Interview with Uniswap Founder Handing Over Routing Issues to the Market through UniswapX

Uniswap Founder on Handing Over Routing Issues to UniswapX

Source: Bankless; Translation: Qianwen, ChainCatcher

Handing over the routing problem to the market

Host: Uniswap is cool because each token has its own exchange and its own pool, whether it’s V2, V3, or V4. I call this path the “Hooks-centered roadmap,” which is consistent with Ethereum’s Rollup-centered roadmap. Ethereum is doing this, trying to reduce complexity as much as possible and let Rollup handle all the execution work.

Uniswap’s Hook is also doing something similar—in this highly expressive situation, it empowers the builders of Uniswap pools to construct them. The problem now is that, despite the reduced complexity, this problem still exists, such as having many different types of pools. So, can we say that UniswapX is a solution that utilizes all this complexity?

Hayden Adams: We are discussing this issue today in the context of the protocol, which is highly decentralized. What we want to do is solve the routing problem, also known as AMM. Currently, exchanges, routing, and liquidity provision are bundled together, trying to find the best price in the process. But I think we can slightly decouple them. Because now we have various strategies, different routing methods, and various aggregators.

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So, UniswapX is a competitive routing market that achieves higher efficiency through decentralization, allowing more people to participate in finding the best route and discovering the best liquidity pool. In the long run, users will get better prices.

Host: The coolest thing about Uniswap is that you can list any token. I think the routing problem—finding the best price for your trades in the token pool liquidity sources—is actually a computational problem. My understanding is that with UniswapX, you want to hand over the routing to the market instead of letting the Uniswap router manage all this complexity to ensure that traders and swappers get the best liquidity and the best quotes, is that correct?

Hayden Adams: Yes, we are not only solving the complexity problem but also other issues. For example, gas fees, validators, MEV, etc. For example, through competition in auctions, it encourages people to seek more complex strategies, provide better price improvements, and save gas costs.

Uniswap X uses off-chain signatures. Users don’t sign transactions directly sent to the chain, but sign off-chain signatures expressing their intentions. Then people compete, and as long as the price reaches a certain level, someone will be willing to submit it to the chain. These submitters (fillers) are similar to today’s block builders, as well as trading firms and arbitrageurs. Other benefits of off-chain signatures include that if your transaction fails, it will never be submitted. It can also extract gas fees for users.

UniswapX is a competitive market

Hayden Adams: Traditional DEX aggregators integrate liquidity sources to cover as much liquidity as possible and manually find the best prices. The solutions provided by these aggregators are singular. But rather than calling it an aggregator, it is more like a market where everyone can compete and various solutions can compete with each other.

The current user experience is based solely on the gas price curve, whether your order is included or not, rather than the asset price curve. But our solution combines them. Combine gas auctions (if included) and price options to optimize your price. In contrast, the past situation was not as efficient, for example, your transaction would wait until the gas price dropped significantly before proceeding, but during this period, the tokens you were selling may also be declining, so you need to pay more gas.

Off-chain orders promote user experience

Host: In the past, I would broadcast the transaction and the gas fee I paid was hardcoded into the transaction, unrelated to the transaction I was conducting, so these are two different variables with no connection. The result may not be optimal, for example, while I’m trying to save $2 on gas, the token price may drop.

Hayden Adams: Now, this off-chain order refers to signing a transaction off-chain but not broadcasting it, waiting for the filler and taker to execute it. They calculate the optimal result by optimizing gas fees and actual exchanges, utilizing this complexity. The complexity issue is left off-chain and assigned to off-chain service providers that can manage complexity.

In this way, we solve the current suboptimal situation. For example, now block builders are not trying to provide users with the most money, they are trying to make the most money for themselves, and this money is often auctioned off to ETH holders through efficient MEV auctions. We still hope to return these profits to users. Off-chain orders also make cross-chain exchanges possible. Starting on July 17th, people can choose to join the beta version on the user interface, which currently only supports a small number of tokens. But in the long run, we can truly achieve cross-chain transactions, where you can sign orders and bring a better user experience.

AMM can be used as a way to create liquidity and build on top of liquidity through on-chain integration. But in the long run, this solution is not completely feasible because we need to consider factors such as MEV. We now have multiple routing options, such as client-side routing, and smarter routing that is faster and can discover more routes, but using open-source APIs behind the scenes. I would consider the latter as a protocol in this field, rather than a protocol like AMM. So, in fact, we already have these routing solutions, and we are more updating them as a protocol. We also have on-chain smart contracts to settle orders, which are immutable and open-source (based on GPL). This is the path: first, the frontend broadcasts the order, and then the filler needs to discover these broadcasted orders and submit them directly to the smart contract.

We now have traders, liquidity providers, and Uniswap is the stage for submitters (fillers). They already exist, we just give them more attention and restrictions. You can imagine them as people who use the most advanced trading strategies today, engage in arbitrage, build blocks, and extract MEV. What we need to do is impose restrictions on them, let them compete with each other, and return value to the traders.

Host: Previously, people who traded on Uniswap will now be directed to UniswapX, so in the future, trading will be done on UniswapX, right?

Hayden Adams: More accurately, over time, there may be more trading volume flowing into UniswapX and users can choose to use UniswapX. But if there are better pricing methods and better resources, people will definitely choose them.

Uniswap is committed to building a better ecosystem

Hayden Adams: The significance of Uniswap is to promote the development of the Uniswap ecosystem beyond the strict definition of AMM. However, I want to say that the way of routing through AMM is still a good way.

Regarding Hook’s question, a concern of many people is that they create a Hook, but people may worry about its security, etc., so how can we ensure that people will discover my liquidity?

The solution is this: if someone creates a new custom pool and a new custom Hook, they don’t need the Uniswap Lab team to review their Hook and integrate it into our frontend. Because there are already so many Hooks, it is impossible for us to do so. Instead, what they need to do is find a submitter (filler) who is willing to integrate your Hook, and once they find them, the liquidity they represent will immediately enter the Uniswap user interface.

How does UniswapX work?

Hayden Adams: Starting from the frontend, the experience for frontend traders is basically the same: choose tokens and exchange. The first major difference is that you will find that your exchange does not require gas. But I want to clarify that each token still has an initially approved permission contract, based on which you can sign. Every once in a while, you need to make an approval transaction for new tokens that you have not traded before, which requires gas and cannot be avoided, unless the token itself contains a gasless signature or you are using a smart contract wallet.

Then, you proceed with the exchange without paying gas fees. You sign the signature and the order enters processing. The difference is that when you sign a transaction, you can immediately go to Etherscan and start waiting. Here it is just an off-chain signature, so the order has not been executed yet, it is not even in the mempool, but in the pre-mempool.

At this point, starting from the frontend, the order will be broadcast to the submitter network. Essentially, this process is like a Dutch auction, where you set the starting price higher than your expected price, and then this price gradually decreases. Once someone is interested in this, it creates competition, and theoretically, this will produce the best result.

If the submitter submits a transaction, it means they will pay the gas, and then they will take out your tokens from your wallet. Because you have already approved this process before, and there is a smart contract that enforces the rule that they can only take tokens from your wallet if they send the specified tokens. So it’s like a timestamp component.

Some people may care about transaction delays. Personally, I think auctions must be fast. So we provide optional components that allow you to add an RFQ. This basically means you use an RFQ inquiry system, so when you parameterize the auction, you don’t have to guess, you can directly ask others for the best price they can offer you. If you want to incentivize people to give you the best quote, you have to give them something in return. For example, in the smart contract, if you use the optional RFQ parameterization, in the initial few blocks, the RFQ winner will have a slight priority.

For example, I signed an order, and if someone can offer a better price, they can fill in their quote, so there is still an element of public auction. In this way, you can achieve very efficient and fast price discovery. If you use RFQ, maybe it only takes one or two blocks, otherwise it may be five to ten blocks. This component is optional, so if the user is willing to wait for a minute or two, they can choose not to use it, it is very flexible. Just saying, if you are willing to wait, then you may need to bear a certain price risk, such as significant fluctuations in price during this period.

How does Uniswap change MEV attacks?

Hayden Adams: What we want to do is to let value flow to the block builders and validators through the MEV market. When someone makes a transaction, it is actually publicly broadcasted. Just like now. When users make a transaction on Uniswap, people compete with each other, but their competition is not to provide the best price for users, but to get the maximum value from Uniswap by exchanging with users. This is the current MEV market, this is the current block building network.

And can we change the way transactions are coded? For example, instead of letting a group of smart people compete to grab value from the exchanger, why not let them compete with each other to grab as much value as possible. For example, some value always needs to be given to Ethereum miners, validators, and block builders, but how can we maximize the percentage of MEV that returns to the exchanger’s hands?

They compete with each other and take away all the money. Now, we hope they continue to compete with each other and return most of the value to the traders. So, this is related to how you encode the transaction, and auctions are an optional way.

The current situation is that as long as I can get the lowest acceptable slippage tolerance, I can make a transaction, then validators can trade ahead of others, reach the lowest slippage tolerance, and take away the money. Through auctions, the price decays over time, and as long as someone thinks that including this transaction is profitable, they will submit an auction, and the order will be executed before the tolerance reaches the bottom, at which point the order has already made a profit. This way, you won’t be front-run on the trading target like before. This system can ensure that someone completes the order when the first profitable opportunity arises, which is itself an MEV protection mechanism.

For example, if you have a pile of transactions off-chain, a submitter can discover all the transactions and complete them simultaneously – meaning they can submit orders early in the cycle. In a price auction, the earlier you bid, the higher the price and the less value leakage.

Cross-chain transactions

Orders are represented as off-chain signatures, which means you don’t need to sign orders specifying exchanging Token A for Token B, instead you sign orders specifying exchanging Token A on Ethereum for Token B on Optimistic. From the perspective of the trader, the user experience is exactly the same, and the user experience can actually feel very fast. Submitters will deal with the complexity and delay of using cross-chain bridges, and figure out the settlement, etc.

Another benefit is that it allows for the exchange of native assets. When people move funds between chains and conduct cross-chain transactions, what you usually do is bridge the assets. Then, you have bridged tokens of that asset on another chain, and the funds passively exist in the cross-chain bridge, and we have seen many cross-chain bridge hacking incidents.

Using UniswapX, users first indicate their intention to exchange, then participate in a descending price auction, once a submitter accepts the price they initiate the transaction, which is completed on the input chain. They transfer the user’s input to a custodial contract, and then are responsible for sending these tokens to the output chain, after which they must prove that they have done so in order to request the user to input tokens on the input chain. This proof can be optimistic proof, which means assuming they did it directly without proof, so the cross-chain exchange will be very fast. Alternatively, if someone questions whether the submitter actually transferred the tokens, there will be a 7-day asset lock-up period during which the submitter needs to provide proof.

Off-chain signed orders not only solve the complexity problem of the pool, but also the complexity problem of bridging. The complexity is solved by the same service provider and the same submitter. They can manage time, delay, and complexity. All of this seems to be determined by the free market and the submitter, and this process is also supervised by smart contracts to ensure that the submitter provides the exchange with what they need.

In the future, I believe that most assets will exist on their native chain, or on the chain that is the safest for them, or on the most typical asset chain for them, rather than on the bridge. That is to say, if a submitter does a cross-chain exchange, they will obtain the tokens on the native chain of the tokens. In this way, the use of bridging seems to be really minimized, and it is better to say that in this model, cross-chain bridges are only used to transmit the final information. You don’t even need that data packet unless the submitter is lying.

This can be called the minimum viable bridging, where users only bear bridging risks when trading across bridges. Once the trader obtains the output tokens and the submitter obtains the input tokens, neither party will have bridging risks again, unless these tokens happen to be packaged bridging assets, but they don’t need to be.

So, we have minimized the degree to which people need to bridge, and at the same time we have abstracted them, so that this system can support any possible bridging. You can think of it as a bridge aggregator, where submitters can use any bridge, but each transaction has a specific cross-chain bridge, which is the “settlement oracle”. It can be any bridging mechanism, or any other system, you can also use multi-signature systems, governance systems or unilateral systems, and you can trust the submitter.

Utilizing Complexity

Hayden Adams: I think this should be a key moment, meaning the forefront development of the Uniswap ecosystem. People expect to use decentralized markets, but there are still areas that need improvement, such as efficiency and insufficient liquidity in user experience.

In the long run, decentralized markets will actually be more powerful and better in user experience, and market structure will also be more efficient, handling things based on the market, rather than operating like a single company.

With this idea in mind, using the new skills we have learned in blockchain and cryptocurrencies, I think we can start the first chapter of the story. We want to establish the ultimate centralized order flow network, and we also hope to collaborate with other teams to solve these problems, such as other teams also researching how to decentralize order flow. In short, I think this is a very important moment for the entire industry.

In terms of trading volume and number of users, more than 30% of all gas on Ethereum may be Uniswap transactions, and I can guarantee that the proportion will be even higher from MEV. I think our work in this field is very important, which helps to drive the development of this industry, and we have users from whom we can learn, optimize, and improve the users who actually conduct transactions.

On July 17th, Uniswapx launched the mainnet test version, which is just an early version and is only open to some tokens and some transactions. During the trial, you will see that there is no need for gas fees, and there are new features such as signatures instead of transactions. This is a gradual release process. There are still many issues to consider, such as parameterization, and how long it will take to start integrating cross-chain, etc.

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