Radicle is a new kind of code collaboration network built entirely on open protocols. At the core of it there is a peer-to-peer code network built on Git. It allows developers to host and manage open source software projects on a decentralized network of nodes owned by their peers, instead of centralized platforms like GitHub owned by companies like Microsoft. This is especially important in today’s world, where the power to control information, including code, lies in the hands of the few.
Read moreOptimal Fees for Geometric Mean Market Makers
Constant Function Market Makers (CFMMs) are a family of automated market makers that enable censorship-resistant decentralized exchange on public blockchains. Arbitrage trades have been shown to align the prices reported by CFMMs with those of external markets. These trades impose costs on Liquidity Providers (LPs) who supply reserves to CFMMs. Trading fees have been proposed as a mechanism for compensating LPs for arbitrage losses. However, large fees reduce the accuracy of the prices reported by CFMMs and can cause reserves to deviate from desirable asset compositions. CFMM designers are therefore faced with the problem of how to optimally select fees to attract liquidity. We develop a framework for determining the value to LPs of supplying liquidity to a CFMM with fees when the underlying process follows a general diffusion. Our approach also allows one to select optimal fees for maximizing LP value.
Read moreWhen Does the Tail Wag the Dog? Curvature and Market Making
CFMMs and associated protocols, which were historically very small markets, now constitute the most liquid trading venues for a large number of crypto assets. But what does it mean for a CFMM to be the most liquid market? In this paper, we propose a basic definition of price sensitivity and liquidity. We show that this definition is tightly related to the curvature of a CFMM's trading function and can be used to explain a number of heuristic results. For example, we show that low-curvature markets are good for coins whose market value is approximately fixed and that high-curvature markets are better for liquidity providers when traders have an informational edge. Additionally, the results can also be used to model interacting markets and explain the rise of incentivized liquidity provision, also known as 'yield farming.'
Read moreThe Great Automaton
The ability to invent and use tools is a defining attribute of Homo sapiens that led to the emergence of civilization. An important concept for framing the subsequent effects of technology on society is automation: any technique that reduces the need for human assistance in performing a task or completing a process. The connection between automation and progress is well understood. Although formulated in a different context, a quote from more than a century ago by the philosopher and mathematician Alfred North Whitehead sums it up nicely: “Civilization advances by extending the number of important operations which we can perform without thinking of them.”
Read moreCan one hear the shape of a CFMM? (Part 1)
The rise of Uniswap in 2019 was a watershed moment for DeFi trading. Uniswap’s simplicity, gas efficiency, and expert-defying performance quickly made it the dominant venue for on-chain exchange. The launch of Curve in the early part of this year demonstrated that even small changes in the design of constant-function market makers (CFMMs) can lead to drastic improvements in capital efficiency and performance. In particular, Curve pioneered a locally flatter curve that offered lower slippage for stablecoin-to-stablecoin trading. This tweak allowed Curve to capture significant trading volumes while routinely outcompeting established exchanges and OTC desks. As a result of Curve’s success, curvature is increasingly recognized as an integral component of the design space of CFMMs. Nonetheless, the precise effects of the choice of curvature on the behavior of the market have not been studied in depth.
Read moreTen Theses on Decentralized Network Governance
Based on my research over the past couple of years, I’ve put together a list of ten theses on decentralized network governance, including base layer public blockchain networks and applications (smart contracts) running on top of them. The ten ideas are listed from the more general and theoretical (descriptive) to the more specific and practical (prescriptive). The first five are revised summaries of my previous writing; the latter five are derived from more recent observations.
Read moreStop Burning Tokens – Buyback and Make Instead
In most “buyback-and-burn” token models, a network generates income in one currency token and uses the proceeds to buy-back and “burn” its own native token. The intent is to grow token value by reducing its supply as income grows. Buybacks tend to accomplish that goal, but burning affects currency and capital assets in different ways. When it comes to money, reducing the supply does theoretically increase the unit value of currency assets. But when it comes to capital assets like governance tokens, issuance is key to capitalization and burning can get in the way of growing fundamental value.
Read moreZcash Thesis
Many folks in crypto today think about privacy backwards; instead of making sure their assets are private, they make the mistake of solely fixating on transactions being private. This is why we see people sending assets through mixers or coin-tumblers, only to return to transparent and trackable addresses, defeating the point of the mixer. Zooko Wilcox, a core contributing member of the Zcash community, voiced the confusion as follows: “You have to *store* your crypto in a private cryptosystem if you want privacy. Then it is safe to *move* it through a transparent system! Unfortunately, almost everyone has this backwards.”
Balancer Thesis
Balancer is a new financial primitive that combines asset management and decentralized exchange. For investors, Balancer currently offers indexed management of cryptoassets. Instead of paying fees to portfolio managers, investors earn fees for contributing their assets to Balancer pools. For traders, Balancer is a permissionless and non-custodial trading venue with competitive prices where the fees from trading increase returns for the asset depositors. In conventional finance, this would be akin to smashing Fidelity asset management together with NASDAQ’s exchange, funneling NASDAQ’s trading profits to Fidelity’s asset holders.
Read moreFOSS Governance and Blockchain Networks
The principles of free and open source software (FOSS) are fundamental to the ethos of the communities building blockchain networks. While it is not uncommon for a single organization or small group of core developers to coordinate and deliver most of the work, the source code is generally open for everyone to inspect and improve upon. Control is maintained not by keeping software proprietary, but through social and institutional means, including ideological discourse, community management, and trademark license agreements. Despite the unique governance challenges from issuing network-specific assets to operators, investors, users, or other stakeholders, there are important similarities between blockchain networks and traditional FOSS projects. Existing research on FOSS governance may therefore prove helpful in designing blockchain governance systems.
Read moreWhy Stake When You Can Borrow?
As smart contract platforms autonomously manage billions of dollars of capital, quantifying the portfolio risk that investors engender in these systems is increasingly important. Recent work illustrates that Proof of Stake (PoS) is vulnerable to financial attacks arising from on-chain lending and has worse capital efficiency than Proof of Work (PoW). Numerous methods for improving capital efficiency have been proposed that allow stakers to create fungible derivative claims on their staked assets. In this paper, we construct a unifying model for studying the security risks of these proposals.
Read moreLiquidity Provider Returns in Geometric Mean Markets
Geometric mean market makers (G3Ms), such as Uniswap and Balancer, comprise a popular class of automated market makers (AMMs) defined by the following rule: the reserves of the AMM before and after each trade must have the same (weighted) geometric mean. This paper extends several results known for constant-weight G3Ms to the general case of G3Ms with time-varying and potentially stochastic weights. These results include the returns and no-arbitrage prices of liquidity pool (LP) shares that investors receive for supplying liquidity to G3Ms. Using these expressions, we show how to create G3Ms whose LP shares replicate the payoffs of financial derivatives.
Read moreA Superior Financial System
In the process of capitalizing itself into relevance, this boom of crypto capital has built a native financial system to account for its very own bootstrapping. While the other revolutionary technologies no doubt led to evolution within the existing financial system, none of them built an entirely new financial system from scratch. Instead, they remained reliant on existing financial systems, placing power in predictable hands. Blockchains can be thought of as 21st century accounting and production systems owned by “the people,” and so it follows that the space has pioneered a new financial system to displace the old.
Read moreInstitutional Participation in Token-Weighted Network Governance
Blockchain enthusiasts often criticize traditional institutions for their tendency to concentrate resources and decision-making authority. But token-weighted governance without system design features that counteract centralization are clearly open to similar criticisms. As a result, large token holders are faced with a dilemma: abstain from participation to stay true to the ethos of decentralization, or seek to govern in a way that doesn’t disproportionately benefit powerful actors at the expense of other stakeholders.
Read moreMagic Authentication
Magic is a passwordless authentication system. It starts with “magic links,” where you’re e-mailed a login link instead of providing the usual username and password. Magic makes it quick and easy for developers to implement this model in any application. Peek behind the scenes, and you’ll find a robust security platform built on secure hardware and user-owned encryption that paves the way for broader adoption of Web 3.0 technologies.
Read moreProof of Liquidity
In a standard proof-of-stake system, the more people stake, the more tokens are taken out of circulation. This may seem good for the price of the token, but in many cases insufficient liquidity can get in the way of network growth. So we should look for ways to create a direct, positive relationship between staking and liquidity. One idea is to use Balancer pool tokens as proofs of liquidity that can be staked in place of the network’s token, such that its liquidity grows together with staking.
Read moreAragon DAOs
DAOs collapse the cost of creating and managing organizations by replacing slow and expensive paper contracts with fast and cheap smart contracts. With lower costs and higher speeds we unlock new levels of organizational scale. Think of it as a spectrum: on one side of the range we can have a larger number of smaller organizations in cases where setting up a legal entity is far too expensive to be worth it. On the other end, we can create mega-organizations that would also be too expensive, or downright impossible to manage with paper. On either side, we can both capture underserved markets and create completely new ones.
Read moreErasure Thesis
Information is a strange good: it’s created in unpredictable ways, you can’t know if it’s good until you have it, and it can be reproduced at no cost by anyone who does have it. This makes it hard for markets to price and distribute its value. But we can use crypto to address these challenges. Erasure is a new protocol for exchanging valuable information on the internet. It uses encryption, smart contracts, and staking with the Numeraire token (NMR) to create a trusted, decentralized venue for exchanging data.
Read moreOn Autonomous Software →
This article is a comment on Lane Rettig’s essay Autonocrats and Anthropocrats, connecting its central themes to two fundamental concepts in social sciences — the rule of law and social structure. It explains how the most informative analogue to a decentralized network of nodes running autonomous software is society itself. Digital record-keeping and distributed computer networks are comparable to other institutions with effects beyond the control of their creators, administrators, and users. As such, they represent an important area of research not only for computer scientists and software engineers but also for social and political theorists whose expertise could be usefully applied to the design and governance of these emerging systems.
Read moreAragon (ANT) Economics
Over the last three years, Aragon has built a suite of governance tools that allow any organization to legitimately and transparently manage activities like community voting, treasury management, organization ownership, and contributor payroll. It takes less than five minutes and a few dollars to set up your own entity, with six templates to choose from and governance as simple as drag-and-drop. Organizations using these tools exist within Aragon’s digital jurisdiction. To further establish the rules of its jurisdiction, and resolve disputes within and between organizations, the team built the Aragon Court, which is now live on mainnet. To govern the jurisdiction, incentivize jurors in the court, and operate the infrastructure processing transactions, Aragon has a native governance asset (ANT), as well as derivative capital assets designed for specific purposes (ANJ, ARA).
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