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b/c I love liquidity so much, have to do a deep dive on the #AMM (Automated Market Makers)... Today, MarketMakers are the likes of JaneSt, Susq, Citadel, and many others. There are 30+ majors in this space that support that trading of trillions$$, many smaller ones too. 1/n
MarketMakers = agents that use own capital to ensure efficient and constant flow of liquidity when natural buyers / sellers do not meet.
B/c a MMs put own capital at risk, must hedge their exposure, while ensuring an orderly market.
This creates limitations 2/n
B/c a MMs put own capital at risk, must hedge their exposure, while ensuring an orderly market.
This creates limitations 2/n
The terms "capital at risk" and "hedge" are important b/c MMs have limitations on how much risk they can support.
Limitations:
1) underlying asset liquidity 2) Capital available 3) Expertise/capabilities 4) hedgability 5) market dynamics ..
I refer to these as "scaling issues"
Limitations:
1) underlying asset liquidity 2) Capital available 3) Expertise/capabilities 4) hedgability 5) market dynamics ..
I refer to these as "scaling issues"
Enter the “Automated market makers” (AMMs) = algorithmic agents that perform those same functions as MMs to provide liquidity in electronic markets, only better. On-chain AMMs are a zero-to-one innovation and since 2017 have seen several notable advancements... 4/n
@Bancor (2017) introduced on-chain AMMs
@Uniswap (2018): first AMM w/significant volume launched AMM #DeFi wave.
@CurveFinance (2019): first AMM optimized for stable asset baskets.
@BalancerLabs (2020): first AMM to enable customized weights between single pool of assets 5/n
@Uniswap (2018): first AMM w/significant volume launched AMM #DeFi wave.
@CurveFinance (2019): first AMM optimized for stable asset baskets.
@BalancerLabs (2020): first AMM to enable customized weights between single pool of assets 5/n
For those who don't know, the traditional MarketMaker in #DeFI is now YOU. When you drop your assets into an AMM pool like @UniswapProtocol, you become an LP leveraging the AMM protocol which supports buyers/sellers swapping assets. YOU ARE THE CAPITAL AT RISK POOL. 6/n
AMMs are known as Constant Function Market Makers....
Because CFMMs encourage passive market participants to lend their assets to pools, they make liquidity provisioning an order-of-magnitude easier. 7/n
Because CFMMs encourage passive market participants to lend their assets to pools, they make liquidity provisioning an order-of-magnitude easier. 7/n
Up to this point, most AMM's, while highly efficient at matching natural buyers / sellers algorithmically, still have certain limitations as well. Limitations = 1) type of assets in liquidity pool 2) LPs must contribute both sides 3) Impermanent Loss 4) don't support derivatives
Enter @Bancor V2 (2020): dynamic weights for liquidity pools by realizing the losses by Bancor LPs to mitigate impermanent loss. Pioneered allowing investors to participate in one side of the liquidity to the pool. 9/n
Enter @blackholeswap (2020): The first AMM that can process transactions EXCEEDING existing liquidity by tapping into the excess supply on Compound or other lending protocols. A very cool innovation enhancing the availability and accessibility of new assets and liquidity. 10/n
A few constraints have been solved for, but we're still left with Impermanent Loss and no Derivative support. Enter the Perpetual Contract, or "Perps": Perps are a derivative similar to a futures contract - but without an expiry date. 11/n
Perps are about price discovery, rather than spot trading (ie: you can never take the underlying asset). Perp price will often diverge from spot market b/c it's forward looking. Deviations from spot signal sentiment of broad market. ie: will trade at premium or discount to spot.
@perpprotocol has introduced a novel new "Virtual AMM" (VAMM) which solves for Impermanent Loss and allows for Derivative trading.. Basically, in a VAMM, traders are also the stakers. They add collateral to the smart contract, and the VAMM issues them levered exposure.
in the Perps, Traders only trade against eachother. No liquidity pool exists, hence there's not underlying asset to deliver or receive. Settlement is virtually instant and slippage is null to none. Protocol fees and Blockchain fees will still apply.
AMMs and VAMMs will continue to grow and innovate how liquidity is derived across markets. With VAMMs, I believe this will be a key driver of deeper liquidity across the DeFi ecosystem.... This is very important for institutional investors to enter the space.
