TWAMM Research: July 2022

We achieved a major development milestone this month 🚨-- our alpha codebase was released for feedback from early integrators and collaborators! The reception from the community has been overwhelmingly supportive 🙌.

Please feel free to reach out directly via twitter if you’re interested in getting early access to our private GitHub. We are planning to release a major code update end of August and are prepping for early access mainnet release end of Q3.

Big Picture

Very early into the development process of TWAMMs, we understood the freedom afforded to us to explore new incentive models. We have the luxury of learning from the previous design mistakes & improve upon them.

Passive LP & ME-V

One such frontier is MEV protection for passive LPs -- introduced in our March update. A common knock against Uniswap (and other DEXs) is LPs get run over by arbitrageurs who collect vastly greater profits than paid out by the standard fixed swap fee.

Market Opportunity

How big of an issue is this for LPs? Currently, over 50% of the trading volume on Uniswap comes from MEV bots. How much is that in dollars? Uniswap (V2 + V3) accounts for roughly 79% of the ~$672M MEV extracted according to flashbots explorer.

A Win-Win-Win Proposition

TWAMMs provide us a unique opportunity to explore MEV protection because the majority of short-term traders are arbitrageurs and a big chunk of long-term trades are uninformed flow. This enables us to better align incentives between traders, arbitrageurs, and liquidity providers.

Lower Slippage for Traders

Long-term traders care about good price fills, i.e low slippage, and are time-insensitive so the trade can be spread across multiple blocks. Instead of paying gas for executing sub-orders, TWAMM automates the trade & transfers the gas costs for correcting asset prices to arbitrageurs.

Price movement along the bonding curve during long-term swaps and arbitrage corrections
Price movement along the bonding curve during long-term swaps and arbitrage corrections

First Right for Arbitrageurs

Instead of grim triggering (paying miners most of the profit), select arbitrageurs get a lower swap fee to correct asset prices and in turn earn a return. Instead of paying the profits to miners for transaction priority, the searchers share MEV profits with liquidity providers.

Over 35% of MEV is paid to miners for transaction priority -- Flashbots Explorer
Over 35% of MEV is paid to miners for transaction priority -- Flashbots Explorer

Higher Profits for Passive LPs

Finally, LPs actively benefit from the MEV captured in this new model. Unlike the old model where LPs received a standard swap fee regardless of the amount of MEV extracted, here LPs receive a chunk of the extracted MEV in addition to a lower base swap fee.

Profit sharing between TWAMM LPs and arbitrageurs
Profit sharing between TWAMM LPs and arbitrageurs

Product Updates

We are still looking to engage the broader community to explore new use cases for TWAMM that will help guide some of our remaining design decisions. Here are some interesting use cases we’ve collected from customers so far.

Design Feedback

As discussed in previous posts, TWAMMs provide strong benefits where large trades need to be executed trustlessly in an environment that is robust against front running while reducing slippage and low liquidity effects.

Our particular TWAMM implementation currently has the following design choices that we are seeking feedback on from people with existing and yet to be discovered use cases:

  1. View functions to get quotes, virtual balances, order status, and fees are in progress. We believe these functions will be key for front-ends, dashboards, and integrators to provide accurate information to their end-users. What other view functions would help that we might have overlooked?
  2. UX, we are interested in novel ways to interact with TWAMMs like order progress, swap fill, virtual liquidity, etc -- see example. What are good UX examples we should explore in DeFi and beyond?
  3. Periphery contracts cost additional gas to help users interact with TWAMMs. However, we believe the majority of early integrations will be highly technical teams (arbitrageurs, DeFi protocols, liquid funds, etc). What additional reasons are there to provide these gas expensive helper features, beyond ease of use?
  4. Our initial selection for block intervals is 15 minutes (ETH<>Stable), 60 minutes (Blue Chip), and 4 hours (Low Cap/New). We selected these intervals to provide a wide distribution and also limit issues when creating pools. What other block intervals would be worth exploring, or are there intervals from TradFi we should explore as well?

Upcoming Work

More code and race to mainnet release!

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