0/ Uniswap only works because Ethereum is slow, *and* because Uniswap LP fees are expensive (30 bips)

Normally, when you combine two bad features, you get something extra bad

But in this case, negative * negative = (almost) positive

How can this be?

A thread https://twitter.com/SBF_Alameda/status/1316509291017203712">https://twitter.com/SBF_Alame...
1/ To understand what I mean, let& #39;s just change the parameters

Lets& #39;s say that Ethereum block times were 100ms, and LP fees were 1 bip

What would happen?
2/ Anytime the price moves by 2 basis points, arbitrageurs will arb and take 1 basis point from the LP

The faster the block time, the more that arbitrageurs will take. To understand this, lets make this a tad more complex
3/ Lets say the price of some pair is going to move 10 basis points over the course of 10 seconds. So 1 bip / second

After 2 seconds, arbitrageurs take a bip

After 2 more seconds, they take another bip

repeat 3 more times
4/ The only saving grace is if non-arbitrage flow enters the picture

But in this example, every 2 seconds, the arbitrageurs take profit

So in this example, organic takers have up to 2 seconds to place a trade, otherwise LPs *lose money*
5/ Reality is worse than that

Prices don& #39;t usually move monotonically. they alternate back and forth

Lets say that the price moves 10 basis in total points over 10 seconds

But now for every 2 bips up, the price moves down on average 1.5 bips with standard deviation of .5 bip
6/ Now, the LP doesn& #39;t just lose 5 bips on a 10 basis point move, they lose something like 7.5 (ballpark, did not do the calculation)
7/ Now let& #39;s consider an alternate scenario

1 bip LP fees, but 15 second blocks

Let& #39;s also assume no MEV for simplicity
8/ Amazingly, by making the system slower, LPs gain

If the prices moves more than 1 basis point on a CEX during the 15 second window, there is more time for organic takers to place trades, rather than arbitrageurs

Slower block times give non-toxic a flow a chance to trade
9/ This is why Uniswap has fees so high: 30 basis points

It& #39;s the only way that LPs can survive

These fees are much higher than every other venue on the market

Uniswap kinda-works because of both 1) slow blocks 2) high LP fees. Those two features feed off of each other
10/ The Uniswap team has talked a lot about moving to a layer 2 with a fast, low-latency sequencer (maxing out single-threaded performance of the EVM)

This is great! Lower latency trading!

Except... arbitrageurs are going to wreck LPs. see above
11/ It& #39;s unclear how fees will be parameterized as latency decreases. But the point remains:

If you blindly quote prices, arbitrageurs will wreck you

The lower the latency, the faster they& #39;ll do it

{fin}
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