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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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”)
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
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!
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