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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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