#10 - Going Bankless with Uniswap | Caleb Sheridan

welcome to banqus 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 sean 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 d5 protocols this is how to go bankless with unit swap what are we going to cover david and why is it important

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 uni-swap 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 yeah this is going to be fantastic uniswap is cool because it is one of the most decentralized defy applications on

that defy truss spectrum that we've talked about in previous episodes unit swap is not a bank it is not a company it's not a user interface this is a protocol it lives completely on ethereum completely on chain and the possibilities that it brings into the open finance ethereum economy are incredible um 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 u.s listeners primarily so if you

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dydx is the leading and most performant 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 die you can lend eth you can lend die dydx has originated

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so check them out okay before we dig into the episode let's talk some big picture stuff david so a couple things that are going on in in the crypto in the bankless sphere so the first is this coinbase is adding a d5 oracle so david i i got a question about this because i tweeted this out and um somebody said well ryan i mean doesn't this make oracles on defy in ethereum more centralized if a crypto bank like coinbase is providing an oracle what are

your thoughts on that yeah it's an easy thing to slip into because you know anyone who's in d5 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 defy it's just one more oracle to add to the list and so this is really good news and and

coinbase of all companies of all institutions is definitely aligned with the crypto vision and so you know their incentives are where we want them to be uh i was once having a conversation with a friend of mine talking about how you know the only way you can get bitcoin is on a centralized exchange uh and he countered with you know well if there are 30 different centralized exchanges all over the world that are very easy to get onto well then bitcoin is actually decentralized and so you know if if coinbase copies this model and then

binance is also an oracle and gemini is also an oracle and huobi is also an oracle you know we start to have more and more options which with where we can get our oracles from and so we you know we're not we're not beholden to just using one oracle right the more oracles the better uh the really cool thing about this story was that um compound the the compound finance team was really pushing for this forever ago and i believe robert lescher had this tweet where he was talking about how centralized exchanges need to be oracles

for the defy ecosystem uh and the the oracle standard the code or the the model of the oracle that coinbase used came from what compound published uh so tip of the hat to compound and robert lescher for for spearheading this a really long time ago and i'm glad it's now coming to fruition robert's gonna be our next show so episode 11 folks so uh tune in to that we'll we'll ask him about this too but yeah i um 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 uh maintains the the peg four dye and and eth and is a is a key component of the entire maker system but it has a dozen or so different oracles some of these are known by operated by known entities some of these are operated by anonymous entities so say it's 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 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 uh make your 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 d5 systems too and further decentralizes the oracle so coinbase adding an oracle good news for d5 actually good news for decentralization and exactly as you say i think it will lead to all of the other exchanges incorporating creating a defy oracle in order to keep pace with coinbase coinbase has really shown their colors i think with uh the commitment to large

amounts of usdc and usdc liquidity into defy applications and now with this defy oracle i'm pretty happy with with what coinbase how they're positioning themselves they're definitely defy friendly and having somebody like coinbase which is the leading exchange in the united states i would say uh you know making pretty bold statements about how they are d5 friendly a d5 friendly company is is pretty pretty cool i mean they they offer interest rates on your usdc in your coinbase account now those

interest rates are extremely low it's like 1.5 percent but uh i i think your protocol sync thesis ryan where uh you know companies like gemini and coinbase uh integrate uh d5 applications like the dsr uh i i'm bullish on that and i think the the friendliness that coinbase is offering d5 is a good sign for that dude are we gonna do an episode on the protocol sync man absolutely 100 yeah so we're i'm giving a talk at the ethereal conference next week uh which

actually so this is coming out on monday in may and so this my talk will be on thursday uh all about the protocol sync thesis and settlement assurances and so uh come and come to the ethereal conference and listen to that uh and then me and ryan are 100 going to do a an epic uh episode specifically about the protocol seeing thesis so it's going to be a good one 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 eath is money

it's got you myself um eric connor anthony sassiano cami is is hosting it as well she's moderating it's going to be super exciting we're going to 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 going to 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 unit swap had what i might

call its first initial uniswap listing like an iul almost like it 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 uh the token and then sort of what happened and then i'd be curious to hear your take david so i'm all for

experimentation and this was definitely a very interesting experiment to run uh i think the outcome of this experiment is uh don't do this again uh 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 uh the so and that's simply because and we saw this in the ico mania way back when uh the bat token sale was famous for uh 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 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 this isn't how you generate an aligned community an aligned uh set of people that are your stakeholders this is how you attract

arbitragers and traders and people trying to make a a quick buck and so that that didn't look too good for me i think there were 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 the unit swap is not people that are stakeholders and want to see the best for your company i would not issue it through unit swap yeah and there 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 their 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 um there are currently no cash flows that i'm aware of accruing to the token nor is there a product that we can get our hands on and use but but that aside that was raised with accredited

investors and vcs and that sort of thing um but the the net outcome after this uniswap listing uh with a very small amount of supply so only about three percent of the total um a tokens were provided as liquidity the net outcome is that uma as a token is the number five defy money protocol token on the market at 121 million right now so i don't know that's a 5x uh or so of their last

raise with vcs so it did whether intentional or not um this was definitely an experiment and you know give give the team the benefit of doubt um it's hard to know you know necessarily if this was intentional but it it uh it had the effect of pumping the price uh to a degree that is probably not sustainable long-term uh and is probably not conducive to growing a community um 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 it's i was starting to get feelings of oh my god this is like ice like the very beginnings of ico mania again only it'll be conducted on on uniswap uh and um 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 are fairly valued uniswap i guess is a easy place to issue a token because everyone knows what uniswapa 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 like maybe an accessibility argument is to be made there but the the two to three percent of the total supply of the token made available on day one it's hard to excuse that in my opinion uh i i think we i you said that you know we don't really know if they were doing that intentionally or not i'm i'm gonna go ahead and be a little bit more critical than that i

think that if they just decided that two percent was the right number and didn't think about the illiquidity that would uh result in uh just only two percent and then the the price pumping effect that comes from illiquidity would would follow i i i must 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 an 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 um this doesn't sit really too well with me over the long term 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 chase the pump um on the bankless journey we're

not about that you know this is about uh long-term uh fundamentals the growth the long-term growth of an industry and so uh 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 d5 protocols here's one you absolutely have to check out this is a lending and borrowing protocol called ave what does it do you can put dye into it you can put eth into it it will take

your diet will take your eat 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 you borrowing from various protocols at a variable rate but this allows you to obvi 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 in one month to the next developers you've got to check out their flash loan protocols groups like d5 saver 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 aave.com try it out 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 uh 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 defy 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 die as it's supposed to be as money as a way to pay for things so go to monolith.xyz and check out their defy card check out

their rates the defy 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 divi card today 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

welcome to our episode on uniswap this is going to be fantastic uh 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 uh in ethereum in sort of the bankless space and how you stumbled across uniswap sure just as unisop was launching i heard

vitalik speaking at east 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 and went and uh did as much research as possible on on the protocol and have been following along ever since so the

unit swap without a token is something that that caught your eye what else about unit swap caught your eye and maybe also about ethereum at large uh 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 uh 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 uh

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 and only then kind of dealing with uh order book uh layouts and order books um and then at the end of all of that you know the the money that was on the centralized exchanges was a lot of times

out of risk and so if you look at kind of when unisol 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 unisoc it was just the simplicity behind it and the fact that it was this public good really um helping helping users out accomplish this simple thing of swapping

tokens 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 coin base or a binance might do for you with with some sort of an order book right um but and then 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 i have a

position in die so that's a stable coin we talked about in episode nine with marion mariano conte um so let's say i have dye and i want to exchange that for ether uh 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 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 so you know long story short uniswap is this uh decentralized exchange ecosystem where traders and liquidity providers kind of all all work together uh to

build to build financial markets between uh different cryptocurrencies and different tokens on ethereum 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 unit swap came out um and i became immediately a little bit more bankless as a result so i definitely resonate with that uh so let's start with um some definitions and i think we have a kind of a fun game ahead of us uh 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 so the first option with unit swap then 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 uh which we'll get into in a few minutes uh 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 are providing liquidity to facilitate trades and collecting fees as as part of the protocol unit swap 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 the various options that uniswap provides people what can you actually do with the application when you make a trade uh or when when liquidity providers provide liquidity to uniswap in this case the etherdie pair 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 wants one of the assets from the pair so in this case die for ether

they provide the smart contract with dye and then they take back an amount of ether that the smart contract kind of just calculates on their behalf so this is this is called like a a price curve or something like that you might have heard it called a bonding curve which is like a maybe a questionable term 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 that are inside of that smart contract

whenever a trader does whenever a trader makes a trade with a 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 small smart contract so the user pays at the moment point zero three percent of the of a fee uh in in eth in this case and then that

addition that each sits in the smart contract and uh and is essentially distributed as a fee to all the liquidity providers of that smart contract balance the second thing that happens is that price changes for future trades so because because you've in this case traded die for eth uh you've you've changed the rate 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 what you kind of uh depending on

your trade size i think you were just about to tell us so so you're not really trading caleb with an order book right you're almost training trading with a smart contract some kind of a like a you called it a bonding curve 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 uh to a constant product uh in this case so this uh pricing curve it it has a unique property in that

as as an asset is removed or added uh a nut the the second asset or the asset pair is increases and the really unique property about kind of the model that uniswap came out with is that this curve you know if if you plot it on x and y you would see that it looks kind of like um like a like a square root um but but essentially this this curve uh goes to infinity on the y and and goes to infinity uh without

touching zero on the x and the idea is that you know if you deposit one eighth and 200 die today in the smart contract uh that contract no matter how many trades are made or what like size trades are made the smart contract will never run out of of those assets it's just that what will happen over 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 this kind of promotes trades up to a

certain point and then the price shifts and then it it supports trades uh back down to like that assets kind of market value or real value uh external to the system so to make this so to make this really tangible caleb right so um if if i am on the dye heath pair and i'm doing a small amount of dye you know say a hundred dollars worth of dye um 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 uh die so uh or for that eth 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 30 basis points in unit swap fees but my slippage would probably be comparable to to that of an order book exchange like a coin base 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 eath with my die what happens in that case what's my slippage like yeah and in this pool right now the east dive pool has about a little bit over six million dollars of liquidity in it uh and so the slippage on a 100 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 50 slippage or something like that and so for for these pools that uh but but that's not to say that you know this is not for for big traders or it's only for tiny uh traders who want to trade 10 or 20 at a time these pools are actually supporting trades of up to 100 grand with very very low slippage 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 uniswa in these deep markets are are really it is really really competitive even with popular order based markets uh you know i find that i i'm just in awe that the the system has gotten to that point where liquidity has grown to a point that that unisoc can be your only exchange uh and that's that's one

of the amazing things about watching uh this protocol grow in particular and get to this stage of you know being suitable for all kinds of traders and i would say that you know if you're really sensitive to slippage and you want to avoid it at all cost the way to do that is just spread your trades out over time right so take 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