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Tarun Chitra
@pinged
Going to give a *sneak peak* about this paper w/ @ksk and others to FC before Twitter! There's been a surge of interest in intent-based systems like @uniswapX or CoW Swap — their claim has been to help improve the acquisition of off-chain price data on-chain But do they work?
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Tarun Chitra
@pinged
In general, there is often the advice that you get in auction mechanism design of, "it is better for revenue and/or welfare to have more bidders in an auction than to have a better reserve prices/parameters" In fact, this is the content of the Bulow-Klemperer theorem! https://www.cs.tau.ac.il/~fiat/mdsem12/amd05.pdf
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Tarun Chitra
@pinged
But does "more solvers (bidders) = better welfare for the user" for intents? In our paper, we find that this is *paradoxically* not always true! In fact, a user using an auction like @uniswapX may actually want to *purposely limit the number of solvers* who find prices for them Does this mean intents are broken? Nah
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Tarun Chitra
@pinged
But it does say that you need to be careful when you design your intents — if you aren't cognizant of the microstructure you create, you might actually make the intent market worse than the fully on-chain market (e.g. a Uniswap V3 CFMM, in the case of UniswapX) So why would a user want *fewer* solvers competing?
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Tarun Chitra
@pinged
A problem arises when solvers incur a) costs in order to be able to participate in the intent market b) amount they have to spend to get best execution prices off-chain A solver in an intent market faces the 1st cost, they face *costly entry* whereas the 2nd cost is *costly effort*
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Tarun Chitra
@pinged
Costly entry: Have to buy a lot of servers and colocate w/ both ETH validators + Binance in order to effectively bid in intent auctions Costly effort: To get the best possible price on Binance, I need to spend money to ensure that my slippage/impact costs are low In some cases, you can't *avoid* costly effort
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Tarun Chitra
@pinged
Concrete example — Consider two scenarios for a user: 1) Buy $1,000,000 of ETH 2) Buy $1,000,000 of WIF 1st: Many solvers are long ETH and don't have to buy ETH from an exchange to fulfill (low costs) 2nd Case: Few MMs hold WIF so they have to buy it — if they all do it at the same time they face congestion costs
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Tarun Chitra
@pinged
This example shows that intent solvers face congestion costs due to inventory constraints — if they hold inventory of an asset, they don't have compete with other solvers for procurement but if they don't, then they all simultaneously hit the same off-chain venue and cause the execution price to get worse
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Tarun Chitra
@pinged
This notion of 'congestion cost' due to lack of inventory gets passed on to the user: the solvers bid less aggressively This type of 'collusive' behavior where all bidders bid below their true value for an item is known as 'bid shading' (a common problem in ad auctions) https://en.wikipedia.org/wiki/Bid_shading
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