Podcast Summary
This podcast episode features Anna from CowSwap and Ludwig from Sorella Labs, discussing the concept of batch auctions as a mechanism to mitigate Miner Extractable Value (MEV) leakage. The conversation delves into the benefits of batch auctions, the issues of riskless arbitrage profits, and front-running in financial markets. The hosts also explore the potential of batch auctions in preventing MEV in decentralized exchanges (DEXs), the importance of redirecting MEV back to liquidity providers (LPs), and the role of solvers in CowSwap.
Key Takeaways
Understanding Batch Auctions and MEV
- Batch Auctions: Anna explains that batch auctions process trade requests in discrete time units (batches) rather than continuously. This method can mitigate MEV by removing slippage tolerance and inefficiencies caused by transaction reordering.
- Miner Extractable Value (MEV): The hosts discuss the issue of MEV in decentralized exchanges like Binance, where sophisticated actors extract value from stale quotes of LPs. They propose mitigating MEV by shifting the auction system to pay LPs directly for executing arbitrage.
Decentralized Applications and Sustainability
- Redistributing Value: The hosts emphasize the importance of designing mechanisms that are MEV-aware and redirect MEV back to LPs, making decentralized applications sustainable and preventing centralization.
- Collaborative Optimization: The need for applications that promote collaborative optimization and maintain permissionless competition is emphasized. The speaker suggests designing applications that address privacy and hyper-competitiveness without introducing unnecessary inefficiencies.
Guard Network and Batch Auctions
- Guard Network: The podcast discusses the concept of a network called the Guard Network, which is dedicated to a specific application and can be run by anyone who provides stake. The network removes the power of proposers or builders to sequence and order transactions by structuring them within a bundle.
- Batch Auctions: The batch auction finds the point of intersection between supply (sell orders) and demand (buy orders) to determine the fair price. LPs only provide liquidity at the final price, eliminating stale quotes.
Market Makers and Liquidity Providers
- Market Makers: Market makers typically have a portfolio of the top 20 assets, even in a batch auction model that can do ring trading. Certain assets will always require on-chain liquidity, even with advancements in order book liquidity.
- Liquidity Providers: The current model of passive liquidity provision on-chain is inefficient and plagued by problems like LVR and continuous arbitrage. Third-party services and decentralized applications may offer more efficient ways for passive LPs to provide liquidity and have it managed for them.
Building on a Hook and On-chain Price Discovery
- Building on a Hook: The hosts discuss the potential downsides of building on a hook, mentioning the concern of being less gas efficient due to operating within the design of Uniswap V3. However, they argue that this concern is not significant because hooks can achieve substantially cheaper swaps through batching and off-chain computation.
- On-chain Price Discovery: The hosts discuss the possibility of moving price discovery on-chain for major assets like Bitcoin or Ethereum, but express skepticism about its feasibility in the near future. They explain that the limited capacity of builders to post transactions on-chain and decide which ones get included could lead to censorship and manipulation of on-chain price discovery.
Sentiment Analysis
- Bullish: The hosts express optimism about the potential of batch auctions in mitigating MEV and improving the efficiency of decentralized exchanges. They also show enthusiasm for the innovative design of Angstrom, which separates MEV opportunities from the rest of the blocks, redirecting the flow back to liquidity providers or swappers.
- Neutral: While the hosts acknowledge the potential dangers of natural monopolies in the Builder Searcher market, they believe that designing a competitive game and allowing for competition is crucial. They also express a neutral sentiment towards the feasibility of on-chain price discovery in the near future, acknowledging the need for fundamental technological advancements and zero-to-one innovations.
