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Very early into the development process of TWAMMs, we understood the freedom afforded to us to explore new incentive models. We have the luxury of learning from previous design mistakes & improve upon them.
One such frontier is MEV protection for passive LPs -- introduced in our March update. A common knock against Uniswap (and other DEXs) is LPs get run over by arbitrageurs who collect vastly greater profits than those paid out by the standard fixed swap fee.
How big of an issue is this for LPs? Currently, over 50% of the trading volume on Uniswap comes from MEV bots. How much is that in dollars? Uniswap (V2 + V3) accounts for roughly 79% of the ~$672M MEV extracted according to flashbots explorer.
TWAMMs provide us a unique opportunity to explore MEV protection because the majority of short-term traders are arbitrageurs and a big chunk of long-term trades are uninformed flow. This enables us to better align incentives between traders, arbitrageurs, and liquidity providers.
Lower Slippage for Traders
Long-term traders care about good price fills, i.e low slippage, and are time-insensitive so the trade can be spread across multiple blocks. Instead of paying gas for executing sub-orders, TWAMM automates the trade & transfers the gas costs for correcting asset prices to arbitrageurs.
First Right for Arbitrageurs
Instead of grim triggering (paying miners most of the profit), select arbitrageurs get a lower swap fee to correct asset prices and in turn earn a return. Instead of paying the profits to miners for transaction priority, the searchers share MEV profits with liquidity providers.
Over 35% of MEV is paid to miners for transaction priority -- Flashbots Explorer
Higher Profits for Passive LPs
Finally, LPs actively benefit from the MEV captured in this new model. Unlike the old model where LPs received a standard swap fee regardless of the amount of MEV extracted, here LPs receive a chunk of the extracted MEV in addition to a lower base swap fee.
Profit sharing between TWAMM LPs and arbitrageurs