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The DEX Brief No. 20 - Special May & June Issue!

Uniswap v4 hot take, commodity volatility harvesting, the next Clipper Adventure + more.

Written by

Mark Lurie

Published on

July 17, 2023

Top of Mind at Shipyard

The biggest news in the DEX world is Uniswap v4. The major innovation is hooks–a cool concept with enormous flexibility, but it’s hard to imagine exactly how it might be used. 

Our take on v4 is that it doesn’t directly address the elephant in the room: Uniswap’s upside-down LP economics. Simply put, LPs in pools of blue-chip tokens that trade like commodities (more mean reverting than momentum), such as ETH<>USD (70% of Uniswap’s volume), lose money. This problem is an existential ticking time bomb. As risk-free rates rise on-chain (ETH staking, Treasuries), the public is realizing the term “impermanent loss” is simply a semantic sleight of hand hiding real losses. 

Presumably, hooks enable Uniswap to crowdsource the issue of impermanent loss to the ingenuity of the market. There are already creative mitigants such as GammaSwap, which aims to transform impermanent loss into put-and-call-like instruments that can be offloaded to third parties for hedging,  protocols like Ambient (fka CrocSwap) which transform LP positions into limit and range orders, and automated concentrate liquidity managers like Gamma (unrelated to GammaSwap). However, it’s difficult to imagine these mitigants solving the problem. Why? Because perfect hedging is rarely attainable, even in the most liquid TradFi markets. Often, hedging is just prohibitively expensive. There is $12B locked in the top 5 DEXs. Is there sufficient demand for puts and calls to offset that? Count us doubtful. Especially since those sophisticated and capitalized enough to buy said puts and calls at scale are likely the same market makers and arbitrageurs who are trying to offset that very risk. 

The problem with Uni v4 is that it leaves the deeper problem unaddressed–the inherent unprofitability of relying on arbitrageurs to bring on-chain prices formed off-chain. This arbitrage will always eat away at on-chain liquidity. In our view, simply duct-taping the negative effects of arbitrage trade won’t solve the problem. The only solution to IL is core architectural innovations that remove the need for arbitrageurs altogether. While v4’s large degree of flexibility could lend itself to surprise results, our prediction is that the new design will succeed for long-tail pairs where price formation happens on-chain, but lead to a slow bleed of Uni’s leadership in blue-chip pairs where price formation occurs off-chain.

P.S. Big news from 0x that reinforces our thesis regarding the DEX Aggregator landscape we presented in our previous DEX Brief. Now all leading DEXs are going gasless.

Insights From Our Team

  • Financialization” of NFTs Proceeds at Breakneck Speed: “Revolutionizing the art market will require more than NFT drops. A new form of patronage is needed, one that alters the method of artist selection, the provision of financial support, and the commissioning and creation of art. Even these three necessary shifts may be insufficient” - Shipyard CEO, Mark Lurie on why he’s skeptical about NFTs being the key to opening up access to the art world. 
  • Lawmakers are wrong to target Gary Gensler: In this op-ed for Cointelegraph, Mark explains why the SEC Chairman in and of himself is not the problem when it comes to crypto regulation issues. Rather, the current laws in the U.S. are to blame. Removing Gensler would be putting a bandaid on the problem–what’s really needed is new legislation. 

DEX Headlines That Caught Our Attention

  • DEX aggregator Matcha launches Matcha Auto, an automated transaction mode that submits transactions and handles the gas on users’ behalf for a frictionless experience. 

What We're Reading

As explored in the Top of Mind section, impermanent loss isn’t actually all that “impermanent”. Bancor's v2.1 product boasted an impermanent loss protection (ILP) mechanism. However, in June 2022, a spike in withdrawals led to suspension of the ILP, resulting in large losses for LPs. As a result, Bancor LPs have hit The Bancor DAO with a class-action lawsuit, claiming the ILP was a false promise as well as an unregistered security.

What’s New at Shipyard

Clipper 

The DEX built to give self-made crypto traders the best possible prices on small trades

  • Commodity Volatility Harvesting & Clipper’s Benchmark: Clipper’s pools track the performance of a theoretical daily rebalancing portfolio to provide LPs with optimal exposure to pool assets while generating superior returns. Check out the blog post to learn more about how Clipper’s benchmark came to be and why it works. 
  • Zero-loss vs rebalancing achieved–see Clipper’s new benchmark page!
  • Adventure 4 is around the Corner! Signups start on August 1st and the adventure sets sail in mid-August. Join the Clipper Discord to learn more and stay in the loop! 

Making Sense of Crypto 

A Shipyard Software Production, hosted by CEO Mark Lurie

  • Perspective on DEXs: Balancer Co-founder & CEO, Fernando Martinelli joins us to discuss DEXs from a builder’s perspective. Topics range from aggregators to liquidity migration to why Fernando believes that in the future most of the TVL for AMMs will be on L2s. 
  • Algorithmic Stablecoins: Where did algorithmic stablecoins come from? What goes into designing a good stablecoin? Why should the flaws in the Terra stablecoin’s design have been obvious from the get-go? Reserve Protocol Co-founder, Nevin Freeman answers these questions and more. 
  • Zero-Knowledge Solutions: John Reynolds from Aleo joins us to discuss leveraging zero-knowledge cryptographic solutions to help secure information while also providing privacy, plus more on privacy matters. 

Written by

Mark Lurie

Published on

July 17, 2023

January 31, 2024

Breaking down the forms of MEV that most affect DEX LPs and traders.

January 8, 2024

Shipyard LP Report results, 2024 outlook for derivatives DEXs, and more.

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