As much as I love the Penrose tiling and long-range order (I used to do glass research!), this seems like a terrible idea

1. Diverge correlation times/lengths means time to verify of a single transaction’s validity could take way longer than block propagation

😬😬😬
2. If you want to anonymize a transaction graph by using a lattice with dense spectra (like the Penrose tiling) to define a DAG, note that you aren’t guaranteed that there isn’t *any* local structure that an adversary can find — only that no tx ordering will be unique
2. (cont.) It is possible that prefixes of tx ordering overlap an arbitrary amount, so there isn’t as much transaction ordering entropy as there is from cryptographic graph traversals (e.g. expander graph walks in supersingular isogeny signatures, lattice based crypto)
3. Do you really want locally 5-fold symmetry? I think the fact that transaction orderings now have this local free action of S_5 on them would make it hard to avoid MEV on segments of 5 txns or less
*diverging

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More from @tarunchitra

2 Nov
Alpha leak: Adverse selection in Uniswap

This beautifully simple paper proves what @theyisun and I called the “noise trader conjecture”:

Strategic LP strategies only profitable if fees are high enough, ∃ many noise traders, and low signal information

papers.ssrn.com/sol3/papers.cf…
This effectively looks at a mean-field, agent-based model of:
1. Noise traders
2. Informed traders
3. Strategic LPs

It shows that as the # of LPs goes to ♾, ∃ a sharp phase transition in LP profits as a function of the number of informed traders (defined via simple signals)
There’s also a kind of curious stability result that is vaguely reminiscent of “rugpull” dynamics: there’s only a stable equilibrium when there are < 4 LPs, if there’s more you have sharp edge equilibria that you can oscillate between (akin to the “last LP holds the bag”)
Read 4 tweets
11 Sep
The VC vs. trader “war” of crypto is reminiscent of the previous talent “war” between HFT and online ads: All of these boil down to latency vs. bandwidth trade-offs where "event-driven" investing depends on the condition number of a participants' value function
Trader: need max and min eigenval. of value fn. to be "close" (low condition number) because of regret minimization between your worst and best case outcomes

If your value function is smooth, this gives uniform bounds on the max/min eigenval. of hessian of your val. function
VC: need max eigenval. of value function to optimized

Things like the Tracy-Widom law force you to chase fat tails, terrible Sharpe, and anomalous portfolio construction
Read 8 tweets
30 Aug
The number of traditional finance chads (e.g. @arbitragegoth) asking me questions about DeFi LP staking is 📈📈 📈

Here's what it is:
1. @synthetix_io / @kaiynne pioneered paying users for liquidity by staking CFMM LP shares
2. CFMM LP shares replicate options portfolios

👇🏾
∴ LP staking is equivalent to collateralizing a leg of an interest rate swap with future expected cash flows from an options portfolio

This is actually *really* hard to execute in normal finance — especially because the CFMM replication is a continuous combination of strikes
Traditional finance has focused on swaps as
a. In-kind (e.g. interest for interest)
b. Purely Synthetic (e.g. variance swaps, VIX)

DeFi let's you combine the two — in-kind on one side in exchange for synthetic on the other

Impossible to do this without non-custodial assets!
Read 4 tweets
22 Jun
Big Short 2.0: PoS and DeFi are mortgage-backed securities!

@alexhevans & I tried to find grand unified theory for the financial derivatives hidden in PoS and DeFi ➡️ uncovered mathematical equiv. to MBSs.

Why? Same payoffs and income inequality!
👇🏾
medium.com/gauntlet-netwo…
tl;dr:
- Synthetic levered assets in PoS and DeFi are MBSs.
- Improvements over meatspace/2008 MBS:
- Used to reduce inequality
- Avoid lending competition in PoS
- Numerical, probabilistic methods are key to correct design of these systems
The post motivates and provides background for our paper which just hit arXiv

The following are equivalent as portfolios

❇️ PoS w/ derivatives
❇️ Leveraged DeFi
❇️ Mortgage-Backed Securities

arxiv.org/abs/2006.11156
Read 23 tweets
16 Apr
Thesis: Crypto needs LIBOR if it is going to be a Eurodollar substitute

Antithesis: People trust centralized lenders/exchanges with fiat backed stablecoins

Synthesis: @Libra_'s new ≋LBR design *is* LIBOR

But can they do better than copying IMF SDR weights?

Yes! 👇🏾
First: What is 'Eurodollar'?

Eurodollars represent dollar deposits held in foreign banks.

There are a number of reasons people outside of the US want dollars (e.g. to buy oil).

Foreign banks charge extra interest for procuring & holding USD for you — an interest spread!
Americans referring to 'Eurodollars' usually mean rate spread (e.g. excess interest a foreigner pays for USD vs. a US national).

And eurodollar futures are the most traded product on CME

(Note: @ChiangRei and I used to trade the Eurodollar curve)

More:
unexpected-values.com/crypto-dollars/
Read 18 tweets
24 Mar
2020: Cambrian explosion in automated market makers — @UniswapExchange, @BalancerLabs, @ShellProtocol, @CurveFinance, ...

A question:

Is there a framework to understand why so many constant function market makers (CFMMs) work IRL?

Yes! Thread 👇🏾

arxiv.org/abs/2003.10001
First of all: Why are there so many different CFMM constructions?

IMO: CFMMs exist to automate ETF underwriting (e.g. @blackrock's ETF division):
- 'create' basket of synth. assets
- 'redeem' same basket

CFMM curve: redistributes rev. to traders, LPs, underwriters (devs!)
What are the advantages to doing this on-chain?

1. Arbitrary decimation: Don't need to redeem integer share quantities [no ILPs, no rounding errors!]

2. Underwriter fees are transparent: @UniswapExchange's sustainability fees are 100x smaller than Blackrock for the same service
Read 13 tweets

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