Welcome to the Whetstone Research blog!
I first want to thank you for taking a look. This Friday (June 21st) I hope to release the first iteration of our newsletter “the Sharpening Block” - the monthly Whetstone newsletter. It will address the future of onchain and other interesting threads in crypto.
Whetstone is currently a team of one. For a little introduction, my name is Austin Adams - I currently advise Uniswap Labs and another soon-to-be-named firm on mechanism design and protocols research. Previously, I worked full-time at Uniswap Labs as a researcher, and before that at the Federal Reserve in non-US financial markets research.
Almost all my academic and professional background is on the mechanics of exchanges - starting with traditional financial exchanges to, now, crypto exchanges. When I was working in traditional finance, I consistently wished that I was around for the early electronification of financial markets with the introduction of ECNs and central limit order books (CLOBs) in the early 2000s. I felt like that was the last major change in financial exchange structures. The most recent change is the internalization of retail trades - popularized by Robinhood - which has had questionable benefits for market participants (a debate that we will save for another day).
Since these early market structure changes, prices for retail traders have not notably improved, especially for small-cap assets. This challenge is one of the reasons I am so fond of AMMs. Liquidity provision for small-cap assets is notoriously difficult and incredibly important for 99% of assets. AMMs provide the first live solution for this small-cap liquidity provision - as AMMs specialize in creating liquid markets from nothing.
One of the reasons why AMMs are so good at providing liquidity is because they de-sync the liquidity provision from the pricing of that liquidity. In other words, one set of users provides the liquidity and another prices it. In CLOB-based markets, market participants both provide the liquidity and the pricing. Very few market participants are able to do both of those things, which has led to an extreme concentration of market power in a few high-frequency market-making firms.
The benefit of this de-synced model is that many market participants (retail, funds, etc.) already hold assets and desire exposure to that asset. Their cost of capital for providing this liquidity is significantly cheaper than a market-making firm, which must both borrow that capital with leverage and pay its employees to rid themselves of exposure to that asset’s risk (which is a desirable property for many).
However, these market participants (retail, funds, etc.) cannot price their liquidity at high-frequency and thus are locked out of the system. With AMMs, these users could, unlocking savings through lower capital costs that pass through to retail traders. Indeed, research has theorized that AMMs could save retail traders $10b a year in trading costs.
Another one of crypto’s super powers is composability, which is the ability for different parts of the ecosystem to easily interact with each other (colloquially referred to as “money legos”). Because systems in crypto are designed with composability in mind, mechanism designers need to think deeply not only about their own design, but about how their system fits within the broader ecosystem. This is something that Whetstone Research intends to focus on.
Here are a few of the many questions we want to explore.
AMMs are the king of low liquidity assets. What improvements can we make to AMMs to become more competitive with high-liquidity assets?
Exchanges underpin capital transformation onchain between risk and flight to safety, which is key to the functioning of lending protocols. How can onchain exchanges work more closely with lending protocols to create a mutually beneficial ecosystem?
Increasing throughput to chains has led to a growth in probabilistic MEV, leading to widespread user experience issues for chains like Solana and Base. How can chains combat probabilistic MEV to continue to lower costs for their users?
DAOs are starting to make significant revenues. For example, MakerDAO is ontrack to make $327m annualized. What is the future of DAOs and how will they continue to scale with this newfound revenue?
If you are building, working, or thinking about these types of questions, feel free to reach out! We are looking for design partners, collaborators, investments, and anyone else interested in these topics.
For more information, see our website.
