Ambient founder touts advantages of single-contract DEX architecture
A single contract structure allows a DEX to behave like one market, Colkitt says
NaturePicsFilms/Shutterstock modified by Blockworks
Uniswap, the largest crypto decentralized exchange by volume, recently broke news of a series of planned updates, including the introduction of a single contract pool structure.
“The big deal” with the new architecture, Colkitt says, is that in previous DEXs, “every time you had a new pool, you had to stand up a new contract.”
“It meant that every single contract was individually managing its own collateral.”
“Standing up a pool,” Colkitt explains, is a relatively “heavyweight” task that deploys a costly contract to the mainnet.
“You’re talking about a few hundred dollars,” which isn’t much for a larger-scale project, but to experiment on the cheap, he says, “it’s not great.”
More importantly, Colkitt says, a single contract allows a DEX to behave like one market rather than a collection of separate ones interacting with each other. Without the new design, “I’m trading between different markets,” he says.
Trading between two tokens and ether (ETH) would normally involve numerous steps, jumping from one pool to another to complete the trades, with gas fees incurred at each step. “That’s pretty heavyweight and unnecessary.”
“At the end of the day, ETH just winds up back at the market.”
“The tokens are all in a central location. The pools are separate, but they’re just lightweight data structures inside a larger contract.”
This design reduces restrictions between markets, making them more efficient, according to Colkitt. It also adds some interesting trading possibilities that were not possible under the previous multi-contract architecture.
“You can do interesting stuff with flash accounting,” he explains. “You can trade in one pool and you don’t actually need to fill in those tokens until the end of the trade.”
“So it also makes arbitrage a lot lower cost.”
Reducing toxic flow
Podcast host Dan Smith notes that transferring tokens incurs about half the gas cost of an ERC-20 trade on DEXs like Uniswap or Curve, reducing the capacity for arbitrage.
Colkitt says that the single contract design lowers the profitability threshold on arbitrages. Thus, prices will “stay in line” with markets more efficiently over time because arbitrages can be performed at “smaller discrepancies.”
Additionally, lowering the barriers to arbitrage could potentially reduce “toxic flow,” a problem whereby predatory traders can cause market makers to provide liquidity at a loss.
“If you lower the barriers to arbitrage,” Colkitt says, “it actually decreases the total amount of toxic flow” on any particular trade. Increasing the number of trades at smaller increments is better for liquidity providers, he explains.
“Ultimately,” he says, “you get the same total toxic flow, but you get a lot more arbitrage trades.” Therefore, liquidity providers collect more fees over time, resulting in “a better deal.”
The fact that Uniswap is also planning, among its improvements, to build a single contract is “good validation” for Ambient, he says.
Colkitt explains that when the team started working on the new design, people were skeptical, asking, “Is that a good idea? Should you put everything in one contract?”
“At least I never have to answer that question again.”
Don’t miss the next big story – join our free daily newsletter.