This episode delves into the intricate world of DeFi liquidity and Maximal Extractable Value (MEV), revealing how BarterSwap's innovative "Superposition" protocol aims to revolutionize liquidity provision by empowering users and challenging traditional AMM models.
Nikita's Journey into the Heart of DeFi
- Nikita, founder and CEO of BarterSwap, shares his evolution from a university student learning about Bitcoin in 2013—initially viewing it as a tool for illicit activities despite recognizing blockchain's potential—to a DeFi advocate.
- His perspective shifted in 2017 with the rise of Ethereum, leading him to his first crypto job during an ICO and later at blockchain gaming company Abyss.
- A pivotal moment was joining 1inch in February 2020 as the third employee, witnessing its growth from three to 150 people during the DeFi summer. Nikita, drawing from this deep experience, remains "super bullish on DeFi."
Understanding AMMs vs. Order Books
- The discussion begins by contrasting Automated Market Makers (AMMs) with traditional order book exchanges, setting the stage for understanding current DeFi challenges.
- Order Books: On chains like Ethereum, order books face high gas costs for updating quotes, as off-chain prices move faster. Market makers must constantly pay gas to adjust positions, which may not find a counterparty.
- AMMs: Introduced by platforms like Bancor and Uniswap, AMMs operate on mathematical formulas (e.g.,
x*y=k). They are generally user-friendly and require less active management.
- Nikita notes, "AMMs, you know, they are a fantastic product... AMMs are much easier to use than order books."
- They excel for bootstrapping new tokens with single pools. However, as assets mature and list on multiple venues (especially centralized exchanges), AMMs can become "extractive," creating arbitrage opportunities where Liquidity Providers (LPs) lose funds to MEV.
- MEV (Maximal Extractable Value): This refers to the maximum profit that can be extracted from block production by including, excluding, or reordering transactions within a block.
- Participant Experience:
- Takers (retail users): Often experience similar outcomes on AMMs and order books.
- Makers (LPs): Order books are generally more efficient for LPs, allowing them to actively manage pricing and earn more. In AMMs, LPs provide capital that trades based on a fixed formula, making it slower to react to market changes.
- The Future of Order Books in DeFi: Nikita is optimistic about a resurgence of order books for spot and derivatives, citing projects like X10 (off-chain matching, on-chain settlement) and Renegade (a zero-knowledge dark pool).
- LP Motivation in AMMs: Despite potential losses (as shown by Dune Analytics data), LPs are drawn to AMMs by the expectation of token rewards and the desire to bootstrap new projects, hoping for long-term compensation.
Introducing Solvers and BarterSwap's Role
- The conversation shifts to the complex backend processes of a DeFi swap, introducing key entities like searchers, market makers, block builders, and solvers.
- Searchers: These are often MEV bots designed to exploit market inefficiencies like arbitrage opportunities.
- Market Makers (MMs): Entities that provide liquidity to trading pairs.
- Block Builders: Entities responsible for constructing blocks of transactions. Some are run by MMs.
- Solvers (like BarterSwap): Nikita describes solvers as a hybrid of an aggregator, market maker, and searcher.
- They route trades through existing DeFi liquidity (e.g., Uniswap, Curve).
- They may use their own liquidity.
- Crucially, they monitor the blockchain for inefficiencies but aim to use these to improve the user's execution price rather than for pure extraction.
- Nikita emphasizes BarterSwap's goal: "to abstract all those difficulties to make this swap process as smooth as possible and provide the best rate."
The Genesis of BarterSwap and "Intents"
- BarterSwap originated from identifying missing DeFi primitives, with a strong focus on "intents."
- Intents: A more flexible way for users to express their desired outcome (e.g., "I want to buy 1 ETH for X price") compared to deterministic transactions.
- BarterSwap was inspired by CowSwap's "coincidence of wants" (CoW) concept, where direct matches between buy and sell orders can lead to optimal settlement without intermediaries.
- After building a CoW solver, they realized CowSwap lacked sufficient volume for frequent CoWs, leading them to explore cross-protocol CoWs (e.g., matching a UniswapX order with a CowSwap order). A Twitter thread on this concept helped secure their seed funding.
Algorithmic Solvers vs. Market Maker Solvers
- Nikita differentiates BarterSwap's algorithmic approach from solvers operated by large market makers like Wintermute.
- BarterSwap (Algorithmic): Routes trades primarily using publicly available liquidity sources across various DeFi protocols.
- Market Maker Solvers: Quote prices based on their proprietary knowledge and often settle trades against their own (private) hot wallets. They have sophisticated pricing models informed by CEX activity and can offer quotes unattainable with public liquidity alone.
- BarterSwap's Edge:
- Excels with long-tail assets and assets from DAOs with deep public liquidity pools.
- Leverages low gas costs for complex, multi-hop trades that benefit users. Nikita states, "It's all about DeFi Legos... how you combine them and then do a sophisticated complex trade that benefits not the bot but the user."
- While MMs might capture more volume on blue-chip assets, BarterSwap maintains a competitive presence, with Nikita estimating a 50/50 split in transaction types between blue-chips and long-tail assets.
BarterSwap's Approach to Mitigating MEV
- BarterSwap actively works to reduce the negative impacts of MEV on users.
- It integrates with solutions like MEV Blocker and Titan Builder.
- MEV rebates generated from trades (e.g., from rebalancing pools) are channeled back to users or the protocol. CowSwap's MEV Blocker, for instance, facilitates this by using bots that share MEV with the protocol.
- Key Safety Features:
- Prevention of high slippage.
- Protection against Sandwich Attacks: A type of MEV where an attacker front-runs and back-runs a victim's trade to profit from the price impact. BarterSwap's solver architecture is designed to prevent these.
- The core aim is to ensure users achieve their expected outcomes without falling prey to common MEV exploits.
Superposition: A New Paradigm for Liquidity Provision
- Nikita introduces BarterSwap's upcoming flagship product, Superposition, designed to be a "big breakthrough" in DeFi liquidity.
- Concept: Superposition allows users to keep assets in their own wallets while making them available for BarterSwap's solver to use in trades, earning yield without depositing into traditional liquidity pools.
- Example: A user with 1,000 idle USDC can authorize Superposition. If another user wants to buy 1,000 USDC for USDT, BarterSwap can use the first user's USDC, and that user might receive, for example, $1,000.01 in USDT, effectively earning a small yield while their assets remain under their control.
- Benefits:
- Users retain custody of their assets.
- Potential to mimic AMM virtual pools (e.g., Uniswap V3/V4).
- Reduced MEV risk as liquidity is not public in the traditional sense. Nikita explains, "we are transforming liquidity provision in a similar way where it becomes an intent rather than [TVL]."
- Mechanism: Users grant infinite allowance to a smart contract, allowing BarterSwap to rebalance assets. Analytics are off-chain, but settlements are on-chain.
- Risk: The smart contract holding allowances could be a honeypot. BarterSwap plans to mitigate this by focusing on asset velocity over Total Value Locked (TVL), restricting large deposits. A few million dollars is deemed sufficient for efficiency.
- Launch: Planned for testing by the end of June, with a release before EthCC.
- Strategic Implication: Superposition aims to compete directly with AMMs and market maker liquidity by sourcing liquidity from a distributed network of user wallets, potentially offering more efficient and user-beneficial trades.
Future Directions: UI, Multi-Chain, and Solana
- BarterSwap plans to reduce reliance on existing front-ends by developing its own UI and expanding to more chains.
- Nikita humorously refers to BarterSwap as an "invisible hand of the market," as its smart contract is a top gas spender, yet many users interact with it unknowingly.
- Solana Strategy: The team has diverse opinions, but Nikita acknowledges Solana's impressive growth, stating, "Majority of people... still don't understand how massive Solana is and how amazing is that it managed to outcompete Ethereum across every metric."
- Superposition's novel design could bring significant value to the Solana ecosystem.
- The planned rollout is ETH mainnet first, then L2s for testing with faster block times, and subsequently, potentially Solana.
- Nikita praises Solana's ecosystem support (hackathons, Superteams) as a factor in its success, contrasting it with the more fragmented Ethereum ecosystem for newer projects.
BarterSwap's Economics and Nikita's Stance on MEV
- Nikita provides transparency on BarterSwap's revenue model and his personal views on MEV.
- Revenue: BarterSwap charges ~1 basis point on stablecoin swaps and up to 3 bps on other assets. From $11 billion in processed volume, they generated approximately $1 million in revenue, nearly half in COW tokens.
- Nikita concedes, "Solving business is not as profitable as many people think."
- Superposition will initially focus on adoption and efficiency, with no fees planned for the first six months.
- Nikita on MEV: He expresses a strong dislike for MEV, believing it hinders DeFi's potential to become a mainstream financial rail. "I really dislike MEV. I think we cannot have like build NASDAQ or new financial rails when MEV is present," he asserts.
- He advocates for eradicating MEV at the network level, though the "how" remains an open question.
- He speculates that block builders might be key, potentially capturing MEV and redistributing it to stakers, or that a degree of controlled centralization in MEV management could prevent fraud-related MEV from being arbitraged away by bots.
Conclusion: Reshaping DeFi Liquidity and Tackling MEV
This episode highlights BarterSwap's efforts to enhance DeFi trading efficiency and user protection, particularly through its upcoming Superposition protocol. For Crypto AI investors and researchers, the key takeaway is the evolving landscape of liquidity provision and MEV mitigation; tracking innovations like intent-based systems and novel solver architectures is crucial for identifying emerging investment opportunities and understanding the future infrastructure of decentralized finance.
