In The Weeds #15
Why we're excited about the Uniswap and Polygon new product releases, and an exploration of TradFi-backed exchange EDX Markets.
Welcome to Decentral Park’s new research sub-newsletter: In The Weeds.
This weekly instalment introduces product updates from two crypto OGs; Uniswap and Polygon, while exploring the Citadel, Fidelity Investments, Charles Schwab and Paradigm-backed EDX Markets.
Let’s get stuck into this week’s key highlights.
1: Uniswap v4
What is it? When the crypto native world thinks about Ethereum, I’d argue that the majority would say the dApp they associate most closely with the network is Uniswap, it’s OG Decentralised Exchange (DEX).
Having launched its second product iteration, v2, at the start of DeFi summer, Uniswap has continued to grow to command 58.9% DEX market share, equating to ~$8b in 7-day trading volume. These volumes were large enough to temporarily push Uniswap’s daily trading volumes above that of Coinbase.
All eyes are once again on the DeFi mammoth as Uniswap releases its plans and previews for v4, its latest product iteration.
So, what’s new? To sum it up in one word: hooks. Hooks are customisable contracts that enable highly customisable pools and additional functionality to the DEX protocol. You can think of hooks as a way of making every transaction on Uniswap programmable, by introducing ‘if, then’ logic that’s associated with the transaction.
The examples of additional functionality that I have seen most frequently discussed include:
Dynamically adjusting fees according to specific pool conditions.
Limit orders to execute a swap transaction only once an oracle meets a specific price.
TWAP orders to execute a series of swaps over a predefined time frame.
MEV internalisation to automatically capture MEV associated with a specific transaction.
In addition to hooks, Uniswap v4 pools move away from the factory model utilised in v3, and introduces a single contract housing model for pools. In conjunction with the introduction of a new “flash accounting" system, the cost of routing across many pools is reduced, but more importantly the cost of deploying a new pool decreases by 99%. This is a particularly important feature given the customisability of v4 pools is likely to lead to the multiplication of existing Uniswap v3 pools.
Source: Uniswap
Why is it important? I’d make the argument that this could potentially be the most protocol-defining upgrade to Uniswap to-date.
What Uniswap has been able to do with their hooks feature is something that we’ve seen on the Cosmos network given they’re able to build a lot of these features into the chain, but Uniswap has found a way to do this at the smart contract level. This is an incredible engineering feat in and of itself.
What’s more important, however, is the strategic move that underlines this feature introduction.
I generally believe in the notion that the DeFi protocol winners will be those that develop generalised tooling upon which additional applications can be built. This is akin to the DeFi lego thesis, in which Balancer has built a generalised liquidity protocol atop which countless dApps, including Aave, have built. Or if we look to LSTs, Lido has developed yield-bearing DeFi collateral, which other applications have integrated and built custom dApps around.
Uniswap has historically been in somewhat of an identity crisis, whereby it has been a user facing interface, all while also building out functionality on the backend, but under prioritising development atop its protocol.
The introduction of hooks takes Uniswap one step closer to being the DeFi lego foundation for DEX innovation and experimentation upon its protocol. This is a strategic move to become the liquidity base layer of the DEX ecosystem, moving more towards a middleware play, as opposed to a single-purpose application play.
Where does it go from here? Hayden Adams, founder of Uniswap, has highlighted the fact that this is a preliminary preview, and that they’re taking on feedback from the community. It’s therefore likely a little while before v4 gets deployed.
The strategic shift described above leans itself to Uniswap dominance in the DEX ecosystem. Uniswap currently dominates in terms of liquidity and user base, and by introducing hooks allows dApps to build specialised user facing products.
If we consider a new team who believe they can build a better DEX than the Uniswap existing product, instead of starting from scratch they could leverage this user base and liquidity and build atop Uniswap using the hooks feature.
I believe, should the developer experience be as seamless as is anticipated with hooks, it will act to materially strengthen DeFi’s short- to medium-term reliance on Uniswap.
Moreover, by outsourcing the innovation and experimentation at the protocol level, it allows Uniswap flexibility to focus on their efficiency as a middleware protocol, while also working on user facing products such as their mobile application.
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2: Polygon 2.0 and Validium zkEVM
What is it? Polygon can be thought of as an Ethereum scalability suite that boasts an array of rollup technologies, including its zkEVM and Miden, as well as an identity solution in Polygon ID and app-specific chains in its Supernets product.
Polygon recently released its strategic vision for the future: Polygon 2.0. This outlines how the company will shift to become what it describes as ‘the Value Layer of the Internet.’.
Polygon 2.0 is, in simple terms, a collection of proposals that will ultimately turn Polygon into a platform for unlimited scalability and unified liquidity on Ethereum. I translate this as Polygon entering the L2-hub race, alongside Optimism with its OPStack product, and Arbitrum with its new Orbit Chains product.
Similar to the Optimism and Arbitrum products mentioned above, Polygon 2.0 endgame is a network of rollup chains, though in Polygon 2.0 these are ZK-powered chains. While not specified, I would imagine these chains are specialised for specific use cases, in what would become application-, or use case-specific chains. These chains will be unified via a novel ZK bridge, which can be thought of as a cross-chain coordination protocol.
For the user, Polygon has stated that the entire network of Polygon 2.0 chains will feel like using a single chain given the ease of interoperability.
Theoretically, Polygon has stated the network can support an unlimited number of chains and cross-chain interactions, without the need to introduce additional security or trust assumptions, while maintaining speed and cost effectiveness. More than this though, Polygon introduces ZK-powered blockspace, meaning capacity can always be added to meet demand. In this sense, throughput scales elasticity.
Source: Polygon
Why is it important? Polygon combined PoS and zkEVM makes it the largest Ethereum scalability platform in terms of DAAs and Daily Transactions, boasting 44.13% dominance in DAAs and 51.70% dominance in Daily Transactions when compared with Optimism, Arbitrum, StarkNet and zkSync Era.
Optimism, Arbitrum and now Polygon have all released their plans to become the liquidity hubs for Ethereum scalability, each with nuanced approaches to allowing the development of L3 chains atop their L2-hub.
While there is a non-zero possibility that more than one succeeds, I believe the likely solution is that we converge on a winner-takes-all liquidity hub race, given the efficiencies offered in interoperability and liquidity by a single, large L2-hub.
The introduction of Polygon 2.0 cements Polygon’s place in this now three-horse race, and what’s more interesting is that Polygon is the only scalability platform with functioning zk-technology to date. Optimism and Arbitrum are both optimistic rollups, which I see longer-term as inferior to the zkEVM technology Polygon is leveraging. In simple terms, this could potentially place Polygon as the favourite to bet on, although Optimism’s introduction of the ‘Base’ chain could prove as a fierce competitive edge.
Where does it go from here? As mentioned, Polygon 2.0 will be rolled out incrementally as a series of proposals, and requires community approval before moving forward. It looks as though they’ve learnt from the Cosmos community in not bundling all proposals together to form one mega proposal, as Cosmos did with the failed Atom 2.0 bundle.
These proposals will be released at the beginning of each week for four weeks, and started on the 19th of June.
The 19th June proposal was to upgrade Polygon PoS to a zkEVM validium, a first-of-its-kind, decentralised ZK Layer 2. This chain would continue to operate by using MATIC-staked validators, who would be running a first-of-its-kind, decentralised sequencer, and data availability network. The result being that Polygon PoS would inherit Ethereum's unmatched security, while preserving low fees & high scalability.
Additional proposals are as follows:
26th June: Architecture and Stack
10th July: Token
17th July: Governance
I will cover future updates in my ‘In the Weeds’ publications, to keep you up to date with the design and development of Polygon 2.0.
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3: EDX Markets
What is it? Having launched back in 2022, EDX markets officially went live on the 20th June. EDX is a non-custodial cryptocurrency exchange that's been the topic of much debate since going live. This debate sat primarily in the context of a slew of institutional interest, with various spot BTC filings (BlackRock, Fidelity, ARK, WisdomTree, Invesco, Valkyrie, Bitwise) and crypto custody applications (Deutsche Bank etc.).
The exchange itself facilitates the matching of buy and sell orders to execute trades. To this extent, it can be thought of as playing a similar role to TradFi exchanges such as the NYSE or the NASDAQ.
A key factor regarding EDX however, is that it is non-custodial, meaning it does not handle customer assets directly, thereby mitigating custodial risks. What this means is that rather than having customers deposit assets into exchange-controlled wallets, as we see with the majority of CEXs, EDX leverages third-party banks and professional crypto custodians to custody customer assets.
Interestingly, EDX has noted plans to streamline its settlement processes with the introduction of a clearinghouse later in the year. Clearinghouses aren’t required on a blockchain, though this is likely a reflection of the current regulatory framework, and EDX’s desire to adhere to it, as opposed to the direction EDX is looking to move in.
So, why has EDX been mentioned in the conversation of rising institutional interest in digital assets? The answer lies in its backers, who include Citadel Securities, Fidelity Investments, and Charles Schwab. The calibre of institutional backers is impressive, and signals a peaked interest from those involved in the digital asset space, but also a likelihood that this will be the venue to service TradFi digital asset trades.
Conviction behind this is strengthened by the fact that EDX is set up to cater for institutions, by providing API-based trading access as opposed to a traditional front-end user interface typically geared towards retail investors.
Assets traded on the platform are currently limited to Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC) and Bitcoin Cash (BCH). This is given these assets are the least likely to be deemed securities, in EDX’s attempt to appease regulators across all aspects of the exchange.
Source: EDX Markets
Why is it important? As mentioned, the backers of EDX are telling, with FIdelity and Charles Schwab being the largest consumer retail brokers in the US, while Citadel is the leading electronic market maker, not to mention a pioneer of technology on Wall Street.
These backers are pushing EDX in a direction that applies federal securities laws to digital assets, in an attempt to appease US regulators. If we think back to major events in digital assets over the past year, including FTX and the Celsius collapse, issues were rooted in the custody of assets. EDX utilises third-party banks and crypto-native custodians to minimise these conflicts and protect against a repeat of these issues.
So, while during the last few months we have had terrible sentiment arise as a result of regulatory pressure, accounting also for spot BTC ETF filings and TradFi custodian applications, we now have a material sentiment shift in which some of the largest TradFi institutions have come out in support of digital assets, particularly Bitcoin.
To this extent, Bitcoin has been largely de-risked from a regulatory, reputation and business perspective. It now looks as though a credible path to institutional participation is emerging within the digital assets space.
Where does it go from here? While speculation has been ripe surrounding the roadmap for EDX, one possible path that I have heard mentioned many times is that of aspirations to evolve into a regulated Alternative Trading System (ATS), and subsequently a national securities exchange for digital assets. This would place EDX markets in a similar vein to the Nasdaq or NYSE.
Further speculation stems from Citadel’s Central Limit Order Book (CLOB) innovation for treasuries, which added never-seen-before transparency to Fixed Income markets on Wall Street. The speculation here is that Citadel may want to, one again, innovate within the Fixed Income markets by introducing blockchain infrastructure rails.
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