Thread by @magikinvestxyz

You would lose ~$7M to fees + slippage when executing a large trade of $100M on @Uniswap even in the most liquid pairs (ETH / USDC)

This is a blocker for Institutional DeFi Adoption.

Here's a solution 👇 🧵

@Uniswap @paradigm's research partners @_Dave__White_, @danrobinson and Uniswap founder @haydenzadams are solving this with Time-Weighted Automated Market Makers (TWAMMs).

@Uniswap @paradigm @_Dave__White_ @danrobinson @haydenzadams Trades in TradFi are executed through an order book mechanism.

In DeFi, trades are executed through a revolutionary liquidity pool-based model known as Automated Market Makers or AMMs.

This enables high-scale permission-less transfers.

@Uniswap @paradigm @_Dave__White_ @danrobinson @haydenzadams Executing a small $1000 USDC/ETH trade costs ~0.2%

However, for large trades like $100M for the same pair, one would have to pay ~7% ($7M) in fees which could go up to $18Mn sometime.

You would say why not break it into a FEW large sub-orders or MANY small sub-orders?

@Uniswap @paradigm @_Dave__White_ @danrobinson @haydenzadams Large sub orders would be vulnerable to price-impact and sandwich attacks.

Whereas small orders involve a lot of manual work and risk of active trading.

This creates a serious bottleneck for DeFi adoption by non-crypto native institutions and whales.

https://twitter.com/bertcmiller/status/1527757146716348416?s=20&t=2Oh_ZWKo3KDtyoSy8v9G0Q

@Uniswap @paradigm @_Dave__White_ @danrobinson @haydenzadams Essentially, TWAMM breaks a large order into many infinitely small virtual orders (Time-weighted average price- TWAP), distributed over a long period which ensures low gas price and overall transaction fees.

There are 2 benefits of executing orders through TWAMMs:

@Uniswap @paradigm @_Dave__White_ @danrobinson @haydenzadams Smoothness

Price action on DEXs depends upon the size of trades being executed on them.

Decreasing the size of trades smoothens the price movement and ensures executions within the prevailing time-weighted average price.

@Uniswap @paradigm @_Dave__White_ @danrobinson @haydenzadams Efficiency

Calculating the transaction for multiple trades per block could be expensive. TWAMMs compute the outcome for traders in a single computation.

For e.g. Ken and Eric want to sell 100 and 200 ETH each for USDC. How would TWAMMs be implemented for such a case?

@Uniswap @paradigm @_Dave__White_ @danrobinson @haydenzadams Gas optimization

Orders of both Ken and Eric would be pooled together and then split into virtual sub-orders.

Individual balances of pooled transactions are tracked by algorithms similar to ones used for tracking LP rewards in yield farms.

@Uniswap @paradigm @_Dave__White_ @danrobinson @haydenzadams Long-term Order Expiration

In our example, we’ll have to perform two trade calculations - One for 1st 100 blocks and one after that.

Multiple transaction pooling would lead to multiple trade calculations eventually making it extremely gas inefficient.

@Uniswap @paradigm @_Dave__White_ @danrobinson @haydenzadams TWAMMs specify the minimum number of blocks that a transaction should take before expiry.

@Uniswap @paradigm @_Dave__White_ @danrobinson @haydenzadams Lazy Evaluation Technique

Whenever a new order is submitted, TWAMM retroactively calculates the effect of all the virtual trades that have occurred.

Order only interacts with TWAMM's embedded AMM, so it accurately calculates the results of all of the intervening virtual trades.

@Uniswap @paradigm @_Dave__White_ @danrobinson @haydenzadams Cancelling Long term orders

TWAMMs allow users to cancel their long-term orders at any time by paying their share of the gas fee.

Users can select the cancellation time for their order down to the block.

@Uniswap @paradigm @_Dave__White_ @danrobinson @haydenzadams We did not cover the mathematical implications of the TWAMMs model here.

If you wish to read more about them, here's the link for you

paradigm.xyz/2021/07/twamm

If you find this explanation informative and has helped you understand a complex topic, please give a Like and Retweet to the original tweet 👇

https://twitter.com/magikinvestxyz/status/1533513808450162689?s=20&t=_8HrUzZtE7DP3eFqNqLUCA