SlotZero === SlotZero is a proposed fork of Uniswap V3 which enables liquidity providers (LPs) to receive payment for the right to swap against their pool (swap right). A swap right is valuable because it allows the owner to arbitrage the on-chain pool as prices move off-chain. On Ethereum, ETH holders and block producers sell swap rights by selling blockspace. Large market makers pay a base fee for inclusion and outbid competitors for priority in a block to land swaps which generate revenue. SlotZero allows LPs to auction off swap rights and accrue the cash flows paid by market makers. Each week - a configurable period - the swap right of a pool is sold in a dutch auction. Only the auction winner is allowed to swap until the period concludes, and therefore the winner 's address always has priority within a block. The winning address will still have to pay for inclusion in a block, but a large portion of this payment can be transferred to LPs by deploying SlotZero on a roll-up. ```sequence participant Market Maker participant Auction Contract participant Pool Contract Market Maker->Auction Contract: Complete Auction Auction Contract ->Pool Contract: Right Sold Note over Pool Contract, Market Maker: Only Market Maker can trade against pool Market Maker->Pool Contract: Swap ``` Empirical Value --- Market makers will only swap against a pool when they expect to be profitable. A market maker is profitable when their arbitrage revenue $r$ is greater than the cost of inclusion $f_i$ and priority fees $f_p$. This expectation for profit on each swap by a market maker, $s_{mm}$, is written as: $$r_{s_{mm}} >f_{i,s_{mm}} + f_{p,s_{mm}}$$ A swap right entitles the owner to accumulate arbitrage revenue without paying for priority, but the owner will still pay inclusion fees to land their swaps on-chain. Thus, the empirical value of a swap right $v_{sr}$ over a historical range of blocks is greater than the sum of priority fees paid by market makers in order to swap: If SlotZero is deployed on a roll-up with inclusion fees that are a certain percentage, $p_i$, lower than mainnet, then the cost savings will pass through to the value of the swap right: $$v_{sr} >\sum_{s_{mm}} (p_if_{i,s_{mm}} + f_{p,s_{mm}})$$ With this inequality and a list of profiled addresses[^1], we can estimate the lower bound of the value of a swap right over a given block range. The data shown below is from a block range[^2] corresponding to the week of May 23 - 30, 2022, a week in which Deribit 's implied volatility index for ETH was rangebound in the 90s. *The roll-up column assumes a percentage reduction of inclusion fees of 75%.* [^1]: Market makers typically perform one swap at a time, utilize addresses with tens to hundreds of millions of dollars worth of tokens on them, and are among the largest traders by volume and transaction count. Sandwichers, on the other hand, can be identified by their use of two transactions to complete a trade, and a classic affinity to touch illiquid shitcoins. [^2]: 14826344 to 14875530 **Weekly** - Estimated Value of Swap Right ```csvpreview {header="true"} Pool,TVL,Mainnet Swap Right / Week,Roll-Up Swap Right / Week USDC_ETH_5_BPS,"$193,042,897","$748,679","$818,138"USDC_ETH_30_BPS,"$203,758,651","$128,007","$140,039"USDT_ETH_5_BPS,"$10,333,950","$20,429","$34,124"USDT_ETH_30_BPS,"$90,445,799","$77,708","$87,171"UNI_USDC_30_BPS,"$1,756,553","$4,512","$8,464"``` **Annualized** - Estimated Value of Swap Right ```csvpreview {header="true"} Pool,TVL,Mainnet Swap Right / Year,Roll-Up Swap Right / Year USDC_ETH_5_BPS,"$193,042,897","$38,931,305","$42,543,192"USDC_ETH_30_BPS,"$203,758,651","$6,656,385","$7,282,004"USDT_ETH_5_BPS,"$10,333,950","$1,062,331","$1,774,445"USDT_ETH_30_BPS,"$90,445,799","$4,040,797","$4,532,871"UNI_USDC_30_BPS,"$1,756,553","$234,638","$440,117"``` **APR[^3]** - Estimated Value of Swap Right / TVL ```csvpreview {header="true"} Pool,TVL,Mainnet Swap Right APR,Roll-Up Swap Right APR USDC_ETH_5_BPS,"$193,042,897",20.17%,22.04% USDC_ETH_30_BPS,"$203,758,651",3.27%,3.57% USDT_ETH_5_BPS,"$10,333,950",10.28%,17.17% USDT_ETH_30_BPS,"$90,445,799",4.47%,5.01% UNI_USDC_30_BPS,"$1,756,553",13.36%,25.06% ``` [^3]: APR is defined as `annualized swap right value / TVL`, but in practice the APR would be much higher for in-range LPs because not all of the TVL in the pools is in-range. ### Commentary The empirical data shows that swap rights are incredibly valuable, with an estimated value of over $40m/year for the USDC_ETH_5_BPS pool if it were deployed on a roll-up. Swap rights for 5 BPS pools are much more valuable than their 30 BPS counterparts, as the arbitrage opportunities are more frequent because of a lower spread. Among 30 BPS pools, the UNI/USDC swap right stands out for its APR. The UNI/USDC swap right also shows the largest increase in value, from $234,638/year to $440,117/year, by moving to a roll-up. Design Overview --- ### Why a modified fork? The SlotZeroPool contract is designed as a fork of [UniswapV3Pool](https://github.com/Uniswap/v3-core/blob/main/contracts/UniswapV3Pool.sol) which adds swap right permission handling and payment accounting. Additional accounting is required because the swap right payment per second changes after each auction, which makes SlotZero unsuitable for the [Uniswap V3 staker design](https://www.paradigm.xyz/2021/05/liquidity-mining-on-uniswap-v3) of liquidity mining with a constant reward rate.[^4] This requirement means that payment growth is tracked at the global, tick, and position levels, somewhat similarly to fee growth. [^4]: Each period could launch a new incentive program, but this would require restaking each week (or configurable period) for every LP. ### Licensing The Uniswap V3 core contracts have a BUSL license controlled by UNI governance until April 2023 when it transitions to GPL. SlotZero intends to request a business source license exemption from UNI governance in order to deploy to production before the license transition. SlotZero plans to offer UNI governance ownership of the swap fees on the modified fork in exchange for an exemption. ### Heuristics A few core heuristic changes fall out of SlotZero 's design choices: - Anyone can swap against the pool when the swap right owner address is zero, but if it is non-zero, then only the owner can swap. - LPs must submit a burn request in period i, before being allowed to burn and remove liquidity in period i + 1. This is to ensure the swap right maintains its value since the buyer is paying for liquidity in the pool. - LPs earn additional cash flow!