1/ There seems to be a common misconception that AMMs won't work because LPs can be constantly arbitraged
Let's clear that up.
2/ First of all, yes LPs constantly get taken by arbitragers. There was rough analysis pre-DeFi explosion, that 70%+ of Uniswap volume came from arbitrage.
There is a lot more soft flow from directional traders these days, but significant volume still comes from arbitragers
3/ The is one false logical assessment that the misconception threads back to:
- Arbitragers make profit from taking from Uniswap LPs
- Uniswap LPs suffer IL from trades
- Trade volume predominantly come from arbitrageurs
-> Therefore, IL is value from arbitrage profit
4/ To understand why this is not true, consider a situation where the Uniswap ETH-USDT pool consists of only 1 LP.
T0 = $350
T1 = $400
T2= $350
Did arbitragers make a profit on the way up and down? Yes
Did ETH-USDT LPs suffer IL?
No IL + Fee revenue
It's really that simple.
5/ So where does arbitrage profit come from?
It comes from market participants (any traders, including MMs) that execute trades without utilizing Uniswap liquidity
E.g. Bid/Ask on CEXs move from 349.95/350.05 to 351.95/352.05. Uni @ $350
Arber takes from both Uni and CEX
6/ In this scenario, the MM got "arbitraged" but does that mean he lost money? No. In fact most MMs are "arbitraged" all the time from bids/asks on exchanges they aren't plugged into
You can't really even differentiate between these arbitrage trades and other types of flow
7/ The most efficient MMs are plugged into as many exchanges as possible, but there are many profitable MMs that only trade on a subset of exchanges as well
As long as volumes are high with takers crossing the bid/ask spread, MMs can make a profit. The same applies for AMMs.
8/ So where does IL come from? It comes from "changing deltas". Essentially your net exposure to each asset changing as price moves on each trade. LPs sell winners on the way up, and buy losers on the way down.
9/ The most important graph is shown here. The point is that as long as you get hit with enough volume, you can still absorb IL and still be in profit.
10/ Some people might pushback and say well in real-world settings AMMs don't really work and they are only profitable because of liquidity mining rewards
See below the return profile (IL adjusted) of ETH-USDT over a 90 day period where ETH appreciated 60%+
11/ Some of this was basic AMM 101, but it's important to understand where IL and arbitrage profits come from as it's not immediately clear.
Some AMM teams have even built flawed AMM designs because of the misconception stated in tweet 3/ .
Hope this is helpful
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This was pretty insane memecoin alpha from AVAX foundation
Whenever a big player says they are buying, it never fails to ignite momentum when market conditions are ok (CZ/Binance in March, early Saylor buys, etc). Suddenly, the technology improves
Think you see this strategy replicated across all chains/foundations in the future, just as all of them launched DeFi incentive programs
It’s a very high ROI/probability way to increase onchain activity, bridging inflows, community members, etc
It’s the same reflexive loop that chains saw with NFTs last cycle where people needed to buy the chains coins to buy the NFTs and every chain wanted NFT collections but I think there’s more power in this loop because tokens are better speculative vehicles than their NF counterparts
1/ The road ahead for Arbitrum ($ARB) - Mega thread
2021
- Arbitrum launch
2022
- Nitro upgrade for improved performance
- Arbitrum Odyssey introduced but paused
- Arbitrum Nova, a separate chain built for lost-cost transactions focused on gaming and social apps was launched
2/ 2023 was the year of big launches and announcements
- Launched highly anticipated $ARB token, with 1.162B tokens distributed to ~580k wallets
- TVL doubled since the start of the year
- 4th highest TVL chain - more than Solana and Optimism combined
- Resuming Arbitrum Odyssey
3/ But things are just getting started for Arbitrum.
Believe that these following catalysts/narrative will really kickstart the arbitrum flywheel going into 2024:
1/ At $5B and $2B TVL, Aave and Compound are currently the largest money markets in crypto
By innovating while others cruise, @RDNTCapital is the top competitor to challenge the throne and has the potential to become the new King of Money Markets in all of crypto
2/ At a glance:
-$260m TVL across Arb/BSC
-First functional cross-chain MM (lend on X chain, borrow on Y)
-Launching on ETH & zkSync next
-Safely adding more collateral like $ARB (other MMs move slowly)
-Token design optimized for demand & protocol growth
Accumulated spot position in $STX last 2 weeks as well
As an investment, it hits the sweet spots of good supply schedule, strong marketability, cheap relative valuation, important catalysts ahead, proven bear market resistant builders
Main catalyst is the Bitcoin Halving in a year and I think Hal's comparison to LDO & the merge is pretty apt
Second big catalyst would be potential catalysts for DeFi on Stacks - potentially catalzying a 9-10 figure DeFi ecosystem built around $BTC
On relative valuation, my proxy would be Lightning network who i believe if they had a token would be valued at least multi-billion FDV just based on brand value alone, regardless of usage
But if DeFi on Stacks takes off, it probably leap frogs Lightning on actual usage
A thread presenting evidence for a mid term bottom and oncoming "echo bubble" with thorough confluence from technical analysis, onchain data, and exchange/derivatives data
/2 From a TA perspective, we have just given every person that considers technicals in their trading/investing reason to start to look for long exposure. $BTC & $ETH have broken above diagonal trendlines & MAs, started weekly momentum crossovers, reclaimed important supports
3/ The most important indicator of an oncoming rally is the weekly RSI crossover from a previous very long period of bearish momentum implying large potential energy for a move higher based on a supply squeeze.