EP 42 — Avoiding the Hidden Tax of DeFi with Nikita from BarterSwap...

Full Title

EP 42 — Avoiding the Hidden Tax of DeFi with Nikita from BarterSwap

Summary

The podcast features Nikita Afzinek, founder of BarterSwap, discussing the evolution of DeFi exchanges from traditional order books to Automated Market Makers (AMMs) and the pervasive issue of Maximal Extractable Value (MEV). BarterSwap's role as an algorithmic solver and their new product, Superposition, are highlighted as innovative solutions aimed at combating MEV and transforming liquidity provision for user benefit.

Key Points

• AMM Limitations & Arbitrage: While Automated Market Makers (AMMs) simplify bootstrapping new assets, they become vulnerable to arbitrage as tokens mature and trade across multiple venues, leading to liquidity providers (LPs) incurring losses due to price inefficiencies.
• MEV as a "Hidden Tax": Maximal Extractable Value (MEV) emerges from the sequential ordering of transactions, allowing bots to profit from market inefficiencies through arbitrage, which effectively acts as an unseen cost to users via practices like sandwich attacks and unexpected slippage.
• Barter's Solver Role: BarterSwap functions as an algorithmic solver, optimizing user swap requests by routing through diverse public liquidity sources and employing complex trade paths to secure the best price, thereby mitigating MEV by redirecting potential arbitrage gains to the user.
• Algorithmic vs. Market Maker Solvers: Algorithmic solvers, such as BarterSwap, primarily utilize publicly available liquidity, whereas market maker solvers (e.g., Wintermute) leverage their private hot wallets, often providing superior pricing for high-volume assets due to their advanced market insights and proprietary liquidity access.
• Superposition: User-Controlled Liquidity: BarterSwap's forthcoming product, Superposition, empowers users to contribute their idle assets (e.g., stablecoins) for trading by granting an "infinite allowance" to a smart contract, allowing Barter to dynamically rebalance and deploy these funds to generate yield for users while inherently preventing MEV.
• Solana's Market Impact: Solana is acknowledged as a significant and often underestimated rival to Ethereum, consistently demonstrating higher user activity and transaction volume, a trend that is influencing BarterSwap's strategic evaluation for expansion into non-EVM chains.
• MEV Mitigation Debate: A continuing debate exists, even within the BarterSwap team, regarding MEV's fundamental nature—whether it is an inevitable feature or a flaw requiring eradication, with proposals including mechanisms for block builders to capture and redistribute MEV directly to stakers.

Conclusion

Continued innovation in DeFi is essential to overcome current friction points like high slippage, gas costs, and MEV, which impede widespread adoption and user retention.

BarterSwap's Superposition represents a forward-looking approach to empowering individual users by transforming their static assets into actively yielding, MEV-protected liquidity.

The future landscape of DeFi liquidity may evolve towards flexible, intent-driven, and user-managed mechanisms that directly compete with and potentially surpass the efficiency of traditional AMM pools.

Discussion Topics

• How can DeFi protocols effectively balance user protection from MEV with fostering healthy market activity and innovation?
• What are the potential long-term impacts of user-controlled liquidity solutions like Superposition on the DeFi ecosystem and the role of traditional AMMs?
• Should blockchain networks themselves implement solutions to address MEV, or is it primarily the responsibility of decentralized applications and liquidity providers?

Key Terms

AMM

Automated Market Maker: A decentralized exchange protocol that relies on mathematical formulas and liquidity pools rather than traditional order books to determine asset prices and facilitate trades.

MEV

Maximal Extractable Value: The maximum value that can be extracted by block producers (or other privileged network participants) from reordering, inserting, or censoring transactions within a block beyond the standard block reward and gas fees.

Solver

An entity in an intent-based architecture (like Cowswap) that finds optimal ways to fulfill user swap requests, often by aggregating liquidity from various sources or utilizing its own, while aiming to minimize costs and MEV for the user.

Liquidity Provider (LP)

An individual or entity that deposits cryptocurrency into an AMM's liquidity pool to facilitate trading, earning fees in return, but also exposed to risks like impermanent loss.

Sandwich Attack

A type of MEV attack where an attacker observes a pending transaction, places an order directly before it (front-running) to manipulate the price, allows the original transaction to execute at a worse price, and then places an order directly after it (back-running) to profit from the price difference.

Slippage

The difference between the expected price of a trade and the price at which the trade is actually executed, often occurring in volatile markets or with large orders, especially on AMMs.

Intent

A flexible way for users to express their desired outcome (e.g., "I want to buy 1 ETH for at most 3000 USDC") rather than specifying exact transaction parameters, allowing solvers to find the most efficient execution path.

Coincidence-of-wants

A scenario in a direct exchange system (like a barter economy or specific intent-based protocols) where two or more parties' desires for goods or services align perfectly, allowing a direct match without intermediaries.

Blue-chip assets

In crypto, well-established, large-capitalization cryptocurrencies (e.g., Bitcoin, Ethereum) known for their stability and widespread adoption.

Long-tail assets

Cryptocurrencies with smaller market capitalizations, less trading volume, and often narrower pools of liquidity compared to blue-chip assets.

Basis point (bps)

A common unit of measure in finance, equal to one-hundredth of one percent (0.01%). Used here to denote transaction fees.

Timeline