Hayden Adams took a $65,000 grant and turned it into a $2 billion protocol; no other developer has come close to that.
Through memes, Twitter ratios and coordinated pump-and-dumps, the DeFi Degen is the dominant life form driving a pernicious part of decentralized finance (DeFi), a crypto subculture known for brand loyalty verging on religious zealotry.
Oddly, the man responsible for the roller coaster of “DeFi Summer” couldn’t be more different from a degenerate. Hayden Adams, creator of the Uniswap protocol, is a soft-spoken developer, first dragged into cryptocurrency less so for the money than the opportunity to make something of himself.
Yet, through his protocol, he may in fact be King of the DeFi Degens.
After being laid off from his junior engineering position at Siemens and living at home with his parents, a career opportunity came knocking: Uniswap, the permissionless token exchange built on the Ethereum blockchain.
Since May, his project’s total value under lock (TVL), or the dollar value of tokens locked in the smart contract of a given decentralized lending project, is up some 3,500%, from $35 million to $1.3 billion. His code proves a decentralized exchange (DEX) is not only possible but more than capable of matching heavyweight competitors like Coinbase pound for pound.
A friend named Karl
All Ethereum projects can be found first in a Vitalik Buterin blog post – or so it seems like from outside looking in.
Uniswap is no different. Adams, 26, was introduced to his future project, an automated market maker (AMM), via a 2016 Buterin Reddit post entitled, “Let’s run on-chain decentralized exchanges the way we run prediction markets.” That post itself was based on work from prediction market Gnosis and even earlier theory from libertarian-leaning economist Robin Hanson.
Buterin’s article was sent to Adams by Karl Floersch in the fall of 2017 and would become his first project. Floersch was a college friend of Adams' then working at the Ethereum Foundation. He is now the chief technical officer at blockchain scaling firm Optimism.
Adams and Floersch attended Stony Brook University in New York, an education Floersch described as good enough to get the job done. Nothing flashy, just cheap and solid. There, Floersch became interested in Ethereum and quickly entered the crypto world after graduating.
Adams, on the other hand, joined Siemens as a car engineer working on computational fluid dynamics and was the last “normie” friend Floersch had, Floersch told CoinDesk in a phone interview. Adams had resisted moving into crypto for years, even passing up ether (ETH) at $0.30 a coin.
Adams was let go by Siemens after only a year, leaving him uncertain about his future even if he hadn’t been particularly fond of working for the German engineering giant.
“From a perspective of ‘I don't know what I'm going to do with my life,’ it was scary at the time. I was living at home [in the New York suburbs] for a while,” Adams said.
Learn to code
Two seemingly inconsequential decisions Adams made in 2017 would set the stage for 2020’s DeFi bull run. First, he bought ETH in March 2017. Second, he learned to code while living at his parents' house.
“It was a very weird time. I was getting very into Ethereum and from that perspective it was a really great thing,” Adams said. The layoff "definitely turned out to be the best thing that ever happened to me.”
Adams soon felt the need to work on a “real project” to stay motivated. That led him to the discovery of automated market making, in spite of Adams’ unfamiliarity with finance and markets. Here, Floersch stepped in again, introducing Adams to the concept of a decentralized exchange.
Adams' story, then, isn’t too distant from many who enter the cryptocurrency space and hit it big. Spurred on by the curiosities of cryptocurrency, Adams went from unemployed and directionless to a programmer within months. Three years later, he is the face behind the most trafficked Ethereum dapp.
“Hayden’s remarkable story is something that couldn’t have happened outside of Ethereum and the DeFi ecosystem, which have dramatically lowered the cost of implementing world-changing ideas like Uniswap,” Paradigm researcher Dan Robinson said in a Telegram message.
“But it also couldn’t have happened without someone like Hayden. His tenacity and clearness of vision are an inspiration to me and to countless crypto founders that I’ve spoken to,” Robinson said.
The early days of v1
Adams became obsessed. He lived in Brooklyn, N.Y., off his ETH stash, programming away for months on a Uniswap proof-of-concept.
Uniswap is as much a product of Adams’ hours as it is the greater Ethereum ecosystem, he said.
Adams began making trips to various conferences in Canada and New York City. In fact, Adams flew to Seoul, South Korea, to attend a crypto conference for which he didn’t have a ticket (he wasn’t allowed in, but he was able to talk about Uniswap with Buterin). By day he sat in the MakerDAO or Balance offices; by night he coded Uniswap. (Balance is now the Ethereum wallet Rainbow).
It wasn’t bad work, particularly compared to modeling car efficiencies at Siemens:
“Programming with money is just really fun,” he said. “Being able to write functions that send money and receive money in a native way is very fun.”.
An Ethereum Foundation grant of $65,000 – a far cry from AMM project Bancor, which raised $150 million in a 2017 initial coin offering (ICO) – enabled a thorough audit of the project’s code. (Some years later, Bancor seems to have lost the AMM race, with Nomics reporting $1.23 million in 24-hour volume on Dec. 7, compared to Uniswap’s $309 million).
Adams also had moved Uniswap from Solidity to Vyper, a programming language purpose built for Ethereum smart contracts. Interestingly, Uniswap was one of the first projects built on Vyper, which he presented at 2018’s EdCon in Toronto.
Uniswap v1 launched at DevCon 4 in November 2018. While promising, it lacked a few technical features to make it truly market moving. For one, orders could only be routed through ETH and a token. That limited the AMMs’ functionality greatly. It also didn’t help to debut Uniswap v1 in the midst of a crypto bear market, where ETH drew down some 95% from its peak price value.
The great liquidity wars
Yet, it took a pseudonymous competitor to really make Uniswap shine in perhaps the most dramatic moment of DeFi Summer: SushiSwap, Chef Nomi and the liquidity wars. Although Uniswap v2 launched in May, its liquidity and daily volumes remained low compared to where it sits now.
That is until Chef Nomi, the pseudonymous cofounder of SushiSwap, reared his or her head this past September. A more combative DeFi Degen, Chef Nomi was able to create hundreds of millions of dollars of TVL on Uniswap by offering a token reward, SUSHI, for farming on Uniswap. Then he lured away capital from Uniswap to SushiSwap by offering higher returns to liquidity providers (LPs) in what is now called “vampire mining.”
Uniswap is open source, meaning people can clone its code and launch their own variant. What you can’t clone is the users and, therefore, the liquidity.
In a salvo back, Uniwap issued its own token, UNI, in what amounted to crypto’s own stimulus check. Millions of UNI were distributed to any early developers, investors, Uniswap $SOCK holders (yes, tokenized socks) and any wallet that had interacted with the Uniswap contracts.
In a few keystrokes, Adams not only won the AMM liquidity wars, he became everyone’s favorite cryptocurrency developer. It also didn’t help that SushiSwap’s pseudonymous chef absconded with (and then returned) a founder’s reward of SUSHI tokens worth $13 million.
To Uniswap went the spoils: Since the turf war, Uniswap’s TVL has not dipped below $1 billion and broke $3 billion for numerous days in November.
Competition with SushiSwap and the subsequent UNI airdrop pushed Uniswap to new levels of popularity. In fact, the project, begun in the lulls of his unemployment, broke Coinbase’s daily trading volume in September for the first time in DeFi’s own “flippening.”
“If you were to ask me a year ago when Uniswap was going to report more volume for a single day of Coinbase, I would probably say 2021. But what we’ve seen is that in September of this year, Uniswap did $15 billion in volume and Coinbase did [about] $12 billion,” Adams said.
What’s a Uniswap, anyway?
Uniswap is a decentralized application, or dapp, built on the Ethereum blockchain. It’s a smart contract that facilitates token trades between different parties.
(Its name was originally going to be Unipeg, Adams wrote in a Uniswap history blog. Buterin, who offered tips on the project whenever he and Adams crossed paths, thought Uniswap made more sense, so Adams went with it).
Those few pools matter, though. Uniswap’s value proposition as an exchange feeds upon Ethereum and vice versa: Ethereum is a blockchain for decentralized applications, especially for launching your own token, while Uniswap is an exchange for those tokens.
A venue for trading Ethereum tokens had failed to sufficiently develop after Ethereum’s 2015 launch. In 2016 and 2017, decentralized exchanges were even more so in their infancy than now, with Adams pointing to EtherDelta as the best such platform.
Uniswap addresses a few issues with DEXs such as poor user interfaces, bad quotes and high slippage through its underlying infrastructure. Adams’ exchange is a form of AMM. To be more specific, it’s a constant product market, meaning there’s always liquidity for a token.
Automated market making
What Uniswap’s smart contract does, among other things, is bring unparalleled access to the inside mechanics of crypto exchanges.
“At its core, Uniswap is about making finance more accessible,” Adams said in an email. “This is most clearly seen [by] how much easier it is to participate in automated market making compared to traditional market making.”
In other words, it democratizes market making.
Uniswap works the following way: Investors deposit equal amounts in value of tokens into the dapps contracts. Uniswap’s smart contracts set prices for each token against the amount of reserves of the two tokens against each other. For example, Uniswap offers ether for sale along with its native token UNI. In a ETH/UNI pool, ETH is priced in UNI and UNI is priced in ETH.
Constant product market AMMs are different from traditional market making in a few ways. Chiefly, AMMs like Uniswap have liquidity at every price. That’s because asset pools are matched to create a price based on an algebraic equation called a bonding curve. Uniswap’s curve is an invariant with the amount of asset X in reserve multiplied by the amount of asset Y’s reserve, equaling the price K.
These price offerings are also symmetrical, CoinRoutes CTO Ian Weisberger told CoinDesk in a phone interview. The bid and the ask are always the same at a given time, unlike on traditional exchanges.
Investors are incentivized to deposit funds into the protocol by garnering a percentage of trading fees for providing liquidity. These investors are called liquidity providers but they function similarly to market makers, just incredibly passive ones.
Market making is the practice of offering bids and asks on an exchange. It’s a highly technical endeavor that necessitates not only the ability to create short run scripts that offer prices, but keep a finger on the market’s pulse to earn profit. Anyone can make markets, but it takes some skill to turn a profit and not “blow up” your account.
A Uniswap LP’s ability to earn funds passively is striking not only because it allows Uniswap to function, but also because of the larger implications for token holders who become part of an exchange’s daily operations via the smallest of thresholds. A small portion of the trade is left in the pool to grow the market while another portion, 30 basis points (bps), is given to LPs for long-term growth.
The earning scheme has had some staying power since the liquidity wars, too. About half the project’s TVL left the Uniswap's platform following the end of UNI farming rewards in mid-November. Still, it’s good enough at $1.33 billion TVL to net fifth place, according to DeFi Pulse.
Funnily enough, Uniswap’s creators are still trying to figure out exactly why passive market making on Uniswap works.
Noyes, Paradigm and developers like Adams are mostly focused on the idea that markets can enfranchise retail traders by making them part of the game. Anyone can become a market maker on Uniswap with a few tokens and get a cut of the action. Thus the spirit of Uniswap is not dissimilar from the general premise of Bitcoin and its attempt to free money from government by democratizing the buying and selling of tokens.
The blog’s questions mostly consider the dynamics of providing liquidity to Uniswap and what trade-offs exist. For instance, what’s the optimal fee to charge for a trade on Uniswap? Or, how does liquidity provisioning stand up against merely holding the same digital asset but not placing it in Uniswaps’ pools?
Noyes’ questions, to the uninformed, are hardly intelligible. And forays into the math and accompanying commentary only reveal how deep the barrel is from which Noyes is pulling questions. For example, what’s toxic flow?
The biggest question is whether liquidity provisioning in an AMM is more profitable than merely “hodling” an asset, given the cryptocurrencies' dramatic price swings.
When you combine market swings with trading, you get arbitrage opportunities. Remembering that Uniswap creates its own prices rather than porting them into the exchange, you can see that LP holdings are prone to being picked off when prices swing against LPs in what is called “impermanent loss.”
But, given the rise in usage, the market continues to impress the importance of these questions.
Indeed, Uniswap’s largest asset pools like ETH/USDT boasts more liquidity than many centralized venues, meaning traders will more than likely get the best quote on a DEX than a centralized exchange (CEX) for certain token pairs. Exchanges such as Coinbase are even looking at adding similar pools.
That doesn’t mean it's all smooth sailing. Normal exchanges can offer prices differing from the market price. They also give more flexibility for preempting market conditions and allowing traders to set bids at different levels. Indeed, Uniswap’s unique offering has been a central topic to traders since it exploded in popularity this summer.
It remains unknown how Uniswap can fit into an average person’s portfolio – much more so than adding crypto to a portfolio, of course. As Noyes writes, it mainly has to do with figuring out how to price liquidity provisioning. Doing so is difficult.
Putting a sticker tag on liquidity provisioning is dependent on a new phrase in the crypto lexicon, that being "impermanent loss." Impermanent loss attempts to measure the price loss an LP takes when a token price moves against the holder in a pool. It’s impermanent because LPs typically don’t remove funds from a pool actively – they are more often than not passive investors – and so the price of the token could recover.
Impermanent loss isn’t something new to Max Bonen, founder of OTC trading desk B2C2, talking to CoinDesk in a phone interview. Rather, it’s a poor trader’s old friend: adverse selection. Uniswap’s dependency on outside forces to set market prices forces LPs to eat bad trades. The only thing that stands between an LP and impermanent loss is the 30 bps fee reserved for LPs for every Uniswap trade.
“In my opinion, there is an iron law of markets that the cost of trades and the spread is going to be a function of adverse selection,” Bonen said.
Bonen further simplified Uniswap’s problem to an AMM’s properties being open and therefore gamable. He said AMMs will continue to have a market as long as they can outperform centralized exchange quotes, but that any market set by a curve will suffer from inherent problems centralized order books will not.
This can be seen actively in markets, Weisberger told CoinDesk. Uniswap price markets are largely flat until the arbitrage opportunity from a trade surpasses the fee and cost of execution on Ethereum.
The price "will basically stay flat for a period of time while other markets have moved. It's only when the fee-adjusted price moves enough. It can get about 30 basis points out of whack without any negative impact because the fee is 30 basis points to take there,” Weisberger said.
A decentralized future
If you ran a centralized exchange, what would you do to stop the bleeding to decentralized exchanges? That’s the last question I lobbed to Adams as our conversation closed.
Of course, he’s pretty bullish on decentralization:
“I basically believe that decentralized infrastructure will be the underlying thing for everything. Everything will be settled on Ethereum. … You’re going to have decentralized infrastructure at the center. I do think that’s ultimately where most of liquidity will live,” Adams said.
Centralized venues do have an advantage in terms of custody, he said. Some investors prefer trusted parties to hold funds. Still, he envisions a future where traders use Coinbase to trade for tokens but Coinbase uses Uniswap.
“Centralized exchanges will potentially become custodial interfaces to decentralized platforms,” he said.
Adams expects Uniswap to continue sucking up spare liquidity driven by AMM incentives while other parties begin building on top of Uniswap itself. Some 200 teams are currently building different projects leveraging Uniswap as a base layer, he said, such as for margin trading.
Although cautious by nature, Adams has set his eyes on the prize: Uniswap becoming the top crypto exchange by volume sometime next year. That prize is currently held by Binance, another crypto unicorn, and would require a 10-fold increase in volume, Adams said.
“Everything is happening a lot faster than my predictions would have been a year ago.”
Disclosure: This reporter holds a small allocation of UNI tokens.
Brady Dale contributed reporting.
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