It's all about the swaps. Why order flow auctions make DEXs better

Flashbots product lead and steward Robert Miller describes a better decentralized exchange experience, enabled by mechanisms like intents and order flow auctions.

A user might simply sign their intent to trade USDC for [ether], for example, leaving the system to determine the best way to make it happen. “There’s many ways to do this,” Miller says. “Usually, they involve some form of competition among many different parties to give the users the best execution possible.”

This is where order flow auctions, or OFAs, come into play. On the Bell Curve podcast (Spotify/Apple), Uniswap Labs research scientist Xin Wan explains that an array of orders are constantly flowing into decentralized exchange or DEX markets to be processed, mostly consisting of swaps.

Participants “assign value to these transactions,” he explains, and “pay for the opportunity to interact with these orders.”

“The order flow auction is just the auction for them to bid on the opportunity to interact.”

Paradigm general partner Dan Robinson adds that ideally, the proceeds of the auction go to the user who initially created the transaction or intent. In some cases, proceeds might also be sent to the interface that originated the transaction.

Ultimately, the goal is to return the maximal extractable value, or MEV, to users rather than allowing it to be siphoned away by parasitic actors in the system.

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“In the last year,” Miller says, “we’ve seen a huge explosion of different types of order flow auctions.”

“They’re working with individual Ethereum transactions, but also order flow auctions work with intents, like Uniswap X.”

With intent-based swapping systems like Uniswap X, many complexities of trading are abstracted away from the users, simplifying the experience and ideally, lowering transaction costs. Users simply sign their intent and let the system take care of all the complexities.

MEV finds a way

Flashbots has succeeded in helping mitigate MEV with order flow auctions that pay the value back to users, Miller says, but he is concerned about the potential centralizing effects of the off-chain elements that run the auctions.

“Our answer to this new form of centralization in the market is Suave,” he says. Developers can use Suave to create order flow auctions and other types of MEV infrastructure as smart contracts on a decentralized blockchain, with built-in credibility and privacy, according to Miller.

In today’s decentralized exchange market, Miller says the majority of MEV comes from swaps. “To that end,” he says, “an OFA that addresses swaps is going to address the majority of the market space.”

But it’s not immediately clear to Miller that this will continue to be the case in the future. “MEV finds a way — and it’s oftentimes popping up in unexpected places,” he says. He mentions that a lot of MEV takes place on the Web3 social app, Friend.tech, for example, which “look like swaps” but are conceptualized differently.

“So who knows where it will come in the future,” he says, adding, “maybe a gaming use case, maybe something else. But today, definitely, the majority of MEV is coming from swaps.”

Wan notes that swaps are, of course, Uniswap’s specialty. “That’s what we are good at,” he says, “and Uniswap, for its history, has always almost exclusively done swaps.”

“We never tried to branch out into lending or other DeFi stuff. No stablecoin, no anything else. Just swaps.”

“There’s so many MEV and other execution related problems with the way swaps happen on-chain,” he says. “Uniswap X is just a nice way to improve the user experience.”

“Maybe in the future, there’s a ton more activities — and I would love to see that,” he says. “Right now, we’re still taking a somewhat more specialized approach.”

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