Intent-Based Markets: Transforming DeFi with Enhanced User Welfare and Solver Incentives

1/ In a fireside chat at REDeFiNE TOMORROW 2024, Tarun Chitra @tarunchitra from Gauntlet @gauntlet_xyz discussed intent-based markets and their potential to transform DeFi by enhancing user welfare and solver incentives. The session was moderated by Roderick van Der Graaf @Roder1k of @Lemniscap
2/ Intent-based markets are a generalization of request for quote systems, bridging the gap between centralized and decentralized exchanges. They aim to improve user experience and pricing efficiency.
3/ Chitra explained the difference between atomic transactions in DEXes like Uniswap, where liquidity providers are treated equally, and non-atomic transactions in intent-based markets, which involve multiple rounds of communication.
4/ In passive LPs like Uniswap, there is pro-rata sharing of orders and fees. However, in intent-based markets with strategic liquidity provision, different market makers can have different expected earnings based on their skill and infrastructure levels.
5/ Chitra's research found that solver markets require an external market with higher liquidity than the on-chain market to offer better prices. Surprisingly, restricting the number of solvers in some cases can lead to better pricing for traders.
6/ This is due to the natural formation of oligopolies in decentralized systems caused by congestion costs. If too many solvers compete for the same inventory, they may push prices up, negating the benefits for users.
7/ Chitra emphasized that intent-based mechanisms are not one-size-fits-all and depend on the type of assets and user behaviors. Low-liquidity assets may not benefit from these mechanisms due to higher competition costs compared to liquidity provision costs.
8/ The research also explored auction mechanisms for intent-based markets. While price auctions were popular in the early days of internet auctions, they are vulnerable to manipulation by adding fake bids.
9/ In contrast, blockchains tend to use first-price or Dutch auctions, which are more resistant to Sybil attacks and can handle complex transaction types. Dutch auctions with decreasing prices can help avoid congestion problems.
10/ Chitra believes that intent-based markets have potential applications beyond crypto, such as in retail order flow auctions proposed by governments. As traditional finance adopts features from crypto markets, intent-based systems could facilitate the transition to 24-hour trading.
11/ Lessons from classical market design theory may not always apply directly to decentralized systems due to differences in resource allocation and the number of participants involved. Decentralized systems often require more specialized roles and less coordination among participants.
12/ Chitra highlighted the importance of considering computational constraints, the number of participants needed for efficient computation, and the guarantees provided to end-users when designing intent-based systems.
13/ Looking forward, Chitra is excited about initiatives that make the multi-chain and multi-rollup world feel like a single-chain experience for users. This includes aggregating liquidity across chains and using intents to hide the final settlement location from users.
14/ As DeFi continues to evolve, the focus is shifting towards providing users with a seamless experience, regardless of the underlying technology. Intent-based markets are a promising step in this direction, offering the potential for better pricing and improved user welfare.