Whether you, I, or the Uniswap team want to admit or not; UniswapX is a tacit admission of defeat that the largest DEX doesn’t believe on-chain markets will provide best-in-class trade execution. Now, for the leading DEX to come to that conclusion and try to productize work-arounds is somewhat commendable. I mean, it would be ideal for them to direct that energy to ensuring on-chain markets are efficient enough to overthrow off-chain markets in liquidity and volume, but we are still far off from that being viable.
UniswapX — a solution that can tap into off-chain liquidity sources for on-chain execution — is great for traders. 1inch uses private sources of liquidity — or at least they used to. CoW Protocol utilizes coincidence of wants to enable P2P matching before moving around to a DEX. But these protocols are still DEX-centric for the most part. UniswapX is the first to explicitly allow CEX liquidity to be brought into the equation.
But this brings up an existential question for AMM LPs. What does their future hold? In a short exchange in the replies on Can and Ceteris’ Delphi Pro report on their ETHCC takeaways, Ceteris shed some light on a question I’ve had since UniswapX was announced.
If UniswapX becomes the default front-end for “Uniswap”, and manages to become the most-widely used aggregator, it will change the DEX landscape. Because larger market makers (MMs) are then better off being solvers instead of AMM LPs. They could shift their inventory from Uniswap v3/v4 to Binance’s books, where they have full control over how they provide liquidity and the ability to rebalance far more efficiently. Even if a token’s taker flows on Binance do not rival what we see on Uniswap today, if UniswapX becomes the dominant swapping method, this flow will still accrue to solvers (MMs). Hell, you could even strike Binance out of the equation and allow MMs to manage their inventory through direct taker flows.
Even smaller, individual LPs could become solvers with some technical-know-how and have better control of their liquidity. So in this scenario, is Uniswap v4’s new-found customizability irrelevant? I would argue that it kind of is.
To me, it looks like the DEX landscape is on the precipice of a big shift in user behavior and interactions — of course, assuming UniswapX becomes the homepage of on-chain swaps. So MEV-aware DEXs are now a very interesting proposition (always have been, really). Products like Dflow that enable orderflow auctions for tokens suddenly don’t seem like a stretch.
All of this is of course far from ideal from a decentralization perspective. We are enabling better execution for on-chain traders, but at the cost of relying on intermediaries like market makers/solvers even more. As Ceteris points out, AMMs will always win for long-tail assets. But in an ideal world AMMs win period. The only thing I can see that stops us from becoming reliant on liquidity intermediaries is a huge breakthrough in AMM design that enables orderbook-like efficiency with a passive LP experience.
Disclaimer: I may be very wrong, as I often am.