been to South Korea and either actually yeah I actually haven't even been to Asia since I've become involved in the blockchain space right so so I haven't kind of never had sort of the exposure to the Asian blockchain world and super excited about that as well also just before that conference there is a hackathon taking place in Seoul as well so that's on Friday to Sunday and we'll put a link in the show notes so that's Friday July 19th - a Sunday July 21st so we'll also be at that we of course

one where we are one of the sponsors of that event and so yeah hopefully maybe see some of you I do a Biddle or at or at hackathon maybe we should do we're like episode meet up there or something like that it's gonna be a fun Marco's hack hackathon as well so you know if you're interested in coming on working on some cool cosmos SDK kind of stuff or tender men so it'll be a really fun experience I think I'll be on mentoring and judging okay fantastic and yeah with dad so today we spoke about with Hayden Adams he's the founder of unis WAP you know shock is one of those things that I think I remember he mentioned it was launched in doing Def Con in Prague and

I think I mentioned it I remember hearing about it back then where people all these units were playing this new UNICEF thing and they started being quite a lot of buzz around it and became kind of one of the first a most widely used hiriam defy project in a very short time so so yeah that's that was a conversation with with Hayden so yeah with that let's go let's go into conversation I think it's really interesting to dive into unit shop and and kind of define naturalistic changes mo channel so let's go there so we're here today with Hayden Adams he's the founder of Yunus Rob and UNICEF was one of these things that kind of came out of nowhere and you know all of a sudden there was you know a lot lots relative adults but lots of lots of activity happening and

it kind of became one of the main the most used aetherium kind of defied apps so yeah we're really excited that hayden on today to dive a little bit into like we are what Yunus walk is and you know kind of his fault on the future of the centrist changes and decentralize finance so thank thanks so much for joining us today and you know thank you for having me on yeah it's often interesting to hear a little bit okay what was his journey how did you kind of become involved in youth areum space and like find your way towards working on Yunus well yeah it might feel like you neva came out of nowhere for you guys but actually before it was even announced I worked on that further over a year but yeah I I basically I was a mechanical engineering

major so I I spent you know after I graduated from college I spent a year working in thermodynamics studying heat flow and car designs but I was sort of passively following cryptic crypto space a good friend of mine from college Carl flourish had joined the etherium foundation and so he was sort of constantly talking about ethereum and slowly piquing my interest and I actually got laid off from work in about I believe June 17 just as the sort of crypto bull run started and I really was interested in the space at that point and I wanted to

get more involved and I decided you know mechanical engineering was interesting but not that interesting and I just decided to dive into crypto and I was looking and so I spent you know a couple months just messing around learning solidity you know trying out token contracts but I was looking for a real project to sort of grow and improve on and really become a you know a smart contract developer Karl the at the time pointed me to some blog posts from Vitalik talking about something called a X times y equals K market maker and so I basically started working on the first version of you know swap in October 2017

and so it was basically my first project it was in something to some extent it was my first big project as a developer and it was definitely my first project in crypto and so I spent you know a few months building a proof-of-concept for that and you know it I sort of it I never really thought it would go that far but I was you know I started it I just created this initial website that allowed you to swap between two tokens and then I slowly started adding features on to it you know pooled liquidity across multiple liquidity providers chaining swaps so you could go ERC 22 eath and then eath to another ear c 20 in a single transaction you know I figured out feat payouts and once it

started to seem like this could be a little bit more than just a side project I applied for an aetherium Foundation grant and this was in April 2018 so I worked on it through the winter basically on my own and I continued specking it out from there I the etherion Foundation grant was granted with granted uh-huh and so at that point it became a lot more real so I hired a runtime verification to formalize the coding spec and formalize the X times y equals K model and I hired some contractors to work on the interface I wrote the white paper documentation and this was through the summer into early fall 2018 and then I

announced it on Twitter to a few hundred Twitter followers in a DEFCON three in Prague and November 2nd I believe in November 4th 2018 and then it kind of exploded from there and so this was like sort of your first ever software engineering project usually took on yeah to some extent I mean I was a mechanical engineer before so it's not that it's not that I never say it's not that I'd never written code before but the code I had written was more about you know it was more like MATLAB style or you know Arduino robots your very very small stuff this is my first real you know the first but website are the first interface for you know swap was my first website and the unis contract was my first yeah so it and like the testing

for you know swap was the first unit test I'd ever and so it was you know yeah it was basically the first coding project yeah and so did you also have any experience with like you know trading and stuff or any experience with like know dealing with exchanges as a user okay so not really well as a user a little bit I had used coinbase uh-huh I had to use bit racks I knew some of the centralized exchanges and I had heard a lot about sort of the some of the like I heard it obviously heard about mount Cox I am I knew about ether Delta and so at the time I started working on you know swap ether Delta was the was V Dax you know it was and it was a big step

forward in some ways it it was non-custodial which was a big deal I kind of understand that the exchange no longer held your funds and it couldn't deal them but it wasn't decentralized in the way that aetherium was decentralized and it wasn't censorship resistant the way aetherium was censorship resistant and it was kind of a pain to use and so when I started experimenting with you know swap it was an experiment in being as uncompromising as possible on the decentralization and censorship resistant front while and and on the UX front as well basically yeah those were the properties of aetherium that had interested you know the fact that you couldn't shut just shut down aetherium the fact that

no one controlled aetherium even though no one could steal the funds in ether Delta people could still shut it down people could still you know there was still someone controlling the order book there hosting an order book there was still someone that you know had was able to take down the smart contracts or upgrade them or control the token listing or take fees off of every transaction it wasn't decentralized in the way that aetherium is and so that's really that was like the the sort of from a research side from a sort of experimental side that's what I was going for with you know swap was the kind of a deeper reason why you cared about you know this particular aspect you know there's so many different things that you could build out in the theorem space and smart contract space

so why focus on exchange why focus on exchange well I mean to some extent I kind of wandered into it I wasn't something that I you know I didn't enter the the etherium space immediately saying oh I need to work on exchange but it was more like I need a project to learn on I need a project to you know figure out how to how to have smart contracts work and what they really do and that just ended up being you know swap the more I spent the more time I spent building it the more interested in exchange I got the more interested in automated market making I got so we kind of developed naturally it wasn't yeah but it seems like funny and funny enough it was the most overcrowded space and

yet it was still not being served in certain ways right there were a lot of projects in the space but they all had like compromised on certain things that I didn't think should be compromised on or at least I thought it was worth experimenting in a project project that did not compromise on those things yeah well let's dive into yunusov a little bit so I mean we mentioned okay the essentials change you mentioned this market maker thing like what give us your like high-level overview of like how this unit sort work yeah for sure you know swap is a decentralized exchange protocol and high levels and it's made up of a series of automated market makers so basically the way it works is that every single there's um

there's a series of exchange contracts one for each token and each and each exchange contract represents an ER c22 ether pair so it allows you to trade between ether and ER c 20 tokens and they are all linked together by a factory / registry contract that basically holds a mapping of token addresses to exchange addresses and so it allows you to look up you know if you have a token address it allows you to look up the exchange address associated with that token and so each so if you want to dive into more of how each exchange contract works let's say you have a eath to dye pair right so anyone who wants can call the a factory contract and deploy this dye exchange

contract and then anyone who wants can deposit liquidity into that dye exchange contract and so there's two classes of users in one of these exchanges there's liquidity providers and there's traders liquidity providers basically deposit two tokens ether and the ERC twenty into one of these exchange contracts and then use it and then traders basically to send one token to the contract and get the other token out one of the cool sort of aspects of that it's trying to solve is removing the need to coordinate users under an order book and you know you don't need to actually it's sort of solving some of the coordination between liquidity providers and traders you have one of these exchange contracts and

let's say someone and you a liquidity provider the first liquidity provider would put in an equivalent USD value of ease in that er c20 token so they might put in $50,000 worth of eath and fifty thousand dollars worth of die and then there's a and then exchange between the two assets are automated using this formula x times y equals K which are calling the constant product market making formula and basically the way it works is you know you have ten eath and thousand die in the contract then the the constant would be ten thousand and then if you send one east to the contract then now there's eleven eath in the contract the contract says well the eath times the die in the contract needs

to be held constant so you do you know ten thousand divided by eleven and that gives you the amount of diet sure be in the contract which is you know 909 and so it returns 91 back to the buyer which is you know the difference between the amount that's in the contract in the madness should be in the contract says I so it's happening here just to just to clarify is that basically you know the more that people are buying that the system sort of is automatically cranking up the price and the more people are selling it's cranking down to price correct yeah the more the more you sell the hot yeah the higher the exchange rate goes and that's basically you know what we're calling slippage so if you you in general you want to make a trade

that is small relative to the total size and liquidity reserves so you know if you have a million dollars in the contract you can make $10,000 trades you can't make $500,000 trades because that will have a huge amount of slippage yeah and and of course some of our listeners will remember or episode with Bank or which you know it's a few years ago now but Bank are kind of had a similar mechanism right where you also have like this contract on chain and then the idea is okay anybody can go there and you know there's always a price right the contracts always willing to trade with you whereas you know traditionally change you have like buyers and sellers and there has to be some sort of matching and you know if there's no let's say there's little liquidity and maybe there are no buyers or very few

buyers whereas here I I guess one of the benefits is that it it it might work especially well for you know illiquid markets - yeah yeah correct banker is very similar to you know swap one of the main differences is that you know swap uses ether so Bank corn and you know swap both have a common pair and you swap it's ether and in bank wards the BNT token we think that you know sort of part of the idea is that you know having ether is sort of more liquid and represents the it's the sort of underlying token for the protocol or as BNT was this just token that Bank were made and sold 30 percent over one hundred and fifty million dollars or

something crazy like that maybe I don't know the exact percent they sold but I know the exact amount that raised which was one hundred and fifty three million what's there what's the trading volume today on Eunice Rock versus bang core today you know today if not it kind of it's hard to measure the the bank or volume because they kind of track it with their volume on a OS and then their volume and then in they double count through the volume through BNT but the units all falling today is five hundred thousand just for some context like you know I know when I checked a few weeks ago Eunice WAP has the highest volume of any exchange it's it's about ten it had them its volume is about 10x that of 0x if

he's on some days not not today today actually is here hi her following him but Eunice WAP had hit a peak volume of six million about dollars in one day about two weeks ago today is just like a low volume day but yeah it on many days if the number one dexon in etherium this episode of epicenter is brought to you by Microsoft and the azure blockchain workbench getting your block tank from the whiteboard to production can be a big undertaking and something as simple as connecting your blockchain to IOT devices or existing ERP systems is a project in itself well the folks at Microsoft have you covered you already know about the Azure blockchain workbench and how easy it makes bootstrapping your blockchain Network

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visit AKMs slash epicenter and be sure to follow them on twitter at MSFT blockchain we'd like to thank Microsoft and Azure for their support of epicenter so to go back to the some of the mechanisms of how it works so you what the ton of like what's happening here is that you know the concept of slippage exists in you know normal markets as well on like any exchange but it's usually rather a in most exchanges in order books it's an emergent property of the behavior that's exhibited by the actors in the system right so you know you'll often have market makers that come into the

ecosystem and you know providing liquidity and you know to incentivize themselves they you know there's a spread between the bid and the ask and that that's what creates the slippage here in yunusov instead of like slippage being a emergent property it is sort of the core property into the protocol and so can you explain a look you know what what's some of the rationale behind this and what are some of the implications and second-order implications of such a radical change to happen we you know normally think about market yeah yeah so you pretty much nailed it on an order book you basically have you know

constant bids and asks and market makers are maintaining you know spreads right always by this token for one dollar and one cent and always or I'll always buy and then I'll always sell it for $1 in five cents something like that and then the more and then you know the more the the more expensive you get the more people are willing to sell out that price and that sort of creeps this natural the more you buy the the more the price flips in units whap you know it locks you into a curve and it says basically the more you buy relatives is the current liquidity available it's it's a deterministic amount of slippage and part of what that does is it forces all liquidity providers to basically work together rather than to compete right so on traditional order books

liquidity providers are basically you know people with a lot of money usually and very sophisticated setups and they're competing to offer the lowest slippage possible and sometimes that actually you know the way it works in many exchanges is that they basically are paid they are paid by the the company that's you know by the exchange itself to operate tighter spreads to give users better rates and then the company sort of kicked some of that money back and so the company the exchange basically takes money on fees and then they kick it back to the liquidity providers unis Waffen somebody's fully automates at it basically says we collect fees on trades that all goes back to liquidity providers but all liquidity providers

are going to basically offer the same the same rates in the same slippage and then we'll buy pro rata from all of them and then we'll pay fees out to them pro rata as well yeah that is it's a pretty big departure there I haven't heard of very many pro rata exchanges in the traditional finance world but I think it's something that is very difficult to do in the traditional finance world it's something that almost you need something like etherium to create at least in a way that is kind of doesn't require having you know people custody all their funds under one person who's maintaining some some formula and yeah one of the one of the one of the cool aspects of it is basically reducing the complexity of market making and reducing the barrier

of entry to market making so you know swap basically fully automates the spread so you know rather than needing to constantly you know sort of me be watching the price and maintaining the spread if you're if you're a you know of liquidity provider you could sort of look at where you how you think the prices of the tokens will move long-term and then you can just lock them up in liquidity lock liquidity up in you know swap and kind of leave it in it's you know you're taking more bets on the the initial and end price and as long as you're kind of expecting it some some volume it also you know allows you to contribute a very small amount of liquidity so traditionally market makers you know they have they have to have a lot of money to sort of be able to operate

these businesses in unis whap it since it lumps everyone's liquidity together and pays out fees pro rata and takes from them pro rata you know you could put in ten dollars you can put in a thousand dollars you can put in a million and no matter what you'll get a portion of the fees directly proportional to your contribution which is the risk that you're taking in the system so you know swap has thousands of liquidity but like in the thief to die pair for example and you know swap has three million dollars and more than 25% of that comes from liquidity providers you put in less than 1% of the total liquidity so there's plenty of people who put in a hundred dollars or $50 and they're all collecting fees which you know normally you can't be a market maker with $50 so

it almost turns it into to some extent it can for some users turn it into I look at almost Robin hood-like experience for you're like putting in a little bit of money and earning passive income while for other people they're putting in a larger amounts and they're maybe updating their prices and and hang a little bit closer attention I would love to dive in a bit this business model of the liquidity provider because basically let's say in the in the example you made so we have three million dollars that are kind of like locked in this liquidity pool now let's say I put up a million right so a third of this and now all of the trading that's going on 0.3% but it's basically

a fee and that kind of gets added to the liquidity pool so I put up a third let's say of the liquidity pool but the liquidity pool now gross because fees are collected right so I'm now entitled to a third and you know let's say over time maybe a million dollars after like half a year a million dollars for fees are kind of accrued in the liquidity pool so if I and so now the four million in there even though only three it was put in as cash so I could like take it out and I would get like you know one point you know one plus a third of a million out and that would basically be sort of my profits right correct yeah there's some fun rules of thumb with it so basically your Priya

if you take the the daily volume times the fee rate which is 0.3% which is point zero zero three and then you multiply that by 365 days in a year it's basically the daily volume times point zero nine but you can kind of rule of thumb it at daily volume times one is the the value and fees generated so to put it in a different way if you do a million dollars in trading per day on you swap the new swap will generate about a million dollars per year in fees and so there are there's a there's a there the profit side and a lot of side I'm just going to focus on the fees and the profits and then we'll get into where the losses come from because they're they're very separate so you know if you have ten million dollars in

the liquidity pool and you do a million dollars per day in trading then you'll basically you know ignoring losses you have about ten percent returns because you've generate a million dollars per year in fees off ten million in the pool and so that's 11 million ten percent APR there's a whole losses side which kind of you have to factor in as well yeah I know I just just wanted a I asked very briefly on on this this profit side so in the die example you made you have because in the end it kind of works out like an interest rate right like I put in some money and then these fees and it's kind of like you make some return on that so right if you had a very dependable volume in a constant amount of liquidity then it's basically just the daily volume over the total

liquidity is your interest rate right it's a high highly variable interest rate potentially but so what what is that right now for this die market for example you know it fluctuates really because of how the trading works there there have been days where the die market did look like to two million dollars in trading off of you know off like a three million dollar pool which would be like a crazy return right it's it's almost you know it's like a sixty percent return on that day if it did that every day for a year it would be a sixty percent return but then there are other days where does you know two hundred thousand dollars office three million dollar pool which is a little bit lower but the profits in general the die pool has been growing at a rate of about 11 percent 11 percent yeah so it's

about an 11 percent return right now on the die pool I'm sort of averaged out ignoring the the losses side which once again all I'll get into and one of the interesting dynamics seems to be here all right so let's say now in this diagram 'pl I mean if you have two million dollars worth of trading on this market then okay turn would be so high but of course it means that there is a huge incentive for anybody else to like come in and like add liquidity to it and then they can basically take a part of this return and you get this kind of dilution right so you'd expect that if there's a high trading volume the liquidity Pro kind of gross and then the Returns come down again right yeah crack here so you're

sort of expecting the liquidity pools to grow basically the the volume drive in my mind the volume drive liquidity more than the liquidity drive volume though it's kind of both ways it's um it's a little bit weird right because if you have higher volume and then suddenly people have more liquidity suddenly people can make better triggers titres like people can get better rates then they can make larger trade so maybe more people come into the market so it kind of could be a positive feedback loop it could be the reverse we're here you know everything's in a death spiral or you know it find some happy medium but yeah basically you're you're expecting the pools to grow proportional to the volume where everyone's kind of expecting to get some reasonable interest rate kind of similar to where they might be able

to get somewhere else is there any incentive for early liquidity providers so like you know for let's say there's an illiquid market and no I can be the first one to pour earlier finding the quiddity and that can help the market grow the only there's only an incentive in that if there's already a high demand and there's no liquidity then while you're the earlier provider you're getting a higher percentage of the fees until more people join the market but the way Yunus Wahb works is your fees are directly proportional to the to the liquidity that you put up and you know so you can put in a million dollars and you're the first person and you do it for a month and you're getting on two percent of the fees someone else comes in puts in another million dollars you know they're getting 50 percent you're

getting 50 percent and maybe you know they're they're more they're willing to take less profit and then you and so maybe you have to exit a little bit of your liquidity it's really just proportional to what you put in there's no early there's no benefits just because you were there earlier and so is there any quote unquote on bonding period from a liquidity pool no it's all instant so as a provider I could like you know you know given that ethers like the common trading volume I you know it's in my incentive to be running some sort of node that is odd like rebalancing my eath from like different liquidity pools yeah so I mean I talked earlier about how like market makers could get the almost the robbing

her level experience if you know with a little bit of work on our end but for people who are more sophisticated who want to make higher profits they can essentially adjust their rates by making a trip so any to swap you know people to say you know you can't it always likes the market you can't adjust your spot price but you really can by making a trade and add a little quit adding liquidity or making a trade and removing liquidity and then or removing liquidity making a trade and then adding it back in synchronously you just like line up a series of transactions that sort of adjust the rate and your liquidity contributions so there are definitely there's definitely room for a lot more sophisticated market makers and that's something that worries sort of very into and we're experimenting with this as

well and also sort of optimizing you know ideally you can you can model the optimal amount of liquidity for an asset based off certain properties such as volatility of the asset and yeah and demand for it so one of the things that seems like a challenging aspect here let's say you have a market where you know there's not that much liquid do kind of like liquidity goes down then okay but maybe I can go and I can lend my ease on dyma or like block somewhere else and I make whatever 6% there but now the trading volume is very low and you know I'm only making 2% on you know syrup so I want to like take my teeth out and put

it somewhere else but of course that means that now the liquidity has decreased and the slippage is higher so it becomes like even more unattractive to trade so like this is kind of like a death spiral seems to be like pretty likely to happen often no um so that's what I was worried about when I really steam swap it seems to have been the other side of the death spiral it seems to be a life spiral of like trading drives liquidity drives more trading drives more liquidity drives more trading drives more liquidity that seems to I was worried about that early on and you know it's it still is possible especially in certain you know if some assets change a huge amount in value one thing I've noticed is that well but I one thing I've noticed is

that you know when it when I ask it does go down a lot in value there is also a lot more trading in that moment before we get too far into this maybe I should explain a little bit of how of the losses in unisom work I don't I think that you know I think so so profits are just are they're just based off the see volume right and every trade that happens affects the the fee profits and every trade is profitable for liquidity providers in in in in one way but the other the so it's it's you know and we call it like path independent right it arid it's for path dependent sorry every everything that happens on unit swap affects your profits your your fees yeah so basically if a if a asset goes up in

you know swap very high relative to the other so you have Ethan mkr let's say mkr triples and each stays the same as MKR goes up in value the the contract automatically rebalances all the liquidity providers more heavily towards eath right so it sells on the it sells on the way up and it buys on the way down and so you don't get all of the benefits of that MK art rippling and so that basically loses you money relative to holding those assets and so what you need is you need the profits from fees to outweigh losses from this from this Auto rebalancing and and those numbers are really kind of deterministic so you know if you put an Ethan die and in the

price of III doubles relative to die then relative so when you put an Ethan die you put in a fifty percent value of ease and fifty percent value of die so maybe it's you know a hundred thousand dollars of each and then if eath were to double in value you know if you were holding your assets outside of you know swap right you would have you'd now have $100,000 of die still because the die is the same but you would now have two hundred thousand dollars of eath right so your total value at the end would be three hundred thousand dollars but in Yunus whap it would Auto rebalance some of your eath towards die as Heath was increasing in price so if either to double you would actually have five percent less in value than you would if you were if you held

your initial position and so in order for that to be profitable you need to have made at least 5% in fees during that period of time and on the way down is the same way right so basically you always worse off I mean again ignoring the fees if you have your you holding kind of Li you liquidity pair then if you're just holding likeif and I in this example correct although the numbers at which you're worse off is not insanely high and it always performs in between the two assets so if one one interesting way of it's actually the the geometric you basically get the geometric mean of the returns instead of the arithmetic mean so if normally if one asset goes up 200 percent and the other asset goes up

50 percent 100 percent then you get between the two you get one hundred and fifty percent returns on the on the initial value versus in Yunus whap you'd basically get the the Jim at the geometric mean which is always a little bit less than the arithmetic mean so off a to X that's a five percent less of a 3x it's 13 percent less off a 50 percent change it's 2 percent less off a 25 percent change it's like 0.5 percent not less but these these numbers are really you know they can all be predetermined you know if I put them in my assets and they start at this price I take them out and they end at this price like you'll know exactly what that loss is and so if you know what the daily thought of

volume will be in that time period you can sort of adjust your risk and you can sort of see whether or not it will be profitable for you let's talk about security you know gaps are pretty unique because unlike other types of software they can hold astronomical amounts of value that's why getting systems audited creating robust security processes and fostering a culture of security in your organization is so important and to do this you should only trust experts with real security expertise there are a lot of security firms in the blockchain space but few have the experience and track record of trails bits and they've been in business since 2012 long before things like the Dow hack were even imaginable trail of bits works with your

team to audit every aspect of your project and smart contract code is just the beginning they'll help you implement best practices around things like DevOps key storage and user facing applications and once your software has been rigorously tested and reviewed by trail of bits they'll provide the tools you need to make sure that your code remains safe over every new commit they can even put a software security expert at your team's disposal will give you advice and answer your questions when you need them it's like having your own security engineer on staff but don't take my word for it go to their publications repo on github to read their papers presentations and security reviews it's no wonder teams like parody status new cipher and organizations like Facebook and DARPA trust Trello bits for those

security audits to learn more go to trail viscom and if you decide to reach out make sure you let them know you heard about them on epicenter we'd like to thank trail of bits for their support so I mean given that you we can make you know it's pretty easy to mathematically model what the expected loss would be is is there no way we could design a fee mechanism to the market makers that ensures that it overcomes that loss essentially we're like you know to make sure that like you know not not not having it be so constant but that's that's another thing I see is that like you know the fact that it's like fixed at 0.3% and you know right now there's no sort of way for anyone to change that

like we know we had the DX tile project on it the the show a couple of months ago and so they actually have like this Dao that controls the governance of this dough Jack's exchange and the reason that they're able to do this is that so that the Dao can modify parameters of the Dutch X in order to make it you know be competitive with like market forces and so you know they can change the liquidity shares up there like the bee and whatnot but if there's no doubt here in unis wha do you like do this kind of stuff how do we make sure that you know you know swap is able to remain competitive yeah yeah there's a few options and definitely dynamic fees is a open research topic that we're heavily

looking into there are all sorts of proposals such as you know automating the fee based premium proportional to the slippage of the transaction you know that's one example or you know so we're looking into it and the other option is basically you know you could have a different contract for different fee levels and liquidity providers could just kind of deposit a liquidity and the one that they think is you know most likely to be profitable and you know you would assume that liquidity kind of accumulates in the one that has the highest fees part of the issue there is that you can sort of you know then you might split up your liquidity which gives you worse rates for users if you know some if half the liquidity providers on a pair put them

in one fee level and half but in another so it it is um but it is something we're heavily looking into and ideally you know governance styles are fun and oh we would love to have it fully automated in a way that can still be profitable and you know that's something we're looking into and and one option is also to have it proportional to volatility because that is one of the sort of most important metrics for losses and for fees right so it seems that there's essentially three main things like three or four market bail three main factors we should be taking into account one is volume which is what it currently is doing the other is spread which is kind of what most market makers on order book

basic changes that's where their primary profit comes from is off the spread and then the third is the volatility and that's important to take into account because like we said based off of how the losses in you know soft work that is what mostly that's what we need to offset so so kind of dealing with those three aspects is kind of the ya mean I mean I mean funny enough it's been like it's been working like you know the point three percent basically was a it was a Yolo from a conversation with me and metallic about like well might be the most optimal fee and it was kind of the way the way we chose it was basically to be competitive with other Dex's and sort of not having it too low not having it too high and it's actually

working for a lot of markets which is kind of which is pretty cool so the MKR pair for example has been fairly profitable the the dye pair has been fairly profitable for the liquidity providers and it is working pretty well have with the with the Yolo female and so now we're but now we're putting a lot more time we know we have a lot more data to work with because these these are this exchange it's been running for a while it's done you know close to 200 million dollars in trading since November it's a just twenty million dollars locked up and so we're able to look a little bit closer and maybe see how different fee levels would have performed CF different types of dynamic fees might have performed and kind of model it a little bit better and I am it is very likely we're gonna

propose a version two of the protocol that adds in some new features version one of you to swap is very good but I don't think it's like the best it can be and then one more like thing that might you know I'd be personally interested in it you know in a version two would be you know more complex bonding curves right because like currently I think you know x times y equals K seems to be highly simplistic in it you know it's awesome particle on both ends and you know is there any reason why it couldn't be you know some closer the flat or like you know even have constants in like so excuse it somewhat and so is that

something that well one what is the benefit of that x times y equals K is there something some special properties about this equation that makes it useful yeah yeah so the the special property about the equation is that it always keeps a 50/50 value of both assets and it also and there are other there are other equations that might work but it also minimizes slippage or at least that's what this sort of current belief is is that you know we haven't found any other curves that would allow you to have like if your curve moves like kind of steeper in some places and more shallow in other places then you're gonna have more slippage on that play on those places and so in you swap because it's kind of an even curve you you know

no matter where you are in the in the in the market you're gonna have kind of the least slippage possible while maintaining a 50/50 value of each now one one topic that we should bring up here briefly which is of course always a topic for disaster changes is the topic of front-running for example like a minor you can see okay you're putting in a big order there's gonna be some sort of slippage and then they can try to Lloyd that in some way maybe they can like reorder the transactions and put one of their ass in first or you know maybe do some other things so is this front running a concern have you seen any evidence of people actually doing front running and you know what's kind of your faults in general there's definitely front running if you go to ability if it's front run me and I

believe front run me / revenue or profit I forget which one of the days there you basically can see a list of all from running transactions on aetherium this is from a field I and it's a really interesting research but yeah so there's definitely front running very active on all the theory and X's and any theory mode X it says there's no front running unlikely except for maybe unless it has some sort of centralized component to it which is preventing it I guess air swap is is fairly front running resistant and I guess dot Jack's it's fairly front running resistant but so on you know swap the current parameters that are sort of prevent preventing some level of front running is the there's a minimum slippage parameter that you can set when you make

a trade so you can basically say I'm making my true so the type of fronting front running that's really scary for users as you know I'm selling 1/8 then the front runner sees this transaction coming in they put in the transaction ahead of it that pushes the price gives me a worse rate and so I'd make a trade a divorce rate and then they trade back against my trade and they take some profits and the the the most baked-in mechanism for there's a few back mechanisms one is just the fees on the transactions so the mind is that so if you if you do a large trade in both directions on you swap that really pushes the rate a significant amount in a large liquidity pool you might actually have to pay a pretty large fee to liquidity providers for that but that's you know still you can still find

trades where it's guaranteed profit for the for the front runner so that's not really that big a mitigation there's also the but the min slippage value is basically you know I'm selling 1/8 and the current price is 200 died and if I get any less than 100 99.7 die I want the transaction to fail and so you know you don't know someone can push the price ahead of you but only up to the amount that you've allowed in your transaction so that's that's the main mitigation Nina swap the the balance that you're trying to is essentially you know if you make it too tight you know if you say even a point zero zero zero one percent slippage will make my transaction fail then transactions could fail from normal trading volume but you don't really want

to happen you don't you it's kind of bad UX to have all your transactions failing so you want to make a sigh you want to make some allowance but not so much that it's extremely profitable for for frontrunners another sort of mitigation is these deadline parameters which is basically you know this transaction can only execute within this timeframe and so it prevents miners from holding transactions and executing them at a time where it's more profitable for the miner it really it prevents it from them from doing holding them for too long you know if you set it to five minutes and the miner only has a five minute window where they can execute your trade at a better time for them and worse for you now we're looking into some very cool stuff which can help reduce front running or socialize it it's it's kind

of interesting mechanism we call it trader Dow but it doesn't need to be a Dow essentially what it is is a pool of liquidity that grants a specific party first arbitrage right on you know swap in exchange for rebating some of their arbitrage profits to the trader it's kind of an interesting mechanism but basically the way it works is I you know I I I want to make a sell on you know swap so you know like Khyber works for example Khyber basically it's a unlike you know swap which automates the spread they have you know market makers that are posting prices and and then they have a spread so they have a they have their own like price Oracle stuff each

each reserve on chain reserved for a token and then it creates a spread around that price and so they'll always buy at one price will always sell at one price and so you could have a you could have a similar contract that sits in between traders and you know swap contracts and if I want to sell let's say I want to sell a million dollars on you know swap I if I'm selling it into a pool with hat which only has two million dollars in it I mean they get a 50% slippage on my transaction that's pretty awful and the person who profits off that 50 and slippage is not the liquidity provider as you might expect the person who profits off that slippage is the arbitrage the first arbitrage er to shift that rate from to make the trade

in the reverse direction to shift that right back to that to the real rate they make all the profits from that except for the 0.3% fee profit and so instead you could have a liquidity pool that maintains it a sort of privately managed to liquidity pool that's maintaining its own its own sort of price feed that has a large liquidity reserve in it and then I want to make my trade on Yoona swap I say I want to sell this million dollars on Yoona swap you can either do one of two things you can forward this trade on to Yunus swap and it will execute like normal you can't make the transaction fail you can forward it to Yoona swap or you can execute this trade on Yoona swap and then synchronously execute the arbitrage back and then you know if at this shift the right 50% you can shift

the right back from 52 to 45 and then and then I will get it you know I'll only have 5% slippage and then the the person who who pushes the price back the the what is whether the trader dial basically could take profits on shifting it the rest of the way so the 5% to the 0% so that basically is a an interesting way of giving better execution to users and reducing slippage for for large trades so it kind of makes sense I think that does make sense in a higher level now I would love to speak a little bit about the centrist exchanges in general so you know if we've kind of talked about how unit shop works but what do

you think are some of the unique things and like use cases where you think that you know maybe the centrality changes or units or in particular you know they really have like an advantage versus centrality changes yeah I mean there are all sorts of problems with these with centralized exchanges you know mount GOx sure but that's the one people point to but like you can look two weeks ago to buy Nance losing 50 million dollars of Bitcoin or um right so the biggest the biggest vulnerability the biggest problem with centralized exchange is is it's probably security but then they also you know they can shut down your account I used to have a bit tricks account and you know they removed all trading in New York they deactivated my account this

week so I can unlock you spit tracks and add to if I if I didn't withdraw funds in time then I would have lost them all never been able to withdraw another example is someone once send via some ZRX tokens to my they asked me for my coin based address to give me some eath they sent and I didn't realize that they sent we're sending me ZRX tokens which you can send to an etherium address on coinbase but because I was in New York you know I was actually not allowed to withdraw them and so they just permanently locked in coinbase the ZRX tokens because I thought I was getting paid denieth anyway so that's like another example of centralized exchange is not being so great so there's all sorts of security issues there's all sorts of issues with censorship and

thanks getting shut down you know they're also they're also charging really high fees right coinbase if I want to buy some eath it's like a 1% fee or something crazy but you know I guess even which you swap you know tries to lower to 0.3% yeah but you're mostly offered asking about decentralized versus centralized or decentralized with other decentralized yeah I know I think that that was that is good I mean one of there so one of the things that I would encourage our listeners to watch so this is great talk by Arthur Hays and he's the you know the I think CEO or one of the founders of this exchange called bit max and bit max is you know I think the largest volume kind of trading platform

it's so sort of I think quite different from violence but gigantic volumes and it's interesting because it's to talk about decentralized changes and of course he runs a centralized to change but then you know he basically says okay what are the people kind of proposing that are building these centralized exchanges and you know do people actually care about it and you know he makes this argument that okay but people care about you know number one is liquidity you know number two is leverage and those are the two most important things and then he says okay three ease of use and then your security is sort of a like it's nice to have but people don't care about it that much and it was pretty interesting you know

because it kind of brings up the question your to what extent you know are these things that we're kind of building out of this you know idealism and maybe coming to crypto if they said okay people should own their own assets and control their keys and stuff like that versus pings that people actually truly you know demand and want and value yeah um I mean I think that's kind of yes not not to insult Arthur Hays but um like I think that it's true to some extent I think that you know there are things people care about and there are things people don't really care about but like if we don't care about decentralization and we don't care about censorship resistance and we don't care about like being noncustodial then like

why have block chains like what uh what are any of us doing here right none of it matters if we don't care about these things like I also think that like you know hand waving securities a little bit weird and I think that security is one of the biggest properties of decentralized exchanges that matter right reducing you know single points of failure I agree that you can get a lot of volume in a centralized exchange I think a lot of people who are speculating don't care but I think that a lot of people who are like building decentralized projects on a theory of do care about decentralization and I think that like Yunus swaps kind of success so far has been evidence of that you can

see sort of some examples to kind of continue some of the kind of benefits of a I didn't really even get through my complaints on centralized exchanges I just forgot some of them in the moment which is that like for example token listing like if I want to list my token on an exchange like what do you what do I have to do I have to like you know sometimes I have to pay twenty thousand dollars sometimes I have to pay fifty thousand dollars I can't do it and like if you know if you want to if you sort of envision a world with a lot of tokens that like so each filling filling different use cases you know maybe you have personal tokens maybe of community little communal tokens not everyone wants to like sort of pay the entry fee and one thing you could do with you know

swap is basically anyone can create the exchange there in token and anyone can trade it and you can pool liquidity and there have been some like really cool examples of this in unis whap so far so the one cool one was for example was the reddit karma donuts or basically someone someone created a a on ramp for reddit karma reticle II read it introduced a feature that allowed you to track karma on a per subreddit basis and actually transferred around and use it in in polls and so they created a governing system on on the eighth trader subreddit and they allowed people to sort of may use their reddit Karma and then someone created a

bridge that allowed you to turn that into a nearly twenty token on aetherium and someone pinged me one day and was like by the way people are trading retic Armand Yunus laughs I was like wait what I I created you in swap I I made the smart contract to me the front-end but like I didn't know about this and then you know I looked through this sort of the contract and within you know three days of this of this sort of someone creating this reddit GRC 20 bridge people traded $30,000 worth of reddit karma on you know swap which allowed them to vote in governance polls on and then you know the guy who operated the bridge kind of freaked out and shut it down but you know ideally the the social media platform would would have a more decentralized component that wouldn't

allow anyone to shut it down yeah so and another example would be like you know for real tokens like you know spank or MKR that have not traditionally the teams behind them have really been adamant on like not paying listing fees and not like you know and and they've been really hard to buy MKR just been pretty high for most exchanges but because of the permissionless nature if you know swap you know you know swap now has six million dollars in it in the eath to MKR pool and it's basically become the largest exchange for MKR and and similarly it's it's the largest exchange for spank tokens which you know also they don't want to pay the pay any exchanges to Atalissa token and it solves the largest exchange for or so

it's one of the larger exchanges for foam which is another project that sort of follows these values so I think that the permissionless listing allowing anyone to deploy their exchange stuff like this is the big deal I mean I I totally agree with that I think like one of the places where the centralized exchange is really shine over the centralized ones is in this listing of exotic assets like you mentioned and for example let's say someone had like created a staking derivative of like bonded atoms to the course one validator right like which exchange is gonna go list that on let you know you're not gonna get bit max to go list that and like you know provide

all these features but like you know only one can then go ahead and take that staking derivative and like you know create a you know swap contract on it and I think sorry and so you know I think given that that's where you know I think out of where you thought really shines is that it provides some level of usability to even very low liquidity assets and because of this I think it works well where like you can have this like you know it I think you look really kind of probably why we've seen unis law grow to be the largest decentralized exchange so far is because it really hit that product market thing where like okay it is the one that's best for dealing with exotic assets which is what

people are actually using the centralized exchanges for yeah yeah no I agree with that it's also there's also a UX component to it and a kind of integrations component to it or so you to swap is incredibly simple it's it's it's accessible folio on chain you can integrate it into your projects very easily you can you can bootstrap your own liquidity really easily it's you know it's highly programmable I guess one thing that we kind of didn't talk about which I sort of I think I saw in some of the notes for this I bet I was the sort of like the aspect of liquidity tokens and this actually plays into the leverage that Arthur Hays was talking about which is basically if you're a liquidity provider on you know swap you can you know you could lock up some eath

and some die and actually while your your tokens are locked up so if you it you know you have the ability to withdraw your proportional share at any moment but you also get in the ERC 20 token that represents your right to withdraw that share and so you could you basically you burn this token to withdraw your liquidity but you can also transfer it around and it can also be used in other contracts so an example usage could be that you you know you lock up your your your liquid D and you in the swap you get some you get your liquidity shares you collateralize and so you now you now have a position on both assets in your swap you know maybe Ethan MKR and you're also generating fees on your swap and then you can lock up these liquidity tow you could actually take out a loan

against these liquidity tow you could open up a CDP and multi collateral die or on or you could take a loan on Dharma you could you could like you know take a loan and get out against these assets trustless lee and then you could you know increase your leverage you could maybe you could collateralize your liquidity shares and become and take out enough eath to become a validator or maybe you in proof of stake when that exists and maybe you can or maybe you could you know swap you could take out so you could take out some eath and you could swap half of it for a die and you put that back into a little quiddity pool now you've leveraged up on you know swap fees has anyone you created a you know salt market against liquidity pool Latorre tokens yeah yeah you actually

someone did create a Yunus whop liquidity pool for eath to die shares on Yunus whap which is kind of funny it's you know it kind of works it kind of makes sense there's not much of quiddity in it right now but it could be kind of a cool way to like on-ramp onto you know swap really easily if you want to become a liquidity provider and you don't want to go you could just send some eath to this contract and you'll immediately get you'll mediately be a liquidity provider another kind of interesting thing that happened as I think compound sort of saw this this model that we were using that I that we've kind of created for you know swap where you have shares and represent your portion of the pool and they've kind of added this thing they call sea tokens they're compound tokens

which are basically if you lend your die on compound you get something called sea die which represents your ability to withdraw the die that you lent on compound plus any interest generated and so it kind of does you can do the same thing in Reverse you can lend your die on compound and then take out the sea die and then you can lock those in a unit swap pool against eath and actually now you can you know immediately go from eath took to you can go from owning an eighth blood to owning a interest generating dye position and a single swap on you swap and this has actually happened and it kind of allows you to increase your leverage ink once again and this actually already happened you know once again without me doing

anything without me saying anything because it's decentralized compound or some people affiliated or just some random person took you know 150 thousand dollars worth of compound dye and put it in a you know slop pool so now you can you know swap between ether and compound dye a or compound I in any other ear see 20 token and three units all in a single transaction oh yeah I know I totally agree I think that's probably the most powerful thing about the centralized exchange is just this aspect of like okay like easily integrate it and innovate on top so let's speak about business model right because unit swap doesn't you know many tokens like you mentioned or you met many projects you mentioned for example banker is an example is similar but then they put in

the bank or token and of course the banker token they did an IC o---- and they own part of it and if it succeeds it will be worth a lot of money and no kind of set the sort of you know traditional way of monetizing crypto project and now you haven't gone down that way right there's no direct way that unit swap is monetizing you did raise a seed round recently congratulations on that and so you have a company now what's what's the what's the business model of that company so to jump back like I think that like ultimately like there was this traditional there was this IC o---- boom and everyone was telling a token but I think it became clear to a lot of people that it didn't make sense most a lot of

these tokens didn't make sense and I'm not gonna point fingers but like I think that the projects that are going to be successful in crypto our projects that build the best version of that they can not a version that's easiest to monetize and that was sort of the idea going into you know swap that said you know it's a very legitimate question you know how how do you make money on public good because right now even Soph is essentially a public good and I will say that I raised money on the idea devalue that there's value to the brand and the reputation that I'm creating and there's value to being at the center of defy and to being at the center of this

like decentralized exchange thing and this decentralized yet financial system we are still deciding you know we have a lot of cool things we want to build our like a lot a lot a lot of cool things we want to build on top of you know swap and we think some of them can have cool business models to them I'm not ready to kind of like immediately just start listing things off but I will say that you know it's more about you know like it's not that crazy to have companies that aren't immediately generating revenue that are valuable right you know a lot of projects in in this current in Silicon Valley right now are still not profitable and worth you know 50 billion dollars or something right I don't even

know if it makes money yet long story short you know we'll see we have some really cool things we want to build but you know still I I don't want to go too far down the path of exactly what it is until we've more clearly decided on the exact our present did you ever consider no integrating a token in there or like was it clear to you kind of from the start that it didn't really make sense I'm not against tokens I'm not even against integrating tokens into you know swap breaking news I I'm against doing things for no reason if it becomes clear that for you know swap to make sense we need we need a

actual group of people modifying parameters then maybe we need a token to control that but I'm not kind of letting the cart lead the horse on on introducing unnecessary feature or like introducing a token before we before it's very clear that it's necessary so yes there are potential you know dau mechanisms that could make sense or you could just you know generate you know maybe you maybe you build a contract that adds some service or build some cool thing on top of you know swap that it takes out a little fee and it's not built into the core protocol I don't think that everything needs to be built into the core protocol I also something that's been kind of I'm still sort of thinking through but

something that I've been thinking about a lot recently is that in this sort of Silicon Valley model for companies has been like someone creates something they own a percentage of it forever for all eternity and I don't know how much that makes sense I think that like what if what if Mark Zuckerberg created Facebook and Facebook owed him ten billion dollars and then after after he got paid ten billion dollars like screw Mark Zuckerberg he doesn't need any more money for what he did building Facebook initially so I've sort of been thinking about this idea of like protocols Oh owing their Oh their creators something but not something forever anyways it's I

I arranged for more of farkas Zuckerberg with only ten billion dollars readily pour right how awful would it be if he only had ten billion dollars and that you know 50 percent of Facebook for all eternity yeah so I I just if something I've been thinking about like yeah I think that you know public there is a really interesting trade-off between like profitable projects and like and like optimal project in the crypt of space and it's kind of interesting but ideally you know you can strike a balance and I'm not like personally to worry yet we have a pretty decent runway to work with from our seed round and and we have a lot of cool ideas yeah I mean

that's where I think like things like the Z cash founding founders reward and stuff are also like interesting ideas yeah definitely and so really quickly you know kind of going back to like exotic assets and you know your revenue model you know I think one of the most exotic assets I've heard about being traded on you know suave is these tokenized socks ah could you tell us a little bit about these yeah this is the project that really just wanted to do for an incredibly long time I kind of came out of these ten wearing one of these you know swap shirts which we're sort of cool and so we kind of you know people kept telling me oh you should create a liquidity pool for your unit shirts and you know people I've been

sort of thinking about what it means to kind of combine these digital assets with these physical assets and so sort of a high overview of what unis ox is is we created a a token stocks it's called that's the ticker and the name is Eunice ox version one or an Edition one and each and the idea is simple you you you create these socks a limited scarce supply so we created 500 socks tokens and then we locked them in the liquidity pool with some eath and so that sets this initial bonding curve where everyone you can send eath to the contract and you get socks out or you could send socks to the contract and you get eath out but we put the because we put the total supply of all socks in it from the very beginning and no more can

be created directly into the liquidity pool with eath that kind of starts you all the way at the bottom of the curve and so every pair of socks you buy kind of increases the cost of the next one but at any point in time you can sell back into the market so if you buy 10 socks and someone else buys 10 socks then the first person can sell them back and actually make some profit and so it's kind of it's a kind of a funny thing but what will happen is that you know every sock token will be redeemable you know you can sew the 500 sock tokens and you can burn a sock token and it will be redeemable and basically pat out give up you know send your address and we'll mail you a pair of socks a limited-edition high-quality socks with you know with the name with with a cool

design on it anywhere in the world basically well almost anywhere in the world Phill Diane was creating a tax on units law they are on you know socks the other day and he would pointed out that two ways the two two things you couldn't we couldn't send it to his you know sanction countries and you can't sense the other so that would be an attack of you if you're like burned the stock token and say send it to this address and then sanction country obviously we're not gonna do that the other attack would be getting a sending hi ordering a few pairs of socks to an address getting out a restraining order for stuff for some weird person sending you socks and then ordering more socks but anyway that's kind of going way down a rabbit hole

but is that obviously you will only send it to a reasonable location but yeah so every pair of socks every socks token can be burned and will will be redeemable for a real pair of socks mailed directly to your address and it's an experiment with UX in in a buying stuff on through crypto it's an experiment in price discovery for rare merchandise so an interesting thing is that like if you--if Nikes buddy releases like a rare pair of sneakers a rare addition Easy's or something no there's a limited supply and they sell them at a flat rate right though we're probably usually if you know maybe was $200 for $300 each but then there's this

whole secondary market that's created around it where people buy them for $300 and they resell them for $2,000 or you know the first people to buy them can tell them a lot more and strangely you know Nikes only indirect doesn't really directly benefit from the fact that they're there and the creators is in the designers of the set of the of the shoes also they don't directly benefit from the socks going to 3,000 dollars versus 300 and Leslie maybe keep a few pairs for themselves or something like that so the idea with this is that you know you you put it on this bonding curve and then the the price if the the asset will just automatically go to you know whatever the value is whatever people are willing to buy for it and the the company created it the designers behind

it they can kind of directly profit from the secondary market which is kind of built in there's only it's like there is only one there's no need for a secondary market because it's built into the the primary market all right start that is you business mall it's not our business model directly but like it's in it's a it's an experiment it's I mean we didn't do it for no reason it's we technically sold ten thousand dollars worth of socks and in like two days back and there's been about and funny enough you know we still ten thousand dollars shocks but people are trading them back and forth now and there's been probably like fifty thousand dollars worth of socks trading not stocks trading stocks trading sin in the past few weeks which is which is

pretty funny cool thanks so much for coming on and it was really thing to hear about unis WAP and you plants I think lots of lots of exciting things here and we're really excited to see kind of like what what's gonna come out of it with all these improvements and different plans and iterations on it so yeah thanks so much for coming on yeah thanks for having me we released new episodes of epicenter every week click here to subscribe for hundreds of insightful interviews with some of the leading minds in blockchain and crypto you can also listen to the audio version of the podcast on iTunes Spotify stitcher and other podcast apps click here for a full list of places where you can listen thanks for watching at the center and we hope you'll join us

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