Titania Research Alphaist
To date, the majority of DEXs have been based on the Automated Market Maker (AMM) mechanism used by Uniswap, Curve, and others. On the other hand, it is an undeniable fact that as AMMs have become more popular, some serious problems have arisen. For example, Sandwich Attack is a pending issue for traders, and The concept of Loss versus Rebalancing (LVR) casts doubt on the sustainability. To begin with, Blockchain is a discrete system. Creating a system predicated on continuous operation poses significant challenges. It is also extremely difficult for a decentralized system to compete with a centralized system in terms of latency. To solve the above problems, Uniswap, for example, proposed UniswapX, which constructs a filler network using Dutch Auction. However, UniswapX also has three concerns: dynamic auction construction, centralization due to latency competition, and execution quality of the filler.
In RFQ systems such as UniswapX, 1inch, and CoWSwap, traders' orders take the form of bids by Fillers and Solvers via auctions. Auctions are considered a very important mechanism in Blockchain, where latency is a bottleneck, but it is extremely difficult to execute auctions on-chain. Suppose we consider a mechanism where the Bidder's Bid is included in the Block and it is executed for a certain period of time. In this case, the censorship resistance is the biggest concern. Even if an ordinary user makes a bid in the auction, it is the Builder or Proposer who includes the bid in the Block. However, if the auction is something from which some profit can be extracted, they will not actively include the user's transaction. It is also difficult to build an active auction model on-chain. For example, UniswapX defines an on-chain Decay Dutch Function, but since this function is based on timestamp, it ends up being a discrete auction. For example, consider the function pb = 100 - ts, where pb = 100 - 12s, since the Blocktime is 12 seconds in Ethereum. And if state = 1, the bidder would win at $88. However, it is not possible or meaningful for a bidder to win at $99 or $98. For bidders, latency can be a major issue for bidders because the amount available for bidding per Block is fixed in advance. These and other latency issues are discussed below.
UniswapX and 1 inch Fusion use Dutch Auction, which tends to execute orders faster than English Auction. Dutch Auction is an auction system with a gradually decreasing price, which requires bidders to quickly place bids at their desired prices. This means that latency is a very important factor in bidding. For example, a typical Filler needs very high transmission speeds to send bid data from Tokyo to a central server in New York, and the physical distance to the server is another factor that cannot be ignored, as is the latency competition in the existing financial industry. Since Filler bases its bidding behavior on prices offered by Binance, Coinbase, and others, high latency is a major disadvantage. This high latency sensitivity can cause centralization problems for Filler Network. In other words, it could create a situation where only large players with fast communication networks and advanced communication technology can trade favorably. Of course, as long as Filler is always offering better prices, this cannot be a pressing issue, but it is an alarming one, such as a cartel in the event of an actual oligopoly. In fact, UniswapX transactions are executed by a very small number of fillers.
3) problems with execution quality of Filler and Solver
In UniswapX and 1inch Fusion, Filler and Solver have direct relative transactions such as Direct Fill, in addition to transactions through DEX Pools such as Uniswap and Curve. Here, we will take UniswapX as an example to delve deeper into Filler's execution quality. Currently, the UniswapX filler is extremely centralized, with two to three addresses handling UniswapX transaction. UniswapX has a diverse set of parameters that users must evaluate when trading, and it is very difficult to scrutinize them. Certainly, parameters are specified as given from the UniswapX UI, so there is not much effort required from the user. On the other hand, there is no way to determine whether the set Parameter is appropriate or not. Although it is expected that users can enjoy better execution quality through DEX's Pool, Filler and Solver execute uninformed flows that are not appropriate by direct fill. We have also compared DEX prices with respect to Filler and Solver's execution quality. However, if more uninformed flow is executed directly by Filler and Solver, liquidity providers will be exposed to more toxic flow. In this case, liquidity providers would suffer further losses and they would exit. Therefore, it can be pointed out that, especially in DEX pools where the CEX takes the lead in determining token prices, it may become difficult to obtain prices on-chain based on AMM as it has been in the past in the long run.