2/ These AMMs use oracles in many different ways. Some use the prices from the oracles to derive a "Zero Slippage" quote price for any size trade (A). Others use them to "rebalance" to external market prices (B). The last group uses them to determine funding rates (C)
3/ These projects that utilize AMMs can roughly be bucketed into the categories above
4/ @synthetix_io exchange was the first AMM to utilize oracles. This resulted in a lot of issues since traders could always front-run price changes before oracle updates. Even when fees were pushed to 1%+ / trade, some frontrunners were still consistently profitable
5/ Even when @synthetix_io demo'd on Layer 2 with sub second block times, there was evidence of soft frontrunning from some of the competitors in the trading competition
"Fee reclamation" was implemented to fix this, with the caveat that it settles you at a future price.
6/ @CoFiXProtocol takes an interesting spin on this by adding a spread and adjusting prices based on market volatility. The spread and vol adjusted prices help protect against frontrunning, but LPs would still be vulnerable during moments where volatility suddenly increases
7/ @Bancor and @BreederDodo use oracle updates to shift their price curve to center around external market prices. Part of the motivation is to "reduce value leakage from arbitragers". I discuss here why that really isn't an issue:
8/ The other issue here is that arbitragers will, in mature markets, always be able to close price gaps before oracle updates settle on-chain.
Oracle updates on Ethereum Layer 1 can't be every block (usually every 2-10 min), and arbers will take profits as quickly as they can.
9/ Another mechanic employed is applying liquidity amplification. While this is good for takers, it can be a double edged sword because it proportionally increases the IL faced by LPs.
Bancor and Dodo use a mechanic to "realize" IL, so in these cases it would be permanent loss
10/ @perpprotocol and @MonteCarloDEX don't have the same issues since the trade prices are not directly influenced by the oracles, rather only trading activity.
Oracles are merely used to determine funding for positions and since prices are TWAPed, there is limited frontrun risk
11/ A & B projects face the same problem that @synthetix_io faced early on, and almost renders the point of using an oracle for price updates pointless without 100% frontrun protection (but these have their tradeoffs).
Higher TPS networks can make these models more effective
12/ I think some of these AMMs could do better removing oracles since it can increase profitability for LPs: gas usage decreases> Tx get cheaper > More arbitrage trades around local vol > More fees for LPs
Excited to see what continued innovation come from these teams
TL;DR Using oracles can theoretically allow you to increase liquidity for traders but practically this is inhibited by arbitragers/front runners
They might work better on higher TPS L1/L2
There might be more problems when the DEXs get large as the reference markets
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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.