Hasu & Hart on Oval & The Recapturing of Billions in DeFi Liquidations

Today on the show, we’re talking about Oval, a new DeFi primitive that Hart Lambur from UMA is introducing to the world of DeFi’s biggest lending markets. Billions of dollars have been liquidated from protocols like Aave, Compound, and MakerDAO over the years, and these liquidations have been extremely inefficiently priced, due to reasons! Reasons that we will discuss here on the show today. Hasu also joins us on this conversation today to discuss the way that MEV share from Flashbots is a part of this conversation, and he helps illuminate what this means for DeFi going forward as a whole. ------ ⛓️ Visit dydx.exchange to learn about dYdX Chain https://dydx.zone/3SfJTP7 ------ 🎧 Listen On Your Favorite Podcast Player: https://bankless.cc/Podcast ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2 ⁠ 🔗CELO | CEL2 COMING SOON https://bankless.cc/Celo 🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/toku 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle 💸 CRYPTO TAX CALCULATOR | USE CODE BANK30 https://bankless.cc/CTC 🦄UNISWAP | ON-CHAIN MARKETPLACE https://bankless.cc/uniswap ------ TIMESTAMPS 0:00 Intro 7:15 MEV & Oracle Foundations 11:19 Why Solving MEV is Important 21:16 High-Level Patterns 28:19 The Oval Mechanism 42:23 MEV Share Parameters 48:36 Decentralization of the MEV Share 54:30 Auction Length 56:08 Oval B/D Adoption 58:05 Uniswap v4 1:02:31 Oval Cut Upside 1:05:45 Future Questions to be Answered 1:08:42 Closing & Disclaimers ------ RESOURCES What is SUAVE? FlashBots Phil Daian and Andrew Miller explain https://youtu.be/j3ZM2ZdUWXU Oval https://uma.xyz/ https://twitter.com/UMAprotocol Hart https://twitter.com/hal2001 Hasu https://twitter.com/hasufl ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures ⁠

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:03David Hoffman?

  Welcome to Bankless, where we explore the frontier of DeFi market structure and capital efficiency. Today on the show, we're talking about Oval, a new DeFi primitive that Hart Lambert from Uma is introducing to the world of DeFi's biggest lending markets. Billions of dollars have been liquidated from protocols like AVE, Compound, and Maker Dow over the years, and these liquidations have been extremely inefficiently priced due to reasons, reasons that will be discussed here on the show today. The long arc of DeFi has been one that trends towards capital efficiency, efficient price discovery, and ultimately better quality products for its users. This episode today discusses a new mechanism to further DeFi's maturity on this very important arc. Hasu also joins us on this conversation today to discuss the way that MEV share from flashbots

• 0:48David Hoffman?

  is a part of this conversation, as well as helping illuminate the further direction that DeFi is going forward as a whole with mechanisms like this. One more part to this conversation that I want to add here that was unsaid in the podcast, this conversation is about bringing mechanisms into DeFi that allows DeFi to leak less value to MEV bots, allowing DeFi customers and users to retain all of that value, and also increasing the economic viability of the DeFi app layer on Ethereum and in crypto broadly. This is a transfer of value away from MEV arbitrators to DeFi apps. What this ultimately means is that this is a transfer of value away from ETH validators, the ultimate beneficiaries of MEV, and towards the users and customers

• 1:31David Hoffman?

  of DeFi products on the Ethereum app layer. As long been known that the ultimate destination of the DeFi landscape, no matter what chain we're talking about, Ethereum, Cosmos, whatever, is that the value that MEV has will ultimately be retained by the source of that MEV, not by any downstream actors. And the reason for this is obvious. If you're an application that creates MEV, you're also the entity that has the most optionality of directing where that MEV goes and its conditions for capture. So why wouldn't you just capture it for yourself and improve your bottom line and the quality of your product for your users? This early hypothesis has been stated by many in the MEV world. And it's the thing that the Cosmos app chain believers have been chanting about for a while now.

• 2:14David Hoffman?

  And it's being shown to come true within the innovation being discussed today on the podcast. So enough of my table setting. Let's go ahead and get right into the episode with Hart Lambert from UMA and Hasu from Flashbots. But first, a moment to talk about some of these fantastic sponsors that make this show possible, especially Kraken, our preferred exchange for crypto in 2024. If you do not have an account with Kraken, consider clicking the links in the show notes to getting started with Kraken today. Kraken knows crypto. Kraken's been in the crypto game for over a decade. And as one of the largest and most trusted exchanges in the industry, Kraken is on the journey with all of us to see what crypto can be. Human history is a story of progress. It's part of us, hardwired. We're designed to seek change everywhere, to improve, to strive.

• 2:57David Hoffman?

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• 3:42David Hoffman?

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• 4:27David Hoffman?

  Click the link in the show notes for more information. You know Uniswap, it's the world's largest decentralized exchange with over 1.4 trillion dollars in trading volume. You know this because we talk about it endlessly on Bankless. It's Uniswap, but Uniswap is becoming so much more. Uniswap Labs just released the Uniswap Mobile Wallet for iOS, the newest, easiest way to trade tokens on the go. With the Uniswap Wallet, you can easily create or import a new wallet, buy crypto on any available exchange with your debit card with extremely low fiat on-ramp fees, and you can seamlessly swap on mainnet, Polygon, Arbitrum, and Optimism. On the Uniswap Mobile Wallet, you can store and display your beautiful NFTs, and you can also explore Web3 with the in-app search features, market leaderboards, and price charts, or use Wallet Connect to connect to any Web3 application. So you can now go

• 5:12David Hoffman?

  directly to DeFi with the Uniswap Mobile Wallet. Safe, simple custody from the most trusted team in DeFi. Download the Uniswap Wallet today on iOS. There's a link in the show notes. Bankless Nation, I'm super excited to introduce you to Hart Lambert, the founder and CEO of Uma. Hart, welcome to the show.

• 5:28Speaker 01

  Thanks, David. Thanks for having me.

• 5:29David Hoffman?

  Hart, we had you on two years ago, I think, to talk about bridges way back in the day. It's good to have you back, my man.

• 5:36Speaker 01

  Yeah, good to be back. Good to see you.

• 5:39David Hoffman?

  And reoccurring guest on the podcast. Well, I guess both are reoccurring, but Hasu's been on a few more times than you, Hart. Hasu, Strategy Lead at Flashbots, as well as just ecosystem researcher and crypto economic enthusiast, Hasu, welcome back to the podcast.

• 5:52Speaker 02

  Hey, David. Nice to meet you. Hi, Hart. Don't think we've met yet on a podcast, but I'm looking forward to this.

• 5:57Speaker 01

  I like the crypto economic enthusiast moniker. That's a good one.

• 6:03David Hoffman?

  I think that's the right title for Hasu. I think that's the right title for most people that come on this podcast, but Hasu especially.

• 6:07Speaker 02

  That doesn't make it very special, David, you know?

• 6:11David Hoffman?

  The lead crypto economic enthusiast that I know, my preferred.

• 6:18David Hoffman?

  Okay, guys, we're going to get into a conversation that I think bankless listeners will be familiar with. Longtime bankless listeners. This is inside of the subject matter of MEV, maximally extractable value, miner extractable value, later rebranded to maximally since we no longer have miners in Ethereum. But we're talking about a specific kind of MEV, which has been dubbed oracle extractable value. So I think this just falls inside of the category of MEV, but it's around a certain set of how the MEV arises, which is through oracles. And this is going to be a conversation that I think talks about the way that applications on Ethereum produce MEV through oracles, the sustainability of applications, the healthiness

• 7:03David Hoffman?

  of the aggregate DeFi applications, a lot of these different subject matters. So it's probably going to be a decently technical episode, but I think we can also make it pretty understandable for people who already know what MEV is. Hart, can I ask you to maybe just set up the context of what we are talking about? The foundations for what's going on? Like, like I said, bankless listeners will know what MEV is, but applying it in an oracle's framing might be a little bit new for them. What is the landscape? What is the problem set that we are going to be addressing here on this episode today?

• 7:36Speaker 01

  Yeah, absolutely. And we can make it concrete and then maybe generalize it a little bit more too. But today, oracle updates, and let's talk about like chain link updates. Chain link updates drop into the public mempool on Ethereum.

• 7:52David Hoffman?

  Chain link price updates.

• 7:53Speaker 01

  Price updates, correct. Chain link price updates get dropped into the public mempool on Ethereum, and then they get used by DeFi protocols. And if a chain link price update triggers a liquidation, if that price update drops below a liquidation target on a OvA or compound position, that liquidation then...

• 8:15Speaker 01

  Triggers a bunch of, bunch of things, but basically collateral getting sold.

• 8:20David Hoffman?

  And

• 8:21Speaker 01

  And it triggers MEV. It's, it's not dissimilar from a user submitting a Uniswap trade with slippage into the public mempool, which we all understand creates MEV and like creates a sandwich attack and creates other things where

• 8:38Speaker 01

  searchers will construct transactions to extract the maximum value possible from that Uniswap transaction. Well, basically, we have the same thing going on with chain link price updates, where the chain link price update looks very conceptually similar to an unprotected Uniswap transaction with slippage. And it creates MEV that gets leaked and ultimately captured by Ethereum validators.

• 9:06David Hoffman?

  And I believe that the amount of MEV that's captured from AVE Compound liquidations can be quite large. I think this probably happens more, this, this amount of MEV capture is more when there's times of volatility and probably times of bull markets as well. And really just to set this stage, this stage here, we are talking about MEV. We're talking about MEV. This is MEV. It just, we're talking about specifically MEV that happens as a result of price oracle updates, which most of DeFi is chain link. So like Ether is at $1,000. It drops down to very quickly $950. A bunch of DGENs get liquidated, but then there is the fight to be the liquidator of these positions.

• 9:49David Hoffman?

  Well, Har, is there like some numbers or some measurements or metrics about like how valuable this MEV is? Like how much value is being squeezed out of these applications?

• 9:59Speaker 01

  Yeah, totally. I mean, estimating MEV is quite difficult. But within like AVE and Compound, we can have a very clear theoretical kind of bound. And the way AVE and Compound work is when a chain link update, price update comes in that causes liquidation, AVE and Compound then sell collateral at a discount. And the, the reason why they sell that collateral at a discount is because they really want to make sure the collateral gets sold to keep the protocol healthy. So that discount is between 5 and 10% depending on the asset. And if we look back over the history of AVE V2 and V3 and Compound V2 and V3

• 10:38Speaker 01

  over the last about two years, we can see that $150 million-ish of liquidation discounts have been sold. So there's been liquidations, a billion and a half dollars liquidations that have caused discounts of about $150 million, and that money has been lost to MEV. If we zoom out and go a little bit further and look at kind of, you kind of think of AVE and Compound since their existence, I think that number is much bigger. It's like quarter million or quarter billion, 300 million type number that has been lost because of liquidations that are really selling collateral too cheap.

• 11:19David Hoffman?

  Hozu, I want to get your perspective on what would happen if this were left unchecked. Hart talked about some parameters about collateral Ether or maybe less liquid assets being sold at a discount. Maybe you could talk about why it's being sold at a discount and why that's important to the protocol. And then overall, if this version of MEV is left unchecked, Oracle extractable value, like what would happen into the future? Because we all want Ethereum, DeFi, any DeFi and any chain to be the world's global financial system. Why do we have to solve this problem? Why is it important?

• 11:56Speaker 02

  Yeah, so to the first part of your question, so why is it sold at a discount? I think Hart actually gave a very good explanation here. So when you want to sell, when you want to buy a token on Uniswap and the token is quite volatile, then you don't exactly know what slippage to set, right? And so if you set a very tight slippage, then you risk not getting in the next block because maybe the price moves against you, right? And the same is true for a lending market. So if they want to sell a token now, they have this trade-off between basically setting a higher slippage, maximizing the chance to

• 12:36Speaker 02

  Get into the next block or setting basically a lower slippage and risking that maybe the the price doesn't take place in the first block, maybe it takes longer time, right? And so you have this.

• 12:48David Hoffman?

  So it's just a protective mechanism that they need to sell this collateral because they must not have bad debt?

• 12:55Speaker 02

  Yeah, so I mean, this is really a design choice by the protocol itself, I would say. So if you're on Uniswap and trading shitcoins, okay, so what's the worst that can happen? If you don't get to buy this position now, okay, you maybe incur some kind of opportunity cost. But the lending market, you could argue, has a much higher responsibility to that capital, right? So they manage the money effectively of many different depositors, right? And so if they let someone get away with bad debt, then that has to, bad debt has to be socialized somehow. So in the first charge probably would go, in the first instance, would probably go to the token holders of that project as a first line of defense.

• 13:38Speaker 02

  And if that doesn't help, then at some point you have to socialize the money on depositors effectively, because there's nobody else there, right? In crypto, you can't, you don't have any legal recourse or anything like that. And so that's why traditionally lending markets have chosen to be very rigid about how fast they want to liquidate in order to minimize the risk that they internalize any of that bad debt either to their token holders or to even to their depositors. And I think that paradigm, I guess, is changing a little bit.

• 14:22Speaker 02

  So I mean, if you look, if you look kind of at the slippage that, for example, a protocol like AWE or Compend has been quoting, five to 10% is a lot and it's more than maybe they need to. And so they tend to bleed a lot of money by doing that. And we've seen some protocols basically handle this problem by spinning up their own auction mechanisms. Like Maker, for example, Maker has, I believe, a reverse Dutch auction. So basically, the money that they, the price that they charge to liquidate this collateral basically starts low and then it increases every block.

• 15:06Speaker 02

  And so this is at the opposite end of the spectrum, right? So where Compound says, I must liquidate this in one block and so I'm willing to pay a lot for this, or I'm willing to accept a low price, you could also say on the other end. Maker says, you know, I'm fine. You know, what Maker actually does is they only bring Oracle updates on chain with one hour delay. So the Oracle update comes on chain, but it can only be used for liquidation after one hour. So they actually say, hey borrowers, we're going to give you a big fat warning. Your position is underwater now, right now. And if you, like, if you don't actually top it up within the hour, then we'll start liquidating

• 15:51Speaker 02

  you. But even then, they have this, this increasing price auction where they give the borrower even more time, right, basically to top it up. And sometimes transactions take, or like that takes longer to liquidate in Maker. So Maker is a protocol that's very borrower friendly. And then a protocol like Avi or Compound is much more lender friendly, I would say. And so you have these different sides of this, of the spectrum. And it's really a design choice, you know, because they compete in the market. And I think it's TBD what, what works better and what's ultimately preferred by the market.

• 16:28Speaker 01

  Also, the only thing I'd add is there, there is a trade off here too, where in the Maker design, when you have that hour price delay and then the slower liquidation process, you need to have higher collateral requirements. Because if you do have a kind of worst case scenario where a price is trending in a negative direction, in the Maker system, you need more of a buffer because it takes longer to perform liquidation. And so you need more, higher collateral requirements are generally required there. And it also, the kind of Maker design wouldn't work very well for higher volatility assets like. Shitcoins, right? So there's this sort of trade-off space that you're alluding to,

• 17:13Speaker 01

  where you could run this slower kind of reverse touch-touch auction to bleed less money, but you can't support higher-ball assets and you probably have higher collateral requirements there, too. So, big trade-off space.

• 17:32Speaker 02

  Definitely. And so why do we care about, I guess, MEV in general, right? So, by the way, the connection that I would draw between MEV and OEV is that MEV is basically money that privileged parties in any system can extract from other participants of that system through asymmetry of power or information. And it comes always from a conflict between different preferences. Two people wanting the same thing and then basically bidding to that centralized party in order to get that preference ultimately. And so, in the context of MEV, that's the validator, right? So if two people want to make the same trade,

• 18:14Speaker 02

  then the two people compete on the fee that they pay to the validator and hence bid up the price and so the money goes to validators. And so, how does it fit in the context of an oracle update? So when the oracle transaction actually goes on-chain, then the liquidation is basically become unlocked, right? And the transaction that's immediately following that oracle update then is the one that can capture that slippage limit, that slippage tolerance in value effectively. The difference between that and kind of the price at which they can internalize their trade.

• 18:52Speaker 02

  And when you kind of let that unchecked, this ability for validators to really like extract different amounts of value from their blocks, then what you end up with is basically possible centralization spiral in the system. And for some systems, that's okay. In many cases, we solve actually MEV through centralization

• 19:17Speaker 02

  in like many real-world systems. But in crypto, that's explicitly not what we want, right? We want to have this really decentralized base layer because that's like... The valid data layer is the root of trust in Ethereum and we want Ethereum to become the root of trust in the global financial and economic system in the future. And so that's why we put so much emphasis on keeping that valid data layer decentralized.

• 19:44Speaker 02

  And yeah, the company that I work for Flashboards and many others, I would say have done a lot in order to, in the first step, keep the valid data layer decentralized by making the same value blocks available to all the valid data, to techniques like MEV boost. And I mean, but what we're seeing right now is, for example, that a lot of decentralization is basically accumulating at the block building layer. So right now, there's one block builder that's building, I think, 70% of blocks. And this is also something that we predicted, because there's a lot of network effect and scale economies and kind of rich get richer effects in MEV and in block building.

• 20:29Speaker 02

  And so if you look at the block building layer now and you say, wow, it's looking very centralized. And this is effectively what was prevented on the valid data layer by introducing systems like MEV boost. But in the block building layer, it's kind of more isolated and compartmentalized and we are kind of, it's more solvable in some ways.

• 20:50David Hoffman?

  Right, yeah, this has been my understanding since we did our end game episode with Vitalik, where centralization in the block building layer has more optionality and checks upon the block builders than we do with validators. Once centralization happens at the validator level, it's kind of a one-way street, kind of hard to come back from that. But with centralization, the block building layer, there's a lot of checks and balances, like proposer builder separation is one of these things. I kind of want to zoom all the way back out and talk about the highest level pattern that I see happening here, especially once we extend DeFi to becoming the global financial system. That's why I'm here in crypto, that's why many of us are here in crypto.

• 21:31David Hoffman?

  And so say these markets aren't growing just by like 10x or 100x, but are like 1,000x bigger. And we have applications like AVE, like Compound, like Maker, becoming some of the foundations of borrowing and lending for the entire globe. This is this Oracle extractable value in its current form without a solution here. It would be a transfer of value from these applications and from the users and customers of these applications towards the infra level. So it's like the infra level taxing the application level. Applications are leaking value to the infra. And Hozza, I think was something that you kind of alluded to is like when you do that,

• 22:11David Hoffman?

  you're kind of pressing the gas on the centralization of the infra level. And so with higher level solutions, which I think we're about to get into with what is being built here at Oval, with higher level solutions, applications can actually stop leaking value and start retaining more of their value. And then the infra level is a little bit just more like streamlined. It's just like smoother because there's less just like random volatility of like 100 ETH MEV blocks being going on and everything's a little bit more stable and dependable. This is my understanding of the highest level of patterns. Does that vibe, does that check out? Anything you want to add there?

• 22:50Speaker 01

  Yeah, that totally checks out. And I think where you're going with this, David, is like on us more of like the business side, the business strategy side or like application revenue side. So Hossu's perspective, you know, he wants to kill MEV because he worries about the centralization risks it creates, which I completely agree with. But I think there's another interesting byproduct here where if you can harness MEV within your application, you can use it as a revenue stream to do useful things. And I'm of the opinion that just the way this all works, applications will leak MEV. There's ways to design them so they leak less, but eliminating it is going to be impossible.

• 23:35Speaker 01

  So if we, you know, being big picture here, design tools, order flow auctions.

• 23:41Speaker 01

  That we're going to get into, if we can design tools to capture that MEV, we can not only decrease the centralization risks that Hossi was referring to, but we can also use that revenue stream to build business models and do useful things. And I guess the analogy here, and it's a little bit dangerous, because I think people, some people have controversial views in TradFi on payment for order flow. But if you think what Robin Hood has done in the stock market, is it used to be that brokers would have this order flow and kind of throw it out there for high-frequency trading firms to use. And they were effectively

• 24:22Speaker 01

  like leaking revenue that those high-frequency trading firms were capturing. And Robin Hood, I don't exactly like all the ways they do this, but conceptually, Robin Hood said, okay, actually, we're going to auction off this order flow and use that revenue to run our business so that we can offer free trading to users. And I think, conceptually, if you think about DeFi protocols doing similar things with maybe like better rules, more auditable rules, more transparency, you can actually get some pretty interesting business models where med capture can drive sustainable, long-term protocols that do useful things.

• 25:05Speaker 02

  Yeah, I definitely agree with that. I would say we definitely don't only care about the decentralization of Ethereum. It's very important, because without the decentralization of Ethereum, the whole experiment basically comes to stop. Like, there's still other kind of gambling technology, right, that's built on top of it, but especially kind of the base layer of Ethereum is very important to fight for. But that said, so I mean, Flash Podcast has a triple vision or three-part vision for good reason. The first part is to illuminate the dark forest, and you can see this through, for example, orderflow.org, which is

• 25:51Speaker 02

  This really cool visualization of how your order, like any order, is routed through the MEV supply chain, like who touches it, who exactly contributed to its eventual filling and like it getting on chain. And then democratize access to MEV, that's the second part. That's for validators, that they all basically get access to the same MEV. But the final part is distribute value back to users. And this is exactly where MEV share and over are coming in, because we have this vision that all MEV should be returned to the parties who created.

• 26:28Speaker 02

  Because, I mean, you can look at this from a few different angles. So on the one hand, all of the applications are in competition with each other, of course, to, like if they leave so much money on the table, that really belongs to their users and, or that to them, and they could like reinvest it in the business and make the experience better for users than applications that don't internalize their MEV will eventually, like to themselves or their users will eventually be outcompeted.

• 27:00Speaker 02

  But even more importantly, I think every, like when we look at these crazy numbers, how much money is lost to MEV every year?

• 27:08Speaker 02

  Like billions of dollars, this is money that somebody lost, right? At the other end of it. So this is money that's straight coming out of the pocket of someone making like a swap on a decentralized exchange, or someone providing liquidity, or someone borrowing

• 27:27Speaker 02

  on a lending market and getting liquidated, right? So there's actually a real counterparty behind all of these. And so if you want to build better systems, then we have to build systems that basically are robust to MEV in the sense that they like expose less of it, but the ones that they still expose, they internalize it back to users through employing techniques like MEV share and over.

• 27:53David Hoffman?

  And I will add, as the industry of DeFi has progressed, it is a story of efficiencies and capital efficiency and like less leakage over. This has just been the arc that DeFi is on. Like, this isn't something brand new. Just all applications are innovating on how to be more capital efficiently, how to best serve their customers. And this is just like another milestone on that arc of evolution of DeFi. And with that as the context, maybe we can actually get into some of the specifics of the Oval mechanism and how we are actually doing this, how we are actually returning value or keeping value in the applications, in users' hands and kind of like stopping, nipping some MEV in the bud is kind of maybe how I will frame it.

• 28:37David Hoffman?

  And so Hart, I'll throw this one to you. Can you just kind of explain the Oval mechanism and what it does?

• 28:42Speaker 01

  Yeah, absolutely. So Oval is a mechanism for OEV capture or capturing this specific type of oracle-created MEV. Oval's not an oracle. It uses chain link or chain link price updates.

• 28:58Speaker 01

  But what it essentially does is say, hey,

• 29:02Speaker 01

  liquidators, searchers, if you want to use this chain link price update, if you want to be the first one to use it, you have to participate in an auction. And the winner of that auction gets the first right to use this chain link price update for a specific protocol.

• 29:19Speaker 01

  And so really, all Oval's doing is saying, chain link updates come in, let's run an auction on them. And we run an auction for each protocol. So there's a different auction running for AVE or and for Compound. And that's so that we can actually understand exactly how much OEV is created for AVE or for Compound. And we use Flashbot's MEV share infrastructure to run this auction process and to actually guarantee or enforce that the searcher that paid the most in the auction, that their money actually gets returned back to the protocol.

• 29:59David Hoffman?

  Seems like a relatively simple mechanism. This is an opt-in mechanism by lending applications like Aave, Compound, Maker, for example. So these things need to elect to use Oval, correct?

• 30:13Speaker 01

  Correct. You can think of this as like a bolt-on for Chainlink. So

• 30:17David Hoffman?

  A bolt-on for Chainlink, okay.

• 30:18Speaker 01

  It like wraps a Chainlink price update. So right now, Aave and Compound and many, many other DeFi protocols have an address where they're like, "Give me the ETH USD price feed from Chainlink." And what Oval does is says, "Okay, we have a contract that looks like Chainlink, but only lets you use that Chainlink price update if you participated in this auction for a very short window. And after that short window is done, then it now looks exactly like Chainlink. It just passes through." So it's kind of just a gate that enforces this OEV auction happens for a very short period of time before just defaulting back to Chainlink.

• 31:00Speaker 01

  So all DeFi protocols have to do is swap a single address via governance to kind of bolt on this Oval intermediary and begin extracting OEV.

• 31:12David Hoffman?

  So it's like an auction module that's being appended on to the oracle price updates that Chainlink is providing DeFi. And hard this makes sense as to how you brought up the Robin Hood analogy where, you know, at one phase in Robin Hood's life, they were just casting off their users' order flow into the wild and then suffering worse execution for their customers because whoever could do the high-frequency trading would get there first. And instead, they opted in for an auction mechanism instead, in lieu of that. So it's like this little like waiting room before the free market happens for an auction to discover the price before their users were able to actually like get the better price and they would get a better price as a result.

• 31:53David Hoffman?

  And in this analogy, Aves are the users, Compound is the users, MakerDAO is the users. And instead of just having access to their liquidations being free for any and all MEV bots that come first and execute it suboptimally, instead, there is a short window of time for market price to be discovered, a fair price to be discovered, and then that value is retained by the lending applications. Is this correct?

• 32:19Speaker 01

  Yeah, exactly right. So that analogy totally holds. And if we go back to the kind of slippage analogy, where we're saying, hey, this liquidation is going to have a fixed 10%, liquidation bonus. We're going to run an auction that says, okay, what does it actually cost? What will people pay here? And people say, okay, I'll actually only pay, I'll buy this collateral for a 1% discount and 9% gets captured and rooted back to the protocol. So we are using the auction to create the market clearing price for the right price to perform the liquidation in these lending markets.

• 32:58David Hoffman?

  So this solves the problem of some of these lending markets not knowing, not knowing what the fair price of their collateral is, whether it's a large supply of Ether or a supply of shitcoins. They don't know the governance parameters around collateral in AVE, Compound Maker, etc. They don't know what the market price is. So they have to basically give themselves worst execution in order to protect themselves. And so this is like a best execution module appended on to their liquidations, which ultimately flows back into the collateral that's liquidated at a better price from their customers, correct?

• 33:32Speaker 01

  Yeah, I like this best execution module, but I'm going to use that.

• 33:37David Hoffman?

  We make names of bankers.

• 33:40Speaker 01

  Haas said it really well. You go back and you think about on Uniswap, I'm wanting to buy a shitcoin. Prices all over the place, so I set a wide slippage limit just to guarantee I get a fill. Or I set it tight to keep the price, more price guarantee, I don't know. So lending protocols are in the same scenario. They really need to sell this collateral, but they don't know how cheap they need to sell it. And so by running an auction and going through this order flow auction for the right to perform this liquidation, we're able to use market forces and competition to precisely set that liquidation bonus to the market clearing price.

• 34:21Speaker 02

  I have some follow-on thoughts to that. So this is one of my favorite topics for years, and it's very hard to like nerds not people on it. So now is my time, okay? So give me like my few minutes.

• 34:33David Hoffman?

  Haas was born for this.

• 34:35Speaker 02

  So both, you actually, so we talk about oracles, which is funny, because like both, setting your fee, how much gray you basically want to bid per gas, and how much slippage you want to set, those are both oracle problems in themselves. So they are both problems that are basically, you as a user, you have no idea what you should, you should put, and they are very hard to parameterize. And so, in the example of a, of a, of a regular transaction, right? This is the fee estimation problem, and for a regular transfer, this is not too hard to say, because you can just look at, okay, what's like the lowest fee that's got into the last block, basically? And you use that as your oracle, okay?

• 35:19Speaker 02

  So and then you parameterize your trade like that. But once there's basically contest between different preferences over the same state, so for example, in multiple people trading in the same Uniswap pool, and somebody like the one person's trade might make another person's trade invalid, because it's now beyond their slippage tolerance, right? Now, all of a sudden, parameterizing your transaction fee is a very difficult problem. And so, it basically spills over into the slippage tolerance. The slippage tolerance is basically an extension of the transaction fee.

• 35:55Speaker 02

  And I mean, what happens here is that you have no idea like how much you're paying for your transaction right now. So it's basically is your fee plus your slippage. Like you can basically add those, and they become in any kind of DEX trade, they become your actual transaction fee that you're willing to pay. But you don't know even how much you're actually bidding, because that depends on like other parties in the block as well. And so this is where an order flow auction comes in, that runs basically, you know, at block building, at block building speed as well. Because this is, what it really does, it gives you this oracle for how much you should bid in order to get into the block. And so, yeah, that's the connection between, that's the connection basically between OFAs.

• 36:38Speaker 02

  Like, they reveal what is the correct fee to set across all of your parameters. It's like the transaction fee and the slippage tolerance together. And then they get you into the block at the cheapest possible price when they work, when they have like enough bidding taking place.

• 36:54Speaker 01

  Yeah, well, to keep going on this, right, so the nerd sniping of it. The, uh, the liquidators in this system are off-chain actors that are, uh, that have full visibility into all these costs and fees. And then through forces of competition, they're figuring out who's going to serve you the best price. So we're able to utilize off-chain actors to know things that the protocol itself doesn't know at that moment in time. And I think that's pretty cool.

• 37:25David Hoffman?

  The off-chain actors, they're just the market. And the market knows a lot. The market is the aggregate of all information. And so it's a place where just like the, the aggregate knowledge of the market can actually become to be expressed and then leveraged by the DeFi applications.

• 37:43Speaker 01

  Yeah, exactly. And, you know, while we're talking parameterization, um, there's interesting knock-on effects here, too. So lending markets like AVE, they can't easily onboard like shitcoin collateral because, uh, the, the price moves too much or whatever. It could create bad debt for the system. But you could imagine where they onboard shitcoin collateral with like a potential 40% liquidation bonus, like something really big that if you had to pay that every time, it would be incredibly painful. But you can now do it safely because you have a huge potential bonus, but you have market forces that actually means you're never going to pay that. You're going to pay the market clearing price.

• 38:27Speaker 01

  And so we've inserted a new tool that gives us real-time information to parameterize some of the important parameters within a lending market like AVE. Uh, and we can use that tool to actually like onboard new collateral and kind of add new features.

• 38:42David Hoffman?

  Right. So the net effect of this is that blue chip collateral in systems like AVE, Compound Maker, Ether will probably be able to achieve even better collateral factors. It will be even more efficient to use Ether. And this will be true for all the collateral that's currently in there. There's more efficiency, more capital efficiency for all capital assets. And then also, the hurdle, the requirement for actually being onboarded into AVE gets easier. So we can actually extend the long tail into further less liquid collaterals, simply because we have better market clearing mechanisms in order to enable these things. Which is to the net effect of AVE, just like increased revenue for the application and

• 39:27David Hoffman?

  increased, a better product for its customers.

• 39:31Speaker 01

  Yeah, they have a, they have a useful new tool in their toolbox to make AVE more efficient and support more collateral tips.

• 39:39David Hoffman?

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• 40:20David Hoffman?

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• 41:49David Hoffman?

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• 42:33David Hoffman?

  Maybe you can kind of go into the specifics of like, if you pop open the hood of this system, what does it look like in the background? Like, how does this thing work?

• 42:40Speaker 02

  MEV share?

• 42:41David Hoffman?

  Yeah, the part of MEV share that Oval taps into.

• 42:46Speaker 02

  Yeah, so MEV share is what I would say, what I would call an order flow auction protocol. So it's, it consists, it introduces one new party that we don't typically talk about, and it's called the MEV share node. And it has a wiser protocol because it allows basically for OFAs or like applications to be built on top by wallets, by applications like Ovle that then kind of extend the service to the lending markets. And it's very customizable. So you can basically customize it across two different dimensions. One is the privacy. So a lot of, in MEV, it's

• 43:28Speaker 02

  a lot about privacy, right? Since we said it's about basically value that can be extracted by having, you know, some kind of asymmetry of information. So how much information you reveal and who you reveal it to is a very big lever in MEV. And so in MEV share, you can customize exactly which parts of your transactions are revealed to the bidders, who are the searchers. And there's a kind of general trade-off here where if you reveal too much, then you can be front-run off-chain. For example, you know, you reveal your intent to trade a certain asset, but then somebody just buys up the asset kind of outside and just they send which you basically

• 44:11Speaker 02

  outside of the auction, right? But when you reveal nothing, then you leave it, you leave a lot of guesswork to the searchers basically to guess what your intent is and they may not be very close in their guess. And so you want to like find the exact like sweet spot between like revealing, you know, some details, but not so much that you can be front-run. And it really depends on the exact application and asset that we're talking about. And this is why we leave this choice to the applications that build on top of the protocol. And the second is the, for any surplus value that's created, so for the money that's coming in from the bidders, how is that

• 44:53Speaker 02

  distributed? And so this is also the choice of Ovle. So between the, you know, Ovle and the lending market and the block builder and like any other party that they want to specify, who do they want to send the value to that's being created? So that also affects kind of the dynamics of the auction. And so, yeah, you can basically create an order for auction, you can parameterize it kind of across these dimensions. And then what happens is In a very simple flow, so like a transaction comes into the MEV node and then the MEV node reveals selectively reveals information to searchers that they can access and any searcher

• 45:38Speaker 02

  can access this because it's permissionless. And then the searchers basically send back their bits and very often they will be kind of guessing based because they cannot actually see the full intent of the transaction. They can only, for example, see, okay, this is like a certain Uniswap pool. So is this like E4STC or something, but they don't know whether the person is buying or selling or how much. And so what they basically do, what is the right strategy for searchers is to submit not just one trade intent, but submit basically like a whole order book, if you will, right? So they would basically submit, okay, if they want to buy this much, here's what I would, here's what I would want. If they buy like this much, here's what I would

• 46:23Speaker 02

  want. If they want to sell, here's my bit. And if they want to sell more, here's my bit, right? So they, every searcher submits basically their own order book. And then inside the MEV node, you have what is basically a matching engine, you know, same as on an exchange. So you have now all of the order books from all of the searchers laid on top of each other. And you have the one, so these are all of the bits and then you have to ask from, from the user and you just match basically the most, the best bit against the user's ask. You wrap them into a bundle and you forward it to block builders. And then it goes into the block and kind of the value, like part of that bundle is also the redistribution of the value, like who

• 47:05Speaker 02

  it goes to, right? And so that's being forwarded to the builder and I think like the top X bundles are forwarded and then the builder can still choose like which ones they take, but usually they take the one that pays them the most, right? And so, yeah, very roughly speaking, that's how it works.

• 47:24David Hoffman?

  The pattern that I'm seeing here, I'm just gonna go back to my line from earlier, is that the cool thing about MEV is that we once thought it was this massive problem. And one of the patterns that I've seen over time is actually mechanisms are allowing us to leverage this problem into market clearing forces. And Hozza, when you tell me that each individual searcher will dump an entire order book into this node, to me, that's like saying one of these many thousands of searchers out there are taking their entire view on the market, placing that into a codified order book, depositing this order book into a central clearing entity, which is this node that you were talking about in MEV share. These orders get matched up, everything clears, and all of a sudden, we have market clearing

• 48:09David Hoffman?

  forces happening in a very short amount of time, very, very quickly. And so what was once this very toxic centralizing system that was liquidating people at suboptimal prices and was creating centralization forces in our infrastructure, has instead resulted in just super efficient markets, which has always been like the sci-fi vision for DeFi, I think.

• 48:32Speaker 02

  Yeah.

• 48:33David Hoffman?

  Cool. Hozza, when we talk about one node, maybe more nodes, a few nodes, collecting all of the market information, sounds centralized. Is there like a decentralization of MEV share conversation or of the infra that makes this whole system happen? What's this look like?

• 48:52Speaker 02

  Yeah, for sure. So you're absolutely right. The MEV share node is a new centralized actor in the system. So I think in this case, it's not a problem because the searchers, it doesn't introduce any new trust assumptions in the sense that Flashback is already a block builder and a relay. And so effectively, everybody already trusts us with all of this information. So for us in particular, it doesn't add any trust assumptions. But nonetheless, I mean, we want to decentralize all of our products. So from builder, relay, MEV share. And that is the vision behind Suave.

• 49:34Speaker 02

  And so you did this really great episode with Phil Day and Andrew Miller, where you dove into this. And for anyone who hasn't seen it, I would strongly recommend it because it's such a great intro. But the gist is, I would say that Swav is a platform that enables new primitives, in particular, the ability to write private smart contracts and have credible off-chain computation. And so, for example, when you look at an order flow auction, you see, hey, this are exactly like two things that it uses, right? It uses privacy, but it solves it basically through centralization. So we just send it to a centralized server and we hope that the server doesn't leak the information,

• 50:18Speaker 02

  or like not more than the information that it's supposed to leak. And while it's also, it's running off-chain and nobody can validate that. Like, we say that, you know, the MEV share node runs a certain code and it's open source on our GitHub, right? But do you actually know that this is what we're running? No, you don't, right? And so, one of the beautiful things about Ethereum is, anybody can see the code behind a smart contract and know that this is exactly what the virtual machine executes, right? And so, this is basically what Swav does. Introduces a new virtual machine that can do private computation and has private storage for private data.

• 51:01Speaker 02

  But it can also, you can also write code as smart contracts that could otherwise only execute on an off-chain server. And when you put those things together, the off-chain, the credible off-chain computation and the decentralized privacy, then you get access, like you unlock a whole new part of kind of the tech tree for crypto and MEV in particular. And so, where we eventually want to go with this is decentralized block building, right? So we want kind of the whole auction, like intense coming in from users and like the whole shebang about how that's basically turned into a block and eventually executed on chain. We want to decentralize the whole of that.

• 51:45Speaker 02

  But for something like MEV shares, it's actually really easy to see how, it's one of the first things that benefits from Swav, because all you do is, like, you run the same code, but you run it instead of on our centralized server, you run it on Swav. And all of a sudden, you no longer need to trust Flashboards as a centralized party to run the code that we say and to keep your information private, because now you basically delegate all of that trust to a decentralized network.

• 52:14David Hoffman?

  So the if listeners are curious into going down that rabbit hole, Hazer just pointed to to the the bankless episode about Suave that we did. We I don't think it would be a mistake to rehash all of that here, but I think this is where that part of the conversation leads. Hart, go for it.

• 52:30Speaker 01

  Yeah, no, no. To add to that, first of all, that episode is really, really good. And I do think of like, as you said, Mevshare is a protocol for building for order flow auctions with some points of centralization. I look at Suave. Suave is a lot more than that, but I look at Suave as going to be a decentralized protocol for order flow auctions. And I'm actually really excited about it. The one other point I want to make on the Oval side, the way we've architected this, the the trust assumptions Oval introduces, I think are just pretty brilliant. Because the way it works is the absolute worst thing if like Mevshare had rogue code

• 53:11Speaker 01

  that was stealing the Mev, or Oval decided to send the Mev to a different address or or anything like that. The worst case from a lending protocols perspective is that they don't get the Mev that they weren't otherwise getting. So it's like you're just back to

• 53:26David Hoffman?

  The worst case is table stakes.

• 53:29Speaker 01

  The worst case is table stakes. And the other answer here, just because there have been some questions around centralization concerns in the Oval design, even if the Mevshare node goes down, or the Oval node goes down, that infrastructure all breaks, as soon as this short auction passes, the Oval contract on chain on Ethereum just passes through and lets you read chainlink prices. So it can't censor chainlink prices. It can't prevent liquidations. You're it really is like worst case is table stakes to what lending protocols have now. All you're doing is inserting this short auction that if it were to go rogue,

• 54:11Speaker 01

  would steal the money you didn't get before. So it's like a really elegant bolt on, you know, best execution module, as you put it, that doesn't it does have a point of centralization, but the fallback is super elegant. You're just back to where you started.

• 54:30David Hoffman?

  You talk about the this short auction. How long is it?

• 54:34Speaker 01

  It's a parameter of the protocol. They can set it to what they want. And this gets a little bit technical in terms of like, why, why would it be more than one block? And the answer is not every block builder, or not every block builder is connected to MevShare. And so you don't necessarily have complete coverage on every slot. So you could have, basically by our math, and Hossi will know this better, you have like 90% of blocks are mined by builders connected to MevShare. So if you don't have your, if your auction happens to land in a block that is not mined or built by MevShare,

• 55:16Speaker 01

  or validator picks a block that's not coming from MevShare, you might not capture your O E V. But yeah, gets a little more technical.

• 55:23David Hoffman?

  Otherwise, it's one block. It's supposed to be one block.

• 55:26Speaker 01

  Yeah, 90% of the time, you're gonna happen the same price update, or the same block that the chain link update would get mined if you didn't use Ovo.

• 55:36Speaker 02

  Yeah, and the nice thing about M E V shares that it doesn't actually increase the latency of transactions that go on chain, because it runs during the one block window.

• 55:48Speaker 02

  And yeah, so as Hart was saying, in the positive, or like the normal case, you don't incur any additional penalties. So this is really more of a fail-safe mechanism, right? So just in case kind of either the two nodes is offline, then you want to have some kind of fallback, so that the transaction can still go on chain.

• 56:09David Hoffman?

  Cool, cool, understood. So Hart, I think this kind of brings us to the last bit of conversation, which we looked at the technical conversation under the hood, the economic conversation as to the incentives, as to why protocols will adopt this. But I think now we have to get into the B D conversation, because ultimately, things don't move unless humans like shake hands over Telegram or in Discords or whatever. And so you actually need protocols to adopt this system. How's that going?

• 56:36Speaker 01

  Going well. We put a proposal up to AVE to adopt OVAL in a very, very limited way. So one of the advantages of AVE, their standard markets are, you know, all interlinked and they want to be very, very cautious of changing anything because there's billions of dollars at risk. But they also have AVE V3 isolated markets, which are siloed and separated from the rest of the system. So we made a proposal to integrate OVAL into AVE V3 markets that have about $10 million in total TVL, which is 0.1% of the total AVE TVL. And it's a pretty cool way for AVE to

• 57:21Speaker 01

  experiment with OED capture in a very safe, low-risk way and get comfortable, get familiar with it, and potentially roll it out to the broader protocol. Where I think, again, if it rolled out to the broader protocol, I think AVE would be more than doubling their revenue. They'd be earning another 25 million bucks a year type thing. Same with Compound. And then, of course, there's all these other, we talk about AVE a lot on this podcast, just because it's a good example. But there's all these other DeFi protocols that we're really excited, that are using chain price updates that are leaking MEV. And we have this really easy integration that we've been chatting with and really excited to integrate.

• 58:04David Hoffman?

  Interesting. I want to actually go down a side quest that's parallel to this, I think. Hoz, I think you might be familiar with this. Maybe, maybe both of you are. Sorrela Labs and their Uniswap V4 hook. Maybe I can set this up and Hoz, you can take the rest of it. It's a very similar mechanism, although it's not at all to do with Oracle extractable value, but it has to do with impermanent loss in Uniswap, which is now being, I think, rebranded to LVR, which is an equally bad name, but whatever. And so like, you know, Uniswap LPs are getting squeezed by sex dex arbitrage. So when like Binance updates its price.

• 58:46David Hoffman?

  Eventually turns into MEV on DEXs and then Uniswap LPs are just having this arbitrage doubt. And something that Ludwig at Sorrela Labs is building is this hook on Uniswap V4, which is kind of just like Oval, a gate for liquidity. And if you want to access the liquidity in Uniswap V4, that liquidity providers have deposited through this gate, then you have to operate by the rules of this gate. And the rules of this gate do something very, very similar to what Hart was talking about here at Oval. Maybe you can talk about just like how this works with a little bit more clarity than what I just gave, but also talk about the pattern and how we're seeing this kind of being extrapolated into different contexts.

• 59:30Speaker 02

  Yeah, so you're exactly right. So it's the exact same pattern and I think the pattern is what's most interesting to understand. So if we kind of go back to what we said earlier, so a user wants to trade a token. They don't know what Feta said, they don't know what slippage tolerance to set. So you kind of have this oracle problem, like how much to bid basically to the valid data. And you don't even know how much you're bidding. And so the very same problem the LPs also have. Because so they have a price and maybe the price is kind of the market price. But then 12 seconds pass and now all of a sudden they're still quoting that price from 12 seconds ago, right? Because it's an AMM, the price didn't move unless someone trades against it.

• 1:00:16Speaker 02

  Or they kind of updated manually, right? But they, so they are quoting this outdated price.

• 1:00:23Speaker 02

  And now somebody can trade against them. And you know, whether it's an oracle or whether it's a liquidity pool or it's a user making a DEX trade. If you're, if you're accepting a certain price then, and somebody else can see that intent, then they will always push you to the worst possible price. And so that's what happens in arbitrage. And I mean, arbitrage, like the LVR problem is a problem that's like 20 times bigger than than even the oracle problem. So it's just like a huge, a huge problem, I would say. And yeah, so the, but the very same same insight that Ovile users can be exactly applied also to liquidity pools. So you basically put like,

• 1:01:05Speaker 02

  as you were calling it, you, you kind of have two ways of doing it. One, you put a gate and it basically says, in order to earn the right to trade on this pool, Oval style, you have to pay me. And so we run an auction. And so you basically unlock the right to do this. The other way is to basically the pool, there's also an auction, but instead of earning the right to trade, it like increases basically the transaction fee to the fee that goes to the LPs in the pool. So it makes that variable. And so when it knows that there's like a large basically demand to trade in the pool, then it would increase the, it would increase the fee to capture more of the

• 1:01:44Speaker 02

  MEV back to the LPs who are in the pool. So I'm not familiar which model exactly, Sorella users, if they found a third way. But yeah, I think the insight is basically to to use some kind of mechanism, some kind of auction that discovers basically the price at which the LPs should quote to the market.

• 1:02:05David Hoffman?

  And I'm gonna go go ahead and Hart, do you want to say something?

• 1:02:09Speaker 01

  No, I just think the Sorella solution, it is using the gating mechanism. I mean, again, we should have Ludwig and all them talk, but it is a very cool, elegant solution that says, hey, we know there's like sex sex arbitrage that's getting leaked here. So you just, if you want to trade against this pool, you got to pay us. And that goes back to the LPs. So I'm really excited for that to to get deployed to.

• 1:02:35David Hoffman?

  So one last conversation here. So we have Oval and this gate, we have this pattern that we were seeing applied on to Uniswap with before with the project that we just brought up, Sorella Labs. But each of these are taking a cut, right? Like, because come on, like, we are rational economic actors, we want our upside. I'm assuming there's a cut that's part of the whole Oval process. Is that correct, Hart?

• 1:03:00Speaker 01

  Yeah, there is. I mean, I think it's makes a lot of sense. Like, Hossi said at the beginning.

• 1:03:07Speaker 01

  MEV should go back to the protocol that created it, or the source that created it. And we very much believe that. So this MEV that we're capturing should go back to AVE or Compound. And they can, or mostly go back to AVE and Compound, and they can use it to say, hey, we're going to keep it for revenue for the protocol. We're going to give back to token holders. We're going to reimburse the guy that got liquidated. We're going to make transaction costs fee free. We're going to pay every gas cost, whatever they want to do. That's their call. And then I think the infrastructure that extracts that MEV also deserves a fair share for the work of building and maintaining the infrastructure to do so.

• 1:03:48Speaker 01

  And so that's the business model for Oval, where we would retain our share for the infrastructure costs. And the other thing I'd add is there's other infrastructure costs besides us. There's Flashbots, MEV Share, Suave in the future. And importantly, in the case of Oracle updates, there's also like Chainlink or your Oracle provider. And one of the things I'm excited about is using this as a sustainable way to pay for Oracle infrastructure as well. Because it's not cheap. Chainlink is spending millions of dollars a year in gas fees supporting their price feeds

• 1:04:33Speaker 01

  as a sort of public service. And this is something that long run is actually a risk to AVE and Compound. Because like, it's not currently sustainable. Chainlink needs to get paid.

• 1:04:45David Hoffman?

  AVE, Compound maker, maybe not maker, are consuming Chainlink Oracle prices. And Chainlink is just giving this out to DeFi for free. I'm assuming they make money on that somehow. Maybe not?

• 1:04:59Speaker 01

  That's complicated. That's a good question to ask Chainlink. But the price feeds are permissionless. Anyone can access these price feeds for free. So.

• 1:05:08David Hoffman?

  So Chainlink itself, or, and you know, insert your generalized Oracle provider here, also needs to be a part of this process of achieving some sort of take rate in order to make themselves a sustainable business. Otherwise, they go away.

• 1:05:23Speaker 01

  Yeah, I agree. And like, again, Chainlink has many different kind of products and business lines, and they do charge or have fees in other circumstances. But the core product that, you know, supports most of DeFi, like their ETH/USD price feed, it's freely accessible. And DeFi is built on top of it. And figuring out a way to make that be sustainable seems like, seems necessary.

• 1:05:45David Hoffman?

  Right, totally, totally. Hart, Hasu, I have learned a ton in this conversation. Is there any stone left unturned? Or maybe just future questions that you have or future topics that I think, that you guys might think are next in this conversation? Maybe if we were to resume this conversation in like a year or so, maybe what are some ideas that you would hope would have answers? Or is any future conversations that you think spawns out of this one? Hasu, I'll start with you.

• 1:06:13Speaker 02

  I need to think about this. Can Hart go first?

• 1:06:16David Hoffman?

  Hart, you first.

• 1:06:17Speaker 01

  Well, I'll give you an easy one. I mean, how does this work on Layer 2s? Like, what does the MEV supply chain on Layer 2s look like? What are the types? What's the type of like Oracle or Oracle-related MEV that gets leaked on Layer 2s? And there's actually a whole slew of MEV that gets leaked by perpetual exchanges, like perp exchanges, decentralized perps, and ways that I think they could be made much more efficient by using auction-like structures to price their trades. So that's where my mind goes. And we've actually done a lot of work and a lot of research on how Wolvo would work on L2s.

• 1:07:00Speaker 01

  And I'm not enough for this podcast, but I think it's a super fascinating topic, and I think it's going to be a big deal.

• 1:07:07Speaker 02

  Yeah, I agree with that. I think if we go, if we come back in one year, I would be very interested to kind of just do a checkup on how much MEV is still being leaked at the application layer? How much basically extra money is leaked by lending protocols? But also, we talked about APs, right? So for me, that would be interesting if that paradigm that, with the gate, basically unlocking kind of certain actions on chain through an auction,

• 1:07:37Speaker 02

  if that's taking hold also in the deck space.

• 1:07:41Speaker 02

  And then for sure, as Hart was saying, as more and more activity goes to Layer 2, so how can we? How can we import some of that same paradigm basically to the layer twos? The layer twos today all have centralized sequencers and they don't have much of an MEV supply chain to speak of. So they all have a kind of shadow MEV supply chain that's kind of, you know, like co-located around the sequencer, like, but like in a kind of uncontrolled way that doesn't benefit the users at all, doesn't return any, doesn't even return any money to the sequencer, um, nor can really be leveraged to build any kind of applications

• 1:08:22Speaker 02

  on top like, like order flow auctions yet. So I would say, um, there's, there's some kind of ground infrastructure that needs to be created. And then I think, uh, a lot of this technology can be scaled to layer twos. And it will be very interesting to see if, if you know, if it looks the same or if it looks different and if it looks different, like in what ways.

• 1:08:42David Hoffman?

  Beautiful guys. I think we have a long roadmap of content ahead of us. There's a lot of juice left to squeeze out of these conversations, a lot of juice left to keep in the DeFi apps. Hart, Hasu, thank you so much for coming on and explaining this part of the, the DeFi world to us.

• 1:08:57Speaker 01

  Thanks, David.

• 1:08:58Speaker 02

  Thanks, David. Thanks for having us.

• 1:09:00David Hoffman?

  Hart, if people are just interested in learning more about Oval, where should they go?

• 1:09:03Speaker 01

  Yeah. So, um, Oval is an Uma product. Go to Uma.xyz and you can read all about it. Um, and then Twitter, it's at Uma Protocol. Um, yeah.

• 1:09:13David Hoffman?

  Guys, this has been fantastic. Thank you so much for coming on. Bankless Nation, you know, the deal. Crypto is risky. DeFi is risky. Hopefully it's becoming a little bit less risky, but you could still lose what you put in. We are headed west. This is the frontier. It's not for everyone, but we're glad you are with us on the bankless journey. Thanks a lot.