The DEX Brief No. 12

Top of mind at Shipyard:

‍The latest DEX news is the success of Sudoswap. We commend the Sudoswap team for proving DEXs for unique items like NFTs are not only possible, but valuable to users! Many wonder what the point of an NFT DEX is when marketplaces like Opensea with centralized ‘order books’ exist and don’t suffer from the regulatory overhead centralized financial intermediaries must deal with. We’ll be honest, we weren’t sure either. But reality always trumps theory, and the proof is now clear to see.‍

‍The reasons seem twofold. First, users value composability. For example, a decentralized NFT asset backed lending protocol like NFTfi can now trigger an automatic liquidation through Sudoswap. ‍

‍Second, and probably more impactfully in recent Sudoswap’s runup, it is impossible to enforce royalty licenses on a fully decentralized NFT DEX. Many NFT licenses require a 10% royalty, which can be enforced effectively against Opensea but not against Sudoswap (note, we are not intending to express an ethical viewpoint here, just an observation). Hence, buyers and sellers on Sudoswap seem to be benefiting from a 10% arbitrage. ‍

‍That being said, Sudoswap is very clearly a first generation design. The DEX works by simply assuming away the differences between NFTs in a given pool so that pricing changes by a predictable amount regardless of which NFT is deposited/withdrawn from the pool. This is clearly a severe constraint. The result is every NFT in a given pool trades at the worst price (floor) of any NFT in the pool, and it doesn’t work at all for genuinely unique items (e.g. 1 of 1s). ‍

‍Still, it did what it needed to do for a first generation design. SudoSwap has planted its flag in exciting new territory, the design space remains wide, and there will be many improvements to come. New DEXs are pushing far beyond simple spot trades for common crypto assets, and the future of DeFi is bright.

Shipyard Insights:

‍The universe of structured financial products is infinite, but the design space for DeFi derivatives remains largely unexplored and mostly unsolved. This recent Shipyard article lays out why the next great wave of crypto adoption won’t kick off until web3 builders abandon centralized finance principles in favor of sophisticated, DeFi-native risk management products. ‍

‍The galaxy brains behind the WTF, Crypto Podcast have had a busy month, with three new episodes covering several interesting trends and key insights within the crypto space:

•  Fractionalizing NFTs: Fractionalized ownership means more access at lower price points for some of the world’s most exciting alternative investments. Crypto is at the forefront of this trend, and in this episode Andy Chorlian of Tessera explains how NFT fractionalization is expanding the concept of ownership and reshaping multiple industries ranging from fine art to real estate.
• Bringing Real World Assets onto the Blockchain: Bridging real world assets onto the blockchain can serve as a force multiplier in terms of economic activity, but it’s easier said than done. Join Mark and Karl Jacob, the CEO and co-founder of the Bacon Protocol and LoanSnap, as they discuss what it takes to get real assets onto the blockchain en masse.  
• What MEV is, and why it matters: Each blockchain has an inherent MEV (Maximal Extractable Value) that has important implications for its on-chain efficiency and security, but most people don’t fully understand why this is the case. Matt Cutler of Blocknative breaks it down for you.

DEX headlines that caught our attention:

• Trader Joe introduces Liquidity Book, a next-gen AMM protocol with low slippage trades for any trade size.
• The Uniswap community proposal to create the Uniswap Foundation recently passed its final vote.
• Tsunami launches the first decentralized exchange on Solana to offer a zero-fee swapping experience.
• Sei raises $5M to build a layer 1 blockchain optimized for DeFi, led by Multicoin Capital.

What we're reading:

This informative overview of the history of automated market making covers the three main generations of AMMs to date, how they work and their impact on the crypto space. If you want a better understanding of how DeFi works and where it’s headed this article is a good place to start.

Clipper updates:

Clipper’s Sponsor Program is now Live! Clipper users can now become a Sponsor and earn among the highest yields in DeFi! This Program is open to any Clipper user who wants to whitelist and participate.

Odyssea Party in NYC: Shipyard and the 1inch network will be co-hosting a satellite event during Messari Mainnet at Lamia’s on Wednesday, September 21st. Join us for a night of decadent seafood, a giant paella, scavenger hunts led by a giant fish, top-tier cocktails, fine wines, and of course, ALPHA.

‍Clipper’s Next Steps, Following the Nomad Bridge Hack: The Clipper team investigated the recent issue and how it has affected the Clipper DEX and community. In order to protect Clipper users. The team has come up with a different approach for Clipper’s bridge strategy going forward.