10 - Going Bankless with Uniswap | Caleb Sheridan

Episode: #10 May 4, 2020 Uniswap isn't a bank, isn't a company, isn't a website. It's a liquidity robot, an unstoppable trading layer for the bankless money system, the first of its kind. Ryan & David talk with Caleb Sheridan about using Uniswap for trade & profit, its ability to serve as a public good for the Ethereum economy, and the coming liquidity robot wars. We cover: An explanation of Uniswap in 10 sentences What you can do on Uniswap Trading Suppling liquidity (for profit!) Listing assets Bootrapping liquidity Funding projects Why Uniswap succeeded where others failed If Uniswap is really unstoppable In what ways Uniswap is a 10x improvement The coming Liquidity Robot Wars Uniswap as an price Oracle The end game This is our second of three episodes in the "King Money Protocols Series" where we talk through the three most important DeFi protocols. Stay tuned for the final episode! Before the episode begins we also talk about: The Coinbase Oracle The UMA token sale on Uniswap ----- Tools from our sponsors to go bankless: Rocket Dollar https://www.jdoqocy.com/click-9261763-13920047 - tax shelter your crypto ($50 w/ "BANKLESS https://www.jdoqocy.com/click-9261763-13920047") Monolith https://monolith.xyz/ - holy grail of bankless Visa cards Aave https://aave.com/ - money lego for lending & borrowing DYDX https://trade.dydx.exchange/r/bankless - trade, margin, BTC perpetuals (10% off with this link https://trade.dydx.exchange/r/bankless) (trade.dydx.exchange/r/bankless) http://trade.dydx.exchange/r/bankless ----- Resources discussed: Uniswap Exchange https://uniswap.exchange/ Pools.fyi https://pools.fyi - check Uniswap returns Use Zap to one-click deposit to Uniswap Pool https://bankless.substack.com/p/tactic-25-how-to-use-a-zap Read: How to Make Money on Uniswap https://bankless.substack.com/p/how-to-make-money-on-uniswap-lite Uniswap is Infrastructure https://bankless.substack.com/p/uniswap-is-infrastructure - David Hoffman Rise of the liquidity robots https://bankless.substack.com/p/rise-of-the-liquidity-robots- Constant Function Market Makers https://medium.com/bollinger-investment-group/constant-function-market-makers-defis-zero-to-one-innovation-968f77022159 ----- Episode Actions: Try a trade on Uniswap https://uniswap.exchange/ Become a liquidity provider on Uniswap https://bankless.substack.com/p/how-to-make-money-on-uniswap and earn ETH ----- Subscribe to podcast on iTunes https://podcasts.apple.com/us/podcast/bankless/id1499409058 | Spotify https://open.spotify.com/show/41TNnXSv5ExcQSzEGLlGhy | YouTube https://www.youtube.com/c/bankless | RSS Feed http://podcast.banklesshq.com/ Leave a review on iTunes https://podcasts.apple.com/us/podcast/bankless/id1499409058 Share the episode with someone you know! ----- Don't stop at the podcast! Subscribe to the Bankless newsletter program http://bankless.substack.com/ Visit official Bankless website http://banklesshq.com/ for resources Follow Bankless on Twitter https://twitter.com/BanklessHQ | YouTube https://www.youtube.com/c/bankless Follow Ryan on Twitter https://twitter.com/ryansadams Follow David on Twitter https://twitter.com/TrustlessState

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

• 0:14Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front-run the opportunity. This is Ryan Shawn Adams. I'm here once again with David Hoffman, and we're here to help you become more bankless. David, we have a fantastic episode. This is our second in a series where we're tackling the top three DeFi protocols. This is how to go bankless with Uniswap. What are we going to cover, David, and why is it important?

• 0:45David Hoffman?

  We are going to cover the complete scope of the Uniswap protocol, which is not a small feat. While Uniswap is very simple, the Uniswap rabbit hole goes very, very deep. There's a lot of layers to Uniswap that it goes beneath the surface, and we're going to peel back all of those layers and explore all of them in this episode.

• 1:07Ryan Sean Adams?

  Yeah, this is going to be fantastic. Uniswap is cool because it is one of the most decentralized DeFi applications on that DeFi trust spectrum that we've talked about in previous episodes. Uniswap is not a bank, it is not a company, it's not a user interface. This is a protocol that lives completely on Ethereum, completely on-chain, and the possibilities that it brings into the open finance Ethereum economy are incredible, and we're going to dive into all of them. But before we do, want to take a minute to talk about our fantastic sponsors. The first one is for our US listeners primarily. So if you have an IRA or a 401k, a retirement

• 1:50Ryan Sean Adams?

  account, chances are it's jailed inside of your brokerage. That means you don't have good access to crypto. If you try to buy crypto inside of your brokerage, it costs you 5X the price. Don't do that. Don't get ripped off. What you want to do is break your retirement account out of brokerage jail. Rocket Dollar can- Help you do that. They'll set up what's called a self-directed IRA or a self-directed 401k. They'll help you with the paperwork. They'll help you with the transfers. They will help you get to a place where you can buy crypto on the spot market, on Coinbase, or on Gemini in a tax-sheltered retirement account. This is a fantastic, a financial hack for you guys. And if you go to rocketdollar.com, you can get set up today.

• 2:36Ryan Sean Adams?

  Just use the code BANKLIST and you'll get $50 off. That's rocketdollar.com. Use the code BANKLIST.

• 2:43David Hoffman?

  We have a new sponsor on the scene, one of my favorite Ethereum applications. DYDX is the leading and most performing decentralized exchange in crypto. And the really amazing thing about DYDX is like Uniswap, it is entirely on-chain. And so it is a non-custodial exchange where you are not trusting people with your money, but you still get to access all of the cool features and services that you would expect from a centralized exchange. Things you can do on DYDX are spot trading, margin trading. You can borrow ETH, you can borrow DAI, you can lend ETH, you can lend DAI. DYDX has originated over a billion dollars in loans over the last year and a half a billion dollars in trading volume.

• 3:27David Hoffman?

  Something pretty new and innovative that DYDX is doing is they're bringing Bitcoin into DeFi through perpetual contract markets, which it's not live yet. It's starting. It's launching in May. So you can sign up for that alpha today. You'll be able to use Bitcoin inside of DYDX inside of the application, which, which is pretty exciting. I like it whenever I see some sort of DeFi application starting to integrate Bitcoin and the Bitcoin price into their, their product and services. So we have a special offer for Bankless listeners. If you sign up with the Bankless link, you will get 10% off of trading fees using our referral link. And that referral link is trade.dydx exchange slash r slash bankless.

• 4:10David Hoffman?

  It's a bit of a mouthful, so it's in the show notes if you want to go get it there. DYDX is one of my favorite protocols. They really do it all. They're basically anything you can do on Ethereum, you can also do inside of DYDX. So check them out.

• 4:24Ryan Sean Adams?

  Okay, before we dig into the episode, let's talk some big picture stuff, David. So a couple of things that are going on in the crypto, in the bankless sphere. So the first is this Coinbase is adding a DeFi oracle. So David, I got a question about this because I tweeted this out and somebody said, well, Ryan, I mean, doesn't this make oracles on DeFi in Ethereum more centralized if a crypto bank like Coinbase is providing an oracle? What are your thoughts on that?

• 4:53David Hoffman?

  Yeah, it's an easy thing to slip into because anyone who's in DeFi is always harping on centralized exchanges and that habit is easy to slip into. But I would contend that this, any further addition of more oracles always makes oracles more decentralized. So it doesn't even matter if like the White House or the Federal Reserve provided an oracle for DeFi. It's just one more oracle to add to the list. And so this is really good news and Coinbase, of all companies, of all institutions, is definitely aligned with the crypto vision. And so their incentives are where we want them to be. I was once having a conversation with a friend of mine, talking about how the only way you

• 5:37David Hoffman?

  can get Bitcoin is on a centralized exchange. And he countered with, well, if there are 30 different centralized exchanges all over the world that are very easy to get on to, well, then Bitcoin is actually decentralized. And so if Coinbase copies this model and then Binance is also an oracle and Gemini is also an oracle and Huobi is also an oracle, we start to have more and more options with where we can get our oracles from. And so we're not beholden to just using one oracle, right? The more oracles, the better. The really cool thing about this story was that Compound, the Compound Finance team was really pushing for this forever ago.

• 6:20David Hoffman?

  And I believe Robert Lesher had this tweet where he was talking about how centralized exchanges need to be oracles for the DeFi ecosystem. And the oracle standard, the code or the model of the oracle that Coinbase used came from what Compound published. So tip of the hat to Compound and Robert Lesher for spearheading this a really long time ago and I'm glad it's now coming to fruition.

• 6:45Ryan Sean Adams?

  Robert's going to be our next show, so episode 11, folks, so tune into that. We'll ask him about this, too. But yeah, I tend to agree with you on this, David. So I think, like, if you look at the way the Maker Oracle works, and that, of course, maintains the peg for die and ETH and is a key component of the entire Maker system, but it has a dozen or so different Oracles. Some of these are operated by known entities, some of these are operated by anonymous entities. So say it's 12 or 15 Oracles, adding another one from Coinbase, and then taking the average price of all of those Oracles, that's net additive to the system. It increases the decentralized nature of the system, as you're

• 7:29Ryan Sean Adams?

  saying, because you are gaining an additional node, an additional price source, and you can still take the median across all of those price sources in order to get your ultimate Maker Oracle price. So I tend to agree with you. And we're actually going to be talking about another Oracle design inside of this episode that is even more decentralized still. Uniswap, actually, can be used. A byproduct of its exchange and trading capability is an actual price Oracle. And that can be used inside of these DeFi systems, too, and further decentralizes the Oracle. So Coinbase adding an Oracle, good news for DeFi, actually

• 8:11Ryan Sean Adams?

  good news for decentralization. And exactly as you say, I think it will lead to all of the other exchanges incorporating and creating a DeFi Oracle in order to keep pace with Coinbase.

• 8:22David Hoffman?

  Coinbase has really shown their colors, I think, with the commitment to large amounts of USDC and USDC liquidity into DeFi applications. And now with this DeFi Oracle, I'm pretty happy with Coinbase, how they're positioning themselves. They're definitely DeFi-friendly, and having somebody like Coinbase, which is the leading exchange in the United States, I would say, you know, making pretty bold statements about how they are DeFi-friendly, a DeFi-friendly company, is pretty cool. I mean, they offer interest rates on Your USDC in your Coinbase account. Now those interest rates are extremely low. It's like 1.5%. But I think your Protocol Sync thesis, Ryan, where, you know, companies like Gemini and Coinbase

• 9:07David Hoffman?

  integrate DeFi applications like the DSR, I'm bullish on that. And I think the friendliness that Coinbase is offering DeFi is a good sign for that.

• 9:17Ryan Sean Adams?

  Dude, are we gonna do an episode on the Protocol Sync, man?

• 9:20David Hoffman?

  Absolutely. 100%. So I'm giving a talk at the Ethereal Conference next week, which actually, so this is coming out on Monday in May. And so this, my talk will be on Thursday, all about the Protocol Sync thesis and settlement assurances. And so come and come to the Ethereal Conference and listen to that. And then me and Ryan are 100% gonna do an epic episode specifically about the Protocol Sync thesis. So it's gonna be a good one.

• 9:49Ryan Sean Adams?

  Yeah, so I'm super, I'm super excited about that conference, David, because not only do you have a talk on the Protocol Sync, we have a panel called ETH is Money. It's got you, myself, Eric Connor, Anthony Sossiano, Kami is hosting it as well. She's moderating. It's gonna be super exciting. We're gonna talk about a lot of the topics we talk about in Bankless and apply those. Maybe there'll even be some debate about how ETH is emerging as a money system, but it's gonna be a fun one. You know, another thing that we should probably talk about, we recorded our episode with Caleb on Wednesday. On that Wednesday, Uniswap had what I might

• 10:31Ryan Sean Adams?

  call its first initial Uniswap listing, like an IUL, almost like it almost felt reminiscent of an ICO. So some of the very concepts that we talked about in our conversation with Caleb, we saw them play out in real time. What was your take on what happened? Maybe you could just, you know, describe the listing itself and the token and then sort of what happened? And then I'd be curious to hear your take, David.

• 11:00David Hoffman?

  So I'm all for experimentation and this was definitely a very interesting experiment to run. I think the outcome of this experiment is, don't do this again. I think it was not the right way to issue a token for a number of reasons. Uniswap is not a way to distribute a token. And that's simply because, and we saw this in the ICO mania way back when. The BAT token sale was famous for selling out of the entire supply of the basic attention token in the first like three blocks. And so that really rewarded technically adept people who were able to make a bot to make sure that their transaction got in on the first block.

• 11:43David Hoffman?

  And we saw that with the UMA token listing on Uniswap as well, where people bought up a bunch of supply on the first block and then sold it on the third or fourth block after the listing. And so this isn't how you generate an aligned community, an aligned set of people that are your stakeholders. This is how you attract arbitrators and traders and people trying to make a quick buck. And so that didn't look too good for me. I think there were much better ways to issue a token in ways that are more long-term aligned with your company, with your project and the community holding your token. If you wanted to get your token into the hands of people, Uniswap is not, people that

• 12:29David Hoffman?

  are stakeholders and want to see the best for your company, I would not issue it through Uniswap.

• 12:34Ryan Sean Adams?

  Yeah, and you know, there might be a better way that somebody can design a way to issue it in a more fair way in Uniswap. But to me, this was not that. So I know the UMA token, they started listing at basically the price of their last raise, so a market cap of UMA tokens of 27 million, which is high in and of itself when you consider there are currently no cash flows that I'm aware of occurring to the token, nor is there a product that we can get our hands on and use. But that aside, that was raised with accredited investors and VCs and that sort of thing. But the the net outcome after this Uniswap listing with a very small amount of supply.

• 13:17Ryan Sean Adams?

  So only about 3% of the total UMA tokens were provided as liquidity. The net outcome is that UMA as a token is the number five DeFi money protocol token on the market at 121 million right now. So I don't know, that's a 5X or so of their last raise with VCs. So it did, whether intentional or not, this was definitely an experiment and, you know, give the team the benefit of doubt. It's hard to know, you know, necessarily if this was intentional, but it had the effect of pumping the price to a degree

• 14:01Ryan Sean Adams?

  that is probably not sustainable long term and is probably not conducive to growing a community. So we'll see how this plays out, but you know, there's a possibility here, David. I don't know if you agree or not, but I was starting to get feelings of, oh my God, this is like the very beginnings of ICO mania again, only it'll be conducted on Uniswap. And, you know, we just need to make sure that the community is informed and buys into assets if they're doing this, that have long-term value accrual mechanisms and that are fairly valued.

• 14:38David Hoffman?

  Uniswap, I guess, is an easy place to issue a token because everyone knows what Uniswap is and it's really easy to go and buy a token. So I guess in that sense, it's making it more accessible because everyone knows how to buy and sell on Uniswap. So that and like maybe an accessibility argument is to be made there. But the 2% to 3% of the total supply of the token made available on day one, it's hard to excuse that, in my opinion. I think we, you said that, you know, we don't really know if they were doing that intentionally or not. I'm going to go ahead and be a little bit more critical than that. I think that if they just decided that 2% was the right number and didn't think about

• 15:20David Hoffman?

  The illiquidity that would result in just only 2% and then the the price pumping effect that comes from illiquidity would would follow. I I I think we should assume that they definitely knew what they were doing. And again, it goes back to the issue of this is not how you generate an aligned community and aligned network of stakeholders, but it is how you pump a token really, really fast in the first few blocks. And that's definitely what happened. And so this doesn't sit really too well with me over the long term.

• 15:51Ryan Sean Adams?

  I think our best defense as a community against this sort of thing is to make sure we understand very clearly the value accrual mechanisms of all of these assets. Things went absolutely bonkers in 2017 because people put fundamentals aside and value accrual mechanisms aside, and they just chased the pump on the bankless journey. We're not about that. You know, this is about long term fundamentals, the growth, the long term growth of an industry. And so, you know, pump-mentals aren't something that we get really excited about. So, you know, I definitely agree with you there. So while we're talking about money verbs and DeFi

• 16:33Ryan Sean Adams?

  protocols, here's one you absolutely have to check out. This is a lending and borrowing protocol called Aave. What does it do? You can put dye into it, you can put ETH into it, it will take your dye, it will take your ETH, and it will transform that into an interest-bearing asset. This is a great way to level up in the bankless money system. You can also borrow from it. We were talking about borrowing from various protocols at a variable rate, but this allows you to, Aave allows you to borrow from it at a fixed rate. So you know exactly what you're going to pay from one day to the next and one month to the next. Developers, you've got to check out their flash loan protocols. Groups like DeFi Saver

• 17:17Ryan Sean Adams?

  have integrated these into their protocols, into their applications, and created a lot of value. Go to ave.com and deposit crypto to start earning or borrowing. That's A-A-V-E.com. Try it out.

• 17:33David Hoffman?

  On your bankless journey, you might find that your bankless account is storing more value than your bank account, but you still need to buy things at the grocery store. You still need to go out and on Friday nights. And if all your money is in the crypto world, well, you're ahead of the times, but you still need to live your life. And that's where Monolith can help you out. The Monolith DeFi card is a way to keep your funds in the bankless universe while still being able to buy things in the real world. The Monolith Visa Card is accepted wherever Visa is, which is like the whole world. And it lets you use your DAI as it's supposed to be, as money, as a way to pay for things. So go to monolith.xyz and check out their

• 18:18David Hoffman?

  DeFi card, check out their rates. The DeFi card is a smart contract wallet, which is something that we definitely have to get into as to what that is on bankless. But it's a really cool way to protect your funds and still be able to use them. So go to monolith.xyz and get your DeFi card today.

• 18:37Ryan Sean Adams?

  Well, without further ado, David, we should get to our episode with Caleb on the Uniswap Protocol. This is How to Go Bankless with Uniswap.

• 18:56Ryan Sean Adams?

  Welcome to our episode on Uniswap. This is going to be fantastic. David and I are here with Caleb Sheridan. He works at Blocklytics, which is a data analysis and services company that focuses on protocols like Uniswap. He knows a lot about it. Caleb, could you just begin by telling us a bit about your journey in Ethereum, in sort of the bankless space, and how you stumbled across Uniswap?

• 19:24Speaker 02

  Sure. Just as Uniswap is launching, I heard Vitalik speaking at ETH London. And he mentioned Uniswap as one of these common goods projects that was released that did not use a token model. And it was right, right as I was founding my company Blocklytics. And so it seemed kind of obvious to go and explore this project that Vitalik mentioned. As soon as I saw it and I saw the simplicity of it, I just got sucked in. And went and did as much research as possible on the protocol and have been following along ever since.

• 19:57Ryan Sean Adams?

  So Uniswap without a token is something that caught your eye. What else about Uniswap caught your eye? And maybe also about Ethereum at large?

• 20:05Speaker 02

  Ethereum is fundamentally useful. I mean, at this point, there are things that you can do on Ethereum with cryptocurrency that, you know, we've, we've kind of been dreaming about for years. And one of those was swapping tokens really easily. And so getting into, getting into Uniswap and seeing this public good that was available that made token swaps easily accessible for individuals was, was kind of eye opening. I think before that, you know, before Uniswap even, the user interfaces and the user experience of doing token swaps was really difficult. It would involve like going on centralized exchanges, giving them personal information, personal details, waiting for 30, 40, 50 confirmations to make a deposit,

• 20:46Speaker 02

  and only then kind of dealing with order book layouts and order books.

• 20:53Speaker 02

  And then at the end of all of that, you know, the money that was on these centralized exchanges was a lot of the times out of risk. And so if you look at kind of when Uniswap came out, how the market was for trading tokens, and then this, this clean product with, you know, you, you have Ether and you want this other token, you know, just pick the amounts and hit swap. It was, it was really eye opening and refreshing. And that, that kind of got me into the rabbit hole of, of Uniswap. It was just the simplicity behind it. And the fact that it was this public good really helping, helping users out accomplish this simple thing of swapping tokens.

• 21:30Ryan Sean Adams?

  This is cool. So, so Caleb, let's, let's dive into those first two. So the first one you mentioned is exchanging and trading, right? So this is basically a function that in the, in the more centralized exchange, the crypto bank world, a Coinbase or a Binance might do for you with, with some sort of an order book, right?

• 21:50Ryan Sean Adams?

  And the, and the second is actually providing liquidity. Let's dive into the first. So, so folks, you know, kind of understand how this works. So if, let's say.

• 21:59David Hoffman?

  Say I have a position in DAI, so that's a stablecoin we talked about in episode nine with Mariano Mariano Conte. So let's say I have DAI and I want to exchange that for Ether. How does it work? What are the the fees for that process? Am I interacting with an order book of any kind? Is there like a peer-to-peer transfer going on? Or how do I tap into that liquidity?

• 22:29Speaker 02

  Sure. So Uniswap is a is a decentralized exchange where users can swap Ether and ERC20 tokens. The exchange itself is funded by its users. In many cases, it's funded by the same people who are swapping tokens. They become liquidity providers who who make the whole thing run and provide liquidity for traders.

• 22:52Speaker 02

  So, you know, long story short, Uniswap is this decentralized exchange ecosystem where traders and liquidity providers kind of all all work together to build to build financial markets between different cryptocurrencies and different tokens on Ethereum.

• 23:10David Hoffman?

  I definitely remember the the days of 2018 when Uniswap came out where, you know, I had my Binance account. And I'm pretty sure the last time I've logged into Binance was the day that Uniswap came out. And I became immediately a little bit more bankless as a result. So I definitely resonate with that. So let's start with some definitions, and I think we have a kind of a fun game ahead of us. Can you explain Uniswap in 10 sentences? And then I'm going to ask you to explain it in one sentence. But let's start with 10 sentences or a paragraph if you can.

• 23:41Speaker 02

  So the first option with Uniswap, and the first thing that many people see on the page is that you can swap Ether for tokens. And there's an extensive list of tokens, which we'll get into in a few minutes.

• 23:54Speaker 02

  This is kind of the most, at its core, this is this is the service that Uniswap is providing end users. You can swap any given token for Ether, and you can even swap any given token for any other given token. The second thing you can do with Uniswap is you can provide liquidity. And when you provide liquidity, you take ownership of a given exchange pair. And you you you share a portion of the fees that that exchange pair generates with every with all of the other owners. So in this case liquidity providers are providing liquidity to facilitate trades and collecting fees as part of the protocol.

• 24:33David Hoffman?

  Uniswap isn't just one thing. There's a bunch of different ways that you can use Uniswap. So can you go through kind of the various options that Uniswap provides people? What can you actually do with the application?

• 24:46Speaker 02

  When you make a trade or when liquidity providers provide liquidity to Uniswap, in this case the ETH-DIE pair, the liquidity providers provide Ether and DIE into a smart contract and the smart contract holds those two assets in balance. Whenever a trader comes through and once one of the assets from the pair, so in this case DIE for Ether,

• 25:11Speaker 02

  they provide the smart contract with DIE and then they take back an amount of Ether that the smart contract kind of just calculates on their behalf. So this is called like a price curve or something like that. You might have heard it called a bonding curve, which is like a maybe a questionable terminology for it. But the point is that the price is determined by the smart contract and the price is determined by the ratio of assets that are inside of that smart contract. Whenever a trader does...

• 25:46Speaker 02

  Whenever a trader makes a trade with the smart contract, they essentially give it a surplus of one of the assets like DIE and they take out some of the ETH from the smart contract. And here two things happen. One is that the user pays a small fee, which sits, which goes back into the smart contract. So the user pays at the moment 0.03% of the fee in ETH in this case. And then that ETH sits in the smart contract and is essentially distributed as a fee to all the liquidity providers of that smart contract balance. The second thing that happens is that the price changes for future trades. So because you've in this case traded DIE for ETH,

• 26:29Speaker 02

  you've changed the ratio of assets within the smart contract. And so the new price for whoever comes after you to trade is going to be based on that new ratio of what you kind of, depending on your trade size.

• 26:44Ryan Sean Adams?

  I think you were just about to tell us, so you're not really trading Caleb with an order book, right? You're almost trading with a smart contract, some kind of a, like you called it a bonding curve.

• 26:56Speaker 02

  Yeah, that's exactly right. You're trading with a smart contract and the idea is that this ratio of assets always needs to be held in a constant, to a constant product in this case. So this pricing curve, it has a unique property in that as an asset is removed or added, the second asset or the asset pair increases. And the really unique property about kind of the model that Uniswap came out with is that this curve, you know, if you plot it on X and Y, you would see that it looks kind of like,

• 27:35Speaker 02

  like a square root. But essentially, this curve goes to infinity on the Y and goes to infinity without touching zero on the X. And the idea is that, you know, if you deposit one ETH and 200 DAI today, in the smart contract, that contract, no matter how many trades are made or what like size trades are made, the smart contract will never run out of those assets. It's just that what will happen over a bunch of trades in one direction is that the more popular asset will get more and more expensive. And so the idea is that, you know, this kind of promotes trades up to a certain point

• 28:17Speaker 02

  and then the price shifts and then it supports trades back down to like that asset's kind of market value or real value external to the system.

• 28:28Ryan Sean Adams?

  So to make this, so to make this really tangible Caleb, right? So if I am on the DAI ETH pair and I'm doing a small amount of DAI, you know, say a hundred dollars worth of DAI,

• 28:42Ryan Sean Adams?

  you know, that, that kind of curve that you described is not going to be impacted so much. So I'll probably get a pretty good price for that DAI, so, or for that ETH.

• 28:54Ryan Sean Adams?

  So the price might be comparable to something I could get on an exchange. Slippage is a word we might use for that. That would be pretty low. It would cost me maybe, you know, point three percent, so thirty basis points in Uniswap fees. But my slippage would probably be comparable to that of an order book exchange like a Coinbase. But if I really ramp up that volume and say I'm making a major purchase, I'm a, you know, a large market maker and I'm purchasing a million dollars worth of ETH with my DAI. What happens in that case? What's my slippage like?

• 29:31Speaker 02

  Yeah, in this pool right now, the ETH DAI pool has about a little bit over six million dollars of liquidity in it. And so the slippage on a one hundred dollar trade would be very negligible. And as you said, you would essentially just pay the exchange fee. The slippage on a much larger trade would increase and it increases at an increasing rate. So the bigger your trade is, the more slippage you would have. And in this case, you might have like fifty percent slippage or something like that. And so for these pools that, but that's not to say that, you know, this is not for big traders or it's only for tiny traders who want to trade ten or twenty dollars at a time. These pools are actually supporting trades of up to a hundred grand with very, very low slippage.

• 30:13Speaker 02

  And the beauty of these pools is that those trades happen instantly. They happen in one transaction. There's no making a deposit to an exchange and, you know, eating up the order book or any of that. So if you really look at the slippage on even big trades, Uniswap and these deep markets are really, is really, really competitive, even with popular order-based markets. You know, I find that I'm just in awe that the system has gotten to that point where liquidity has grown to a point that Uniswap can be your only exchange. And that's, that's one of the amazing things about watching this protocol grow in particular

• 30:54Speaker 02

  and get to this stage of, you know, being suitable for all kinds of traders. I would say that, you know, if you're really sensitive to slippage and you want to avoid it at all costs, the way to do that is just spread your trades out over time, right? So take your one million dollar trade and spread it out over a few days or a few weeks, doing like a small fraction of it at once, and really watching the amount of slippage that is affecting you. But I think that you would be surprised at how much volume Uniswap can handle in terms of these deep pools.

• 31:33David Hoffman?

  How has the liquidity in Uniswap changed over time? Can you kind of illustrate that graph for our listeners?

• 31:40Speaker 02

  Sure. Uniswap, being a Uniswap liquidity provider, it's not easy to understand what your returns will be. So it's based off of demand for a token that is hard to anticipate. And it's also based off the relative price of two assets. So if you're just looking at the Uniswap ETH dipool, you're kind of...

• 32:08Speaker 02

  The price of ETH external to Uniswap really matters and really affects you. And essentially, what liquidity providers are doing in order to collect this trading fee is they're depositing their liquidity in such a way and promising to make trades and fulfill trades in such a way that it can actually kind of cost them money in the long term. So in other words, a Uniswap liquidity provider does not get the option to not take a trade that, you know, looks bad compared to the current market rate. And so what may happen is that, you know, Uniswap liquidity providers take a bunch of bad trades in a row, and the price ratio causes this phenomenon called impermanent loss.

• 32:51Speaker 02

  But it is called impermanent loss because the price ratio can always return, and then the liquidity provider is not actually realizing that loss. It's just that on paper, the liquidity provider may take a few bad trades in a row and take some loss. So this is to say that anticipating returns as a liquidity provider is quite difficult. But what we've done at Blocklytics is kind of tried to say, okay, well, what helped the historical returns then? And what does demand look like today? And so we do provide that kind of historical, those historical returns on our website, pools.fyi.

• 33:28Speaker 02

  But in general, this is kind of one of the difficulties of being a liquidity provider and having people kind of choose whether or not to be a liquidity provider. It's a very hard question to answer.

• 33:44Speaker 02

  Despite that, over time, as people have watched liquidity grow in Uniswap and as people have watched the returns on these Uniswap pools, we have seen liquidity growing over time. And so there was a slight, in ETH terms especially, because each Uniswap liquidity pool is denominated in ETH. In ETH terms, we've just seen more and more highs. And at one point, I was looking at it on a weekly basis, it just never dropped. Every single week was a new high for the amount of liquidity in Uniswap. And now that there's a long history of looking at previous returns and what happens in different types of markets, I think that people are more comfortable with getting involved

• 34:27Speaker 02

  and accepting that there may be a little bit of impermanent loss. But in many, many markets, the trading fees have historically made up for that.

• 34:37Speaker 02

  And so right now, we're kind of very close to an all-time high in terms of liquidity, even after a lot of liquidity was removed following Black Thursday.

• 34:47Speaker 02

  And then obviously, in dollar terms, we'd be very close to an all-time high at this point as well.

• 34:53David Hoffman?

  Let's touch on impermanent loss a little bit more. And then also, every single Uniswap pool has two assets in it, right? And so each Uniswap pool is its own characteristic. What types of Uniswap pools would see impermanent loss more than others?

• 35:11Speaker 02

  Yeah, great question. I'll break this down into maybe three types of pools. And broadly speaking, everything...

• 35:20Speaker 02

  Everything more or less falls into one of these three types. So the first type is two assets like ETH and DAI, which are not necessarily inherently linked or inherently related. And, and you may, you may have a personal opinion on where the price of ETH in, in terms of DAI is going in the future. But, but there's no kind of reason why it, it can't go up and then, you know, come back to this price or whatever the case is. So in, in this type of pool where, where the two assets are kind of separate or non-correlated, the,

• 35:59Speaker 02

  the impermanent loss i- is kind of just that, like you, you may check your account balance one day and see that you've suffered a lot of impermanent loss and come back the next day and see that you, you've, you have no impermanent loss anymore. And so the idea is that this, this loss, which, which is what you risk as a liquidity provider, i- i- i- it comes in, it kind of goes away in, in, in pools like Uniswap ETH, DAI. There's another type of pool, uh, which is, uh, what, what I would refer to as kind of a stable pool, where it's, uh, an example of this is the Uniswap ETH and Synthetix ETH pool. Uh, and the idea behind this is that you take two assets that, uh, you know, should have the same value.

• 36:43Speaker 02

  And because they should have, you know, the same value or very, very close to the same value, you know, by, by definition, there can really be no impermanent loss unless there's some catastrophic breaking of the peg. So in this case, SETH is loosely tied to ETH, but broadly speaking, you know, trades within, within a range that's, that's very close to, uh, within a range that's very close to one, uh, one, one to one ratio. So in this case, you know, traders just collect, uh, trading fees and they don't really have too much risk of impermanent loss. Uh, and, and in these cases, you know, we see that the, the growth of this pool has kind of spoken for itself. So historically, you know, th- this has been one of the biggest pools ever.

• 37:26Speaker 02

  Uh, one of the other biggest pools ever is the Uniswap ETH to wrapped ETH pool, which also ha- is, is a pegged asset. And what we see is that, you know, traders are collecting, uh, reasonable returns in those pools and, and so far not really feeling much impermanent loss at all. Uh, because the exchange rate has, has remained very, very steady and very, very close to one.

• 37:50Speaker 02

  The third type of pool that I'll just mention quickly is a pool where the token is designed to be inflationary or designed to be deflationary. In this case, you know, there is a huge risk of impermanent loss. And so this would be things like interest-bearing tokens or certain deflationary tokens that have kind of shown up over the past year or so.

• 38:14Speaker 02

  And these tokens essentially are designed in their mechanics to gain value against ETH. And so what that causes is, you know, these are much more at risk of, or the liquidity providers are much more at risk of impermanent loss if the token is designed to change in ratio, grow or decrease in ratio against ETH. So for example, in like compound tokens, you know, these make very poor pairs against ETH because ultimately, you know, the exchange rate of a compound token increases and therefore, you know, it doesn't hold that same property of mitigating impermanent loss the way that

• 38:57Speaker 02

  wrapped Ether or synthetic ETH does.

• 39:00Ryan Sean Adams?

  This is so super cool. I mean, I think we'll talk about this a lot, the idea of permissionlessness. So anyone can go in and make a trade. And just as everything you were talking about, about becoming a liquidity pool provider, anyone can do that. It's permissionless. There's no identity required. You just have to have the assets, you know, 50% of each in a pool and deposit those assets. And then you are effectively a liquidity provider. And different pools give you various rates of return. So if someone wants to increase their ETH-denominated returns, for example, maybe an ETH-type pool

• 39:44Ryan Sean Adams?

  might be for them, maybe an ETH-DIE pool. But you're in the data every day, Caleb. Can you tell us where the big opportunities are for being a Uniswap liquidity provider? So if I want to take my ETH and I want to make more ETH, you know, which pool should I deposit into? If I want to take my DIE and make more DIE out of it, where should I go?

• 40:06Speaker 02

  For people who, let's say, like want to stay, so that, I guess the... The best pools for brand new users to kind of try out and dip their toes in are definitely the ones without impermanent loss, you know, or with limited impermanent loss or mitigated impermanent loss. So the popular pools like ETH South and ETH wrapped ETH are great examples of this. Where where it kind of starts to get tricky is, let's say that if you care about your returns in terms of ETH and you want to stay exposed to ETH, to join to be a liquidity provider in the ETH DAI pool, it would require that you trade in half of your ETH for DAI. And so you lose out on any upside on on half of your liquidity pool

• 40:50Speaker 02

  deposit. I think that for a lot of people, that is has been sort of a deal breaker. Now that said, there are ways of, you know, using Maker, using some of these other systems to deposit ETH in order to generate the DAI that you need and then deposit ETH and the generated DAI against another different ETH deposit in into these pools and then stay completely exposed to ETH. And one of the teams that's doing great work on making that process really straightforward and simple is DeFi Zap. That that kind of takes all of these different money legos and combines them in such a way to give users that that end, that end exposure that they want. But I'll just say the the important thing to

• 41:35Speaker 02

  kind of figure out as a liquidity provider is what do you want to earn money in or what what is your underlying kind of, how are you going to count your your victory? Right? And so if that's if you're really concerned about just stacking ETH, that's one strategy. If you're really concerned about tracking wins in terms of DAI, that's that might be a different strategy. And so I think kind of internalizing that and figuring that out as a liquidity provider is almost as important as picking or even more important than picking out the which pool to join or whatever the case is.

• 42:07Ryan Sean Adams?

  Yeah, so we're definitely all about stacking of ETH in the bankless program. It is the reserve currency of upside for this entire space, for sure. But increasing DAI-denominated returns is also interesting. And I want to jump on that point that you mentioned with DeFi Zap. So that gives you the ability to essentially supply liquidity to these pools in one click, in one transaction. We'll include a tactic about DeFi Zap and how that works in the show notes. But if you're just getting started, that's a really cool way to do it. It makes it incredibly easy. But what are you seeing lately? So what kind of returns are we talking about on ETH or with DAI, Caleb?

• 42:52Ryan Sean Adams?

  So are we talking like 1% to 2% returns on ETH over, say, a 90-day period? And how about DAI? And how does that compare out there to other DeFi protocol opportunities?

• 43:03Speaker 02

  Yeah. In terms of high volatility, the ETH-DAI pool just outperforms everything. And it's not even close. And so it just outperforms holding ETH in many, many cases. And you can look at the historical returns to see where this kind of breaks down. But ultimately, in some cases, it is possible that if you had held your deposit separately or if you had held your ETH separately, you would have done better than the pool. And like today, that's the case. So over the past 30 days, you actually would have done better to just hold ETH than be an ETH-DAI liquidity provider. But if you look back historically and over long periods of time, there's no question

• 43:46Speaker 02

  that Uniswap ETH-DAI is a much better option for certain users. So the returns that we're talking about kind of vary. And over long periods of time, we're talking better returns than what's possible in lending protocols, for example.

• 44:04Ryan Sean Adams?

  So over a long period of time, what you're essentially doing is you're taking a bet on the transaction volume of Uniswap. Because every time there's a Uniswap trade, you earn a portion of the fees. You earn like 0.3%, right? So you're betting at some level on Uniswap over the long run. But over the short run, it's sort of a gamble based on the volatility of ETH, right?

• 44:30Speaker 02

  That's right. And if you, if you look at, you know, the, we spoke about impermanent loss. And if you kind of look over

• 44:38Speaker 02

  the race that liquidity providers are looking at is, am I going to earn enough in fees to cover whatever impermanent loss happens to me over a certain period? And if you look over a long enough period, you know, in theory, you'll have like infinite trading fees that you collect and your impermanent loss will be, you know, reasonable. And so over like an infinite period, you know, you could say that, okay, well, this is definitely going to outperform. But obviously, you know, infinite is a really long time. But even if you look at over the last 90 days compared to ETH, so if you provided liquidity 90 days ago and you cashed it up today, you would have earned an equivalent APR of 60% on top of or above

• 45:20Speaker 02

  holding ETH. So in ETH terms, you know, these are very, very good returns. And, and I think like that's, you know, that's the underlying theme that's common in all of these pools. Is that the longer you hold and the longer that you're a liquidity provider, the more fees you can collect and kind of even out the short term variance of the price ratio of the assets.

• 45:44David Hoffman?

  So we've been talking about impermanent loss and using Uniswap as an investment tool, providing liquidity to various token pairs in order to, you know, collect that fee and get a passive return on your income. But there are other ways and other reasons to provide liquidity. And at Realty, for example, every time we release a property, we put it on Uniswap, but then we also seed it with our own liquidity. And we don't really, we don't do that looking, because we're looking for a return, we're looking to do that simply to provide liquidity. And, and one of the really powerful things about Uniswap is its permissionless ability to list an asset. And then also its permissionless ability to provide liquidity. Can you just comment on that?

• 46:30Speaker 02

  Oh, absolutely. Uniswap has over 2,000 liquidity pools. And that number on a daily basis is just growing. And the idea is that anybody can come through and list an asset. And what you guys have done with Realty is really amazing. And even in your case, you know, that's an asset that has a whitelist and has kind of a permission setup. And it just kind of works with Uniswap. And so, you know, you don't have to give up your permission logic in your token to make it work with Uniswap. And that's a really amazing thing. And so there are a number of tokens like that that just kind of work with Uniswap really well. And what we kind of see is that

• 47:14Speaker 02

  users have started to sell goods and services on the network.

• 47:19Speaker 02

  And one of the early examples of this was from the Uniswap team itself, who sold socks in a token called Socks

• 47:28Speaker 02

  in order to kind of raise a little bit of money for their company.

• 47:32Speaker 02

  So what they did is they minted 500 Socks tokens, added a little bit of ETH, and then let this limited edition good go off and start trading. Of course, the token could always be redeemed for physical socks. But what's happened is maybe more amazing. The price here just kind of went up. And like at the moment, socks cost quite a bit. And so what started at $12 is now in the hundreds of dollars for a pair of socks.

• 48:01Speaker 02

  The long, as initial liquidity providers, you know, the team is just earning fees on each of these trades. But what's amazing is more that, you know, they produced this limited edition good and then immediately went and found the market for it. And naturally, the price of a limited edition good just kind of went up and up and up with demand until some of the first buyers who maybe bought it at $12 decided to sell it at like $40, $80, $120 to other people who wanted to hold these limited edition goods. So if you're talking about something like price discovery on limited edition goods, this is an amazing tool to do it. Because as there's more demand and as there's more purchases, the price goes up.

• 48:42Speaker 02

  And so you meet, you kind of, you kind of find out what the real price of this limited edition good should be or can be.

• 48:52Speaker 02

  Many teams have kind of followed in suit and in fact, we've seen people selling their time or even things like retweets or legal advice or whatever the case is. And so there are many of these kind of goods and services now available on Uniswap. And I think that that's why we're seeing a lot of new markets created and you know, quite a lot of innovation in the space. One of my favorites is the cafe token, which is a limited edition batch of coffee. That was that was pre-sold on Uniswap and then the tokens themselves could be redeemed for for bags of coffee beans. And that type of, you know,

• 49:35Speaker 02

  coming up with a product, making a token for it, adding it on Uniswap and instantly getting a market for your goods is really incredible and really amazing. And one of the key feature about, you know, this, this, that makes this protocol work really well for maybe the long tail of assets who otherwise, maybe, you know, this, this could have been too much work to set up an online store. They didn't want to quite go through the process of

• 50:04Speaker 02

  signing up for like

• 50:07Speaker 02

  credit card payments or whatever the case is. Instead, they, you know, create tokenized assets, add them on Uniswap and then collect their, their sales in ETH. And then the, over the long term, you know, if that asset is really popular and trades a lot, they also just keep on collecting trading fees, which is, which is incredible.

• 50:24David Hoffman?

  So how does this compare to, you know, bootstrapping liquidity on something like Binance or a centralized exchange, an order book based exchange? If, if the Unisox team, Uniswap with their Unisox wanted to get liquidity for their, their stocks token, how would they even do that? Was that even possible before Uniswap?

• 50:43Speaker 02

  Uh, very difficult. And I, I think at the time, you know, with that Uniswap is coming out, we were hearing stories of uh, token listings costing hundreds of thousands of dollars. And compare that to maybe two dollars worth of gas that you pay to create one of these markets. Maybe a handful of ETH and tokens to, that you minted to get the market started. I mean, from that aspect, it's, it's really amazing uh, what, what's possible here. Uh, I think that, you know, when it, when it does come to kind of bootstrapping networks, uh, there have been a few teams that have done it really well. Uh, and to be honest, Maker and the Maker Token and the Die Token used Uniswap uh, as one of the primary kind of liquidity vehicles. So i- in a time before they were, these tokens were listed everywhere,

• 51:28Speaker 02

  Uniswap had some of the deepest liquidity and still have some of the deepest liquidity uh, for Die and Maker.

• 51:36Ryan Sean Adams?

  Do you know, I wanna, I wanna sort of test this thesis uh, with you Caleb and y- you too David. So I was trying to think, I mean, U- Uniswap has really taken off like a rocket as a DeFi protocol, like just growing massively. Its volume in, in March was uh, incredible. Um, I think beyond what a lot of people expected. So like, like the question is, why? Why was it so successful? Why is it, you know, kind of this 10x improvement from alternatives? And one reason I came up with, uh, so at first I thought, well, maybe it's because it's more decentralized, more censorship resistant. And those things are true.

• 52:15Ryan Sean Adams?

  But the one thing that sticks out to me and everything that you, you were just talking about is its permissionlessness. So the fact that anybody can list a token on the exchange. It's, it's almost reminiscent of, you know, the early internet where you, you had closed platforms like AOL where you have to ask their permission to sort of list websites or, you know, in the Yahoo directory, someone kind of, you know, lists, lists a website versus the open internet, which lets anyone publish a website uh, anywhere uh, at any time.

• 52:53Ryan Sean Adams?

  And then, you know, the best websites essentially rise to the top. It creates this long tail of really interesting niche websites, but also this constant churn of, you know, the most successful websites rising to this top. This Uniswap almost does that with assets. And I think the key part about it is permissionlessness. What do you think about that, Caleb?

• 53:16Speaker 02

  Yeah, I do agree. And I think what Uniswap has done quite well is made it really simple to go through these steps of creating a permissionless market. And permissionless doesn't just mean people. I mean, it does in a sense, but the other aspect of having a permissionless market is that it's extremely easy to integrate Uniswap into other products. And so what we've seen is like one of the driving factors in Uniswap's growth in terms of volume is definitely its its ability for other projects to integrate it and facilitate and send trades to Uniswap in order to make their own platforms better and improve their own user experiences.

• 54:00Ryan Sean Adams?

  I think what you're saying, Caleb, is that Uniswap almost exists as this infrastructure for other money protocols. It's almost like we've talked in a couple of episodes about some of these money protocols, DeFi protocols, being almost like emergent organisms. And Uniswap is almost an emergent organism that eats assets like ETH and DAI, for example, and spits out liquidity. And then it provides that liquidity as a pool for all of the other DeFi protocols. So what you're saying is it's, you know, they can, all the other DeFi protocols can tap into them and then bootstrap their own liquidity,

• 54:43Ryan Sean Adams?

  have a censorship-resistant, unstoppable way essentially to trade assets. And that's all been added into the Ethereum superstructure, as David would call it, like this kind of super organism. Now, not only do we have a store of value reserve asset like Ether, we also So have a liquidity machine, a liquidity robot on top of that that is also unstoppable in the same way that Ethereum is. Now, I want to dig into that, though, like censorship resistant and unstoppable, because we talked in an episode about the DeFi trust spectrum.

• 55:22Ryan Sean Adams?

  And we talked about Uniswap being on sort of the far end of the most decentralized and the most autonomous side of the DeFi trust system spectrum, because it really is kind of just code. And it doesn't require human intervention or human governance to run. But like, I want to ask you, Caleb, is Uniswap really autonomous and really unstoppable? And like, things like the user interface, or the team, or even the Uniswap.io or .exchange, excuse me, a domain name, are those vectors of centralization? And, you know, could those be stopped?

• 56:07Speaker 02

  The Uniswap smart contracts and the Uniswap factory cannot be stopped. There's no, there's nothing in it that, you know, there's no button that somebody can press to turn off the smart contracts. You know, we did see that the Uniswap team restricted access to their website and their exchange system to a certain list of countries. But, you know, what happened in the days following was really amazing to see. So different community members around published their own versions of Uniswap on IPFS and made those available on IPFS. So the underlying smart contracts, there's no off button, there's no off switch or anything like that. It's just that, you know, the website in this case, Uniswap.exe

• 56:50Speaker 02

  was restricting access to some countries. But then, of course, what happens is that, you know, the website was then made available on IPFS and where it's extremely redundant and essentially available for everybody. I think, you know, that's an amazing property. I probably disagree that, you know,

• 57:10Speaker 02

  There is some choice that users are making. And so I would have to say that Uniswap only runs forever if liquidity providers are there kind of accepting the deal of providing liquidity in exchange for for for trading fees. And so in some cases, there is this human element of like deciding, you know, should I put my liquidity in this pool, in that pool? Should I support this project by adding liquidity or whatever the case is? And so I wouldn't say that, you know, it's it's devoid of of human decisions or something like that. I think that we see, we see a lot of human decisions based on what what pools are the deepest and how winning kind of the liquidity race.

• 57:54Speaker 02

  Because at the end of the day, if every liquidity provider withdrew their liquidity, then that would essentially stop a Uniswap, a Uniswap pool. But that is a decision that, you know, would be a collective one that everyone makes and not a forced decision like an administrator withdrawing everybody's tokens or something like that. And it makes it makes an extremely interesting thing to watch as Uniswap version two comes out, which is that the team themselves cannot force people to upgrade. You know, they they actually have to make if they want people to move to a version two, they have to make a more compelling product that people actually want to move away from version one to version two. And so they've actually kind of said themselves, you know, version one is going to live forever. It's always going to be there.

• 58:39Speaker 02

  And at the end of the day, it's up to users to to decide like, you know, will this thing live on as a as a public good or will they move their liquidity, attention and trading elsewhere?

• 58:49David Hoffman?

  So you said that there is some human component to it because, you know, ultimately it's humans that are choosing to provide liquidity. But I'm actually going to push back on that and say that the rewards or the returns offered by Uniswap turn people, it forces people's hand. And so while there is a human ultimately hitting the deposit button, Uniswap actually creates incentives to, you know, force the hand of people. So at the at the end of the day, all blocks. Systems are are human systems, right? Like even with Bitcoin, you have to choose to run your own node. But with with Uniswap, and I want to get, I want to get into both the topic of Uniswap as a DAO and also Uniswap as

• 59:34David Hoffman?

  this perpetually growing feedback loop. And and and so the original definition of a DAO is something with humans at the periphery and and code at the center. And the code at the center has this inherent feedback loop where, you know, more, some, some people decide to just come and deposit some liquidity. And that makes some people come and decide to trade, which gives those liquidity providers returns, which those returns incentivize further liquidity. Further liquidity deposits, which then allows for a wider participant pool of people to come and trade on Uniswap without, you know, severe slippage, right?

• 1:00:17David Hoffman?

  The more liquidity inside of Uniswap, the more viable it is for larger and larger people. And then when larger and larger people come to Uniswap, there's more trading fees going to Uniswap, which incentivizes further liquidity deposits. And then that in turn feeds back into itself and allows for further people to make more trades on Uniswap. And so while I think that, of course, everything has this human element, this internal mechanism, I think, forces people's hands and almost promises the growth of Uniswap as an application. Do you agree with that?

• 1:00:56Speaker 02

  Yeah, I do. So I I really buy into Uniswap being some kind of a DAO-like structure. But ultimately, what what you're describing is a virtuous circle where as long as traders show up, liquidity providers will will be there to accept their trading fees. And in this case, the the parameters that Uniswap kind of guessed for trading fees and and everything else, you know, were were suitable enough to actually grow these these markets into into really substantial infrastructure and really substantial liquidity pools and and as as a public good. So, you know, I think it's it's just been incredible to watch the growth of Uniswap and watch these virtuous circles work themselves out and work themselves up for

• 1:01:39Speaker 02

  you know, the these, these, the the most popular Uniswap markets. It's it's really stunning to watch happen in in kind of almost real time here.

• 1:01:47Ryan Sean Adams?

  One thing we haven't talked about is how other experiments like this have been tried in the past. So maybe a couple to reflect on Caleb. So the first was Bancor, which actually had a similar concept as Uniswap. Why was Uniswap more successful? And why did its growth accelerate? Well, Bancor's sort of stayed stagnant, do you think?

• 1:02:17Speaker 02

  Yeah, at some point, very soon after launch, you know, this little project with a unicorn emoji logo started getting daily trading volumes like above this massive ICO project Bancor. Ultimately, the two technologies are quite similar and the two product offerings are quite similar. But for me, I think that the difference lies in how easy it was to start pools on Uniswap, how easy it was to start providing liquidity and getting to the point of the virtuous circle. Whereas on Bancor, everything was a little bit more difficult, a little bit more restrictive. The code is more difficult to read and parse and integrate into smart contracts.

• 1:03:01Speaker 02

  And I think at the end of the day, if you're looking at the developer community who wants to integrate something that's, you know, infrastructure should be simple so that it's secure. And I think that is like one of the key points of looking at Uniswap. You can see it, you can read the contract in a few hours and figure out like, yeah, this thing is gonna run for a while. I think that that's kind of ultimately what made Uniswap really popular initially and caught its volumes and kickstarted its volumes that has now allowed for this long tail of assets to live on its platform and be traded every day.

• 1:03:42Ryan Sean Adams?

  I definitely like the Uniswap approach, too. I think you said when we were getting started with this that you were attracted to Uniswap because it was a public good. We had just come out of the ICO craze and Bankor, I don't know what they raised, 150 million? And here's the little Uniswap with a $100,000 grant from the Ethereum Foundation, creating something that's better. Was it 10,000? It's just some tiny amount, one developer. It's actually Hayden Adams, I believe it was his first actual software program that he ever built. And he did this and outcompeted $150 million ICO.

• 1:04:24Ryan Sean Adams?

  I think that just, this shows you that what you need is a good mechanism and simple is better. There are some other decentralized exchange approaches that have been tried on Ethereum that are still in progress and getting some uptake, too. But how would you contrast Uniswap and its success to something like the 0X Protocol, which is more of a peer-to-peer type order book protocol? What's the difference in your mind?

• 1:04:56Speaker 02

  I think order books have places. I'll just say, when it comes to a product like Uniswap, where you do trade against a smart contract, it's frictionless. I mean, it really feels like magic the first time that you swap tokens on it. And when it comes to integrating token swaps into smart contracts and into applications, that same frictionless experience exists for developers. And so if you're saying like, well, you know, why can't we make an order book exchange that makes everything completely smooth for users? I just think that it's very difficult to compete with a protocol that's built to do one thing in one transaction.

• 1:05:40Speaker 02

  And so at the end of the day, this thing is, the scope of Uniswap is not huge. At least Uniswap version one, the scope is just token swaps and liquidity provision. And it's very good at what it does. It doesn't overreach or extend. It makes it really quick, simple for users. And I think that is very, very difficult to compete with and makes an extremely compelling infrastructure layer. Whereas with order books, they are just more difficult to use generally.

• 1:06:10Ryan Sean Adams?

  Yeah, there's this concept, I think, that we've seen repeated in the most successful money protocols, DeFi protocols so far, and that is their tendency to pool state together. And when I say state, I mean basically capital pools, asset pools together, so that you're actually, as a user, interacting with the contract itself, the capital pool itself, and drawing on that liquidity. Synthetix has done this fairly effectively, Maker has also done this effectively. And it's kind of a contrast to the more the peer-to-peer approach that ZeroX is taking, where for every sell, you have to find another peer

• 1:06:52Ryan Sean Adams?

  who's going to buy. With this, the liquidity is always there. So you're just trading with the money robot. You're just trading with the pooled capital. And it seems like that is a much more scalable way to create these money protocols, and maybe why we've seen them be so successful. But is there an upper limit to that? So I think maybe some of our Bitcoiner friends might say something like, but yeah, Uniswap's great, it's a nice toy. But I mean, the volume's happening on BitMEX, the volume's happening on Binance and Coinbase, and it'll never be able to compete against these centralized exchanges. What do you say to that, Caleb?

• 1:07:37Speaker 02

  Yeah, I mean, we're kind of celebrating that Uniswap hits 10 million average daily liquidity over like March. But I think it's just a different system. It's just not comparing the same thing across both products. And so there is a lot more volume on other products. But for me personally, I don't feel

• 1:08:06Speaker 02

  I don't feel as invested in whatever happens to BitMEX and their liquidity, or whatever the case is. I don't feel like BitMEX is doing something good for the Ethereum ecosystem, the same way that I definitely feel that way about the Uniswap liquidity pools.

• 1:08:23David Hoffman?

  So Caleb, an article came out not too long ago talking about the core mechanism underlying Uniswap, but not just Uniswap, some other very integral DeFi protocols like Balancer and Curve Finance. And this mechanism has been called a constant function market maker. Now, this isn't exactly a simple algorithm, at least to explain maybe through a podcast, but I hope you can do your best in explaining the role of a constant function market maker at large, not just through Uniswap, and then kind of maybe explaining the pros and cons of that in comparison to the legacy alternatives.

• 1:09:01Speaker 02

  The constant product market makers are the fancy math behind the curves, the pricing curves that we were talking about earlier. And they are what set the rules that liquidity providers have to trade for. So if you wanted to think about this as, you know, like the house in a casino game or something like that, imagine that liquidity providers are that house where, you know, in a game of blackjack, they abide by certain rules, hit on certain numbers, and so on and so forth. In these cases, the constant product market makers are the set of rules that liquidity providers play by in order to facilitate trades for the traders. And in exchange, of course, they get the trading fee, which is like the house edge

• 1:09:47Speaker 02

  for providing that liquidity. So in the case of Uniswap, the math behind the constant product market maker is quite simple. So it's X times Y equals K. And the idea is that this constant product of X times Y, which is asset A times the balance of asset B in the smart contract, always equals some constant. And so whenever there's a trade, that constant needs to remain the same. And whenever liquidity is added or removed, that constant also needs to be the same.

• 1:10:19Speaker 02

  And so the the idea is that, you know, these are the rules that everyone in the system plays by. In the case of Uniswap, it's a very, very simple calculation. It's designed for two assets and it's not really designed for for more assets. And so now what we're seeing is a very high degree of innovation in terms of the the types of pricing curves that are being provided. We're seeing things like multiple assets being batched together into liquidity pools and the price being some function of all of those assets.

• 1:10:56Speaker 02

  Different different price ratios. We're seeing things like the pricing curve being amplified at a specific at a specific price. So in the case of kind of stable pools, where the two assets are pegged very closely together at a specific

• 1:11:17Speaker 02

  price ratio. The curve itself is designed to make better use of the underlying liquidity by by kind of flattening itself out around that around that price target. And so the idea is that, you know, it, you know, who knows if Uniswap got the fee correctly, who knows if they got the exact math right for this pricing curve? All that we know right now is that it was very simple and what we're seeing now are alternatives coming along that are more complex and trying to tweak and tune the pricing curve a little bit to meet certain goals. So I think we're we're just getting started in what I would probably consider, you know, Bancor and Uniswap have been kind of phase one or year one even of

• 1:12:03Speaker 02

  of liquidity pools. And I think we're just on the cusp of, you know, phase two, which is which are these more complex pricing curves and and more bespoke pricing curves to specific sets of assets.

• 1:12:15Ryan Sean Adams?

  As a kid, Caleb, I used to watch this show called BattleBots. Right? And it is basically the idea of like you get to like people designed to robots. And like one will have a hammer on top that swings and the other will have like a saw of some sort. You put them in a ring, like the octagon, and they fight. And you see which one wins, right? This is kind of what this reminds me of because you're essentially, you're taking these math formulas, these constant functions or constant products, as you call them. And you're putting them in the ring. That ring is the Ethereum economy, essentially. And you're, they're fighting. They're all fighting for liquidity, right? They're also helping each other, but ultimately it's kind of a battle between these bots,

• 1:12:59Ryan Sean Adams?

  between these math functions for liquidity. And some might do better in some circumstances, say, stable coins. And others might do better in more general purpose circumstances. Say, you know, like Uniswap's very simple function for, for all assets. It kind of reminds me of that. Is that, am I way off base here? Is that what's going on?

• 1:13:25Speaker 02

  I love that metaphor and I think that's the perfect way of looking at it. You know, in some cases you want the robot with the hammer. And in other cases, you want the robot with the wedge. And so I think, I think that what we'll see is depending on the asset and the types of assets that are being pooled together. Certain protocols will win and certain robots will play well. And, you know, against another type of robot. And then in other cases, we may see that a different protocol wins for a different class of assets. You know, I, this is one of the more exciting things going on in Ethereum from my point of view. These money robots, I really believe have a chance of changing how we, how we create markets

• 1:14:10Speaker 02

  everywhere for limited edition goods, for bootstrapping, token network liquidity, even for initial token sales. And so we're even seeing teams offering their tokens for the first time in almost like a Uniswap initial coin offering. Type of situation. And so for me, I see that there will be a very bright future for these liquidity pools. And at the end of the day, it benefits traders to have a little bit of competition. It benefits the people that are building on top of this infrastructure to have some of this competition. And ultimately, you know, the traders will go where they're getting the best prices, at the cheapest gas.

• 1:14:54Speaker 02

  And the liquidity providers will follow. And then ultimately, the developers may follow them, or they might just integrate whatever's easiest. So, you know, I think that it's going to be a really interesting next like six months, watching these math functions battle it out. And in the Money Robot Wars, but you know, that's kind of where we are right now. And so this is like a particularly exciting point in the journey. And many, many protocols are kind of announcing their version two, including Uniswap. And we're kind of going, we're getting to see that next iteration of this financial product that I really believe can be mainstream. Which is just incredible, incredibly exciting.

• 1:15:36Ryan Sean Adams?

  It is super exciting. And I, you know, I think I want, just want to emphasize, because we should, we should zoom out for a minute. So what all of this is doing essentially is it is adding a permissionless liquidity source as a public good to the Ethereum network and the Ethereum economy. That's the net benefit to the system of Uniswap existing and Uniswap playing its scarcity game, as we've called it in the past, because everyone has an opportunity to trade as a protocol. So no bank required, essentially. Anyone has an opportunity to list their asset. Again, no exchange, no bank required.

• 1:16:20Ryan Sean Adams?

  Anyone has an opportunity to bootstrap their asset. And this is additive to the Ethereum economy in general. It creates a bankless way to complete all of those money verbs. And it does so as a public good. And I think We're just beginning to see the secondary effects of what a public good as a liquidity source can do to the Ethereum economy and for these other money protocols too. So we're just at the cusp. But there's one last thing I think we should talk about here on the subject of of public goods. So we've got, we've talked about Uniswap so far as being

• 1:17:01Ryan Sean Adams?

  a public good for liquidity. But in Uniswap V2, it's doing something else. It can actually be used as a price oracle. And I want to discuss that with you, Caleb. So first, can you talk about what a price oracle is and maybe why it's important?

• 1:17:24Speaker 02

  Sure. So a price oracle is defining a price of the assets using some underlying data. And typically, you know, Ethereum knows about Ethereum. It doesn't really know anything else about Ethereum. And so typically, these price work goals may come from markets external to Ethereum with data that's brought on chain by Oracle services.

• 1:17:47Speaker 02

  But what Uniswap is proposing is they're saying, look, we have, we have, we know every trade that goes on on Uniswap are all on chain. So why don't we just look at the price? And then we'll have this on chain price source where we don't have to worry about if, you know, an exchange misrepresents price of an asset, or, you know, if we miss a transaction and bringing that API data on chain or something like that, we don't have to worry about any of that. It's all sitting right here. Now, teams have previously tried to use Uniswap as a price oracle. And there's been some downsides to doing that, or some potential attack vectors to doing that. So one of these, one of these attack vectors is essentially if you trade, if you make a really

• 1:18:32Speaker 02

  big trade on Uniswap, you can crash the price of an asset and then use the crash price of an asset to carry out some other transactions elsewhere on the network. And so what Uniswap is proposing in its next version is actually to add some time weighting to its price oracle. So in other words, it wouldn't just be a matter of making one trade, maybe using a flash loan or something like that, but it would actually require a sustained downward pressure on the price to manipulate it's on-chain price oracle, which is time-weighted. So that's kind of the idea that they're proposing. I think it's great that they're branching out into using their trading data for another public good here. And I'm very, very eager to

• 1:19:17Speaker 02

  kind of see what happens with this. I almost see this as, you know, they've, they created, obviously, this amazing public good that we're spending so much time on, but I think that this is another one that could ultimately be quite powerful for the network.

• 1:19:35David Hoffman?

  So recently, we discussed the mechanism of constant function market makers. And one of the many reasons why those things are cool is because every single constant function market maker produces an oracle. And so not only Uniswap is an oracle, but also Curve is also now an oracle, and Balancer is also now an oracle. And then we also discussed the perpetual feedback loop of Uniswap growth, where liquidity begets liquidity. You incentivize, you put in liquidity, you incentivize trading to incentivize more liquidity, and all of a sudden, you know, Uniswap can grow into this very large, high liquidity structure. And for things like a constant function market

• 1:20:15David Hoffman?

  maker that has a large amount of liquidity, that produces censorship resistance in the oracle. And so that same liquidity bootstrap strapping mechanism also applies to things like Balancer, right? And so maybe if both of these applications, you know, grow and grow and grow in liquidity, they're also growing and growing and growing in censorship resistance of that oracle. Do you think that that is the long-term solution for the oracle problem inside of the Ethereum ecosystem? Or is there still a chink in the armor somewhere?

• 1:20:47Speaker 02

  I that that's kind of the question and you know I I'm I'm not sure to be honest, I I think that you know time waiting adds some guarantees in theory. But we've seen some very clever attack vectors. And so if we're talking about kind of building.

• 1:21:02Speaker 02

  You know, using this as a core piece of infrastructure or something like that, you know, I I think that. We're going to see, you know, over the next year, two years, three years, if this is a suitable price feed mechanism. In terms of kind of the types of projects that you know might. End up end up building on this, I I think that what we could see are are are things like prediction markets and. Options, options, mart decentralized options, protocols and and things like that where. You know, you you really need a strong guarantee on the price of an asset over time. And and and this this may provide it.

• 1:21:42Speaker 02

  However, I I will say that it's just not it's the security guarantees are just not quite clear to me and I know that. Using Uniswap as an oracle has kind of backfired in the past. You know, whether or not that's. It's it's not really Uniswap's fault, but but it hasn't it it there have been issues with relying on kind of decentralized. Prices pricing from from Uniswap that that kind of make me nervous for for the first few applications. But I do think that as as these initial applications roll out, we're going to see some new and and cool uses of from it. Ultimately, the the the main advantage of having it on chain and having it through Uniswap is that. It is like unstoppable, sure, but it's also very cheap.

• 1:22:28Speaker 02

  And I think that, you know, between being unstoppable and being very easy to query. You know, that's that that's where the advantage will be for up and coming infrastructure projects.

• 1:22:37Ryan Sean Adams?

  Yeah, absolutely. And the nice thing about oracles is, of course, they can be additive. So if you have a set of oracles and you add an additional oracle, then you can use that and take the average. You can medianize across all of those. So it can kind of add to the decentralization, even if it's not used exclusively. So let's finish with this, Caleb. So what's really the end game for Uniswap? How big could this thing really get? And what would the world look like if Uniswap won?

• 1:23:12Speaker 02

  Just in terms of asset trading on Ethereum, I think that's a huge goal to ultimately bring in more volume than, say, centralized exchanges, I think, are an easy target. In order to do that, there are definitely some challenges that need to be overcome. But I do think, just based on the user experience of Uniswap and the permissionless nature, and really the trustworthiness of integrating it into projects because of its permissionless nature, it stands a very good chance at growing quite large. As far as I understand, the end game is that there's obviously a team building this. And I think that they will probably need to be raising money out of Uniswap.

• 1:23:57Speaker 02

  So far, there has been no money raised by the team off of the protocol itself, with the exception of selling limited edition goods. And so I think at some point, there needs to be like some kind of share of these trading fees that go just a little bit beyond the liquidity providers to ensure that Uniswap developers and community developers are motivated to continue growing the ecosystem and innovating in the constant function market maker space. So I believe that that's built in as like an option in Uniswap version 2, but set kind of off by default.

• 1:24:40Speaker 02

  But imagine that a lot of the concerns around,

• 1:24:45Speaker 02

  I guess, being able to make more transactions through these Uniswap markets or being able to utilize liquidity better. Or being able to support new asset types for liquidity providers in more profitable ways. These are all kind of easy targets for a well-funded team to kind of take on. And I think that that's kind of the intermediate steps towards taking over the world with liquidity pools.

• 1:25:13Ryan Sean Adams?

  So maybe a token in the future to fund the public good itself could happen at some point. Caleb, this has been fantastic. Thank you for telling us all about Uniswap. Uniswap is one of the three DeFi king protocols that we are talking about in this series. Very exciting stuff. It could definitely grow quite large into the billions, maybe trillion someday. You know, it's not out of the question. It's not crazy. Caleb, can you tell the listeners where to find you on socials, where to learn more about the analytics projects that you're working on?

• 1:25:52Speaker 02

  Yeah, you can find me at Caleb Sheridan on Twitter. And you can visit the website pools.fyi for more information and statistics about liquidity pools, including Uniswap. Those are definitely the two best places to find me online. Thank you very much for having me on. It's really been a pleasure. I really enjoyed being able to have the opportunity to speak about Uniswap with you. It's really, really an honor.

• 1:26:20Ryan Sean Adams?

  Fantastic, Caleb. Thank you for joining us. So actions for our listeners today. We've got some fantastic articles for you to read, one of which Caleb actually wrote that was published on Bankless, "How to Make Money on Uniswap." David takes us through Uniswap as an emergent organism, the underlying infrastructure of it, in another article. We also have some material about the rise of liquidity robots. So catch those articles if you're interested in learning more about Uniswap. Also, we encourage you to try it out. Go to the Uniswap website, actually exchange some ETH for DAI, swap some tokens. If you're feeling particularly brave.

• 1:27:03Ryan Sean Adams?

  Research the liquidity returns on pools.fyi. That is a site that Caleb and his team put together. It's fantastic for kind of seeing the range of returns that you might expect in each in each pool. Guys, risks and disclaimers. Ethereum is risky. Crypto is risky. Uniswap is a risky protocol as well. This is not for everybody. We told you before, of course, we are headed on the west. This is the frontier. You could lose what you put in, so be careful out there. But we're thankful you're with us on the journey. Thank you for joining us on Bankless, episode 10.