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Andrew Kang Profile picture
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15 Oct, 10 tweets, 5 min read
AMMs aren't broken

Professional MM's don't need them, but they are great for the rest of us and improve liquidity for the space as whole

Good thing that blockchain data is public so we can see what's really going on

Low latency, high throughput orderbook based hybrid DEXs have actually existed for years now e.g. dydx, IDEX, etc.

They consistently are lower than 10% market share

Image
I would refute the the idea that AMMs had very little usage before yield farming summer.

Uniswap had already started to surpass volumes of some well known CEXs and had been experiencing hockey stick growth pre-yield farming Image
Out of the top 10 pairs on Uniswap by weekly volume, 4 contain "yield farming tokens". The volume from them make up 22% of total top 10 volume.

I'm not sure about calling incentivization "not natural", because liquidity incentivization is here to stay

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It's true - much of the growth of AMMs came from incentivization & subsidies, but so did a lot of the growth of most startups and even mature companies e.g. Uber, Amazon, Spotify, etc. It's a central strategy for every startup to bootstrap growth.

Yes AMMs "make bad trades" on a trade by trade basis

But the fees shouldn't be understated as they are game changers.

Imagine if the Charlotte Hornets got 2x points per bucket. Yea they might be awful shooters but the bonus is enough to turn a L to a W

IL is independent of fees. IL only changes based on start and end price.

30 bps is huge for HFT, but 90%+ of crypto volume comes from apes, not HFT. For Apes, 30 bps on 200+ vol assets is completely fine.

LPs are not losing without incentives.

You can look at pool yields net of IL, EXCLUDING incentives to see yourself. Here's ETH-USDT returns:

30D - 13% APY
90D - 60% APY

APY dropped recently because of massive pool growth (large dilution) and IL

ImageImage
AMMs are not bad, imo they will coexist with orderbooks and serve a pretty large population.

Yes, they lose $ in trending environments, but actually perform the best in high volatility, mean reverting markets - exactly what crypto has been

LPs don't need to blindly enter and exit. Some will be smart enough to identify a time horizon and entry/exit targets to minimize IL and maximize profits.

Single formula does NOT mean single strategy

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More from @Rewkang

Andrew Kang Profile picture
17 Oct
1/ is by far the most extreme juxtaposition of being both an amazing investment with huge addressable markets and not being investable at the same time
2/ In less than 6 months, it dominated the stablecoin swap market

And it will play a central role in the two strongest emerging themes in DeFi:

1. Cross-chain interoperability
2. Synthetic Assets
3/ Both of these themes already have demonstrated strong traction & PMF out of the gate but are still only in the early stages

Cross Chain Interop - @WrappedBTC @renprotocol @thorchain_org @CreamdotFinance @ptokens_io etc

Synthetic Assets - @MakerDAO @synthetix_io @arcxgame etc
Read 7 tweets
Andrew Kang Profile picture
10 Oct
1/ Liquidity Mining rewards are currently wasteful and suboptimal

We can be smarter about defining reward amounts

I present a simple framework for determining DEX LM rewards
2/ First Step - Identify how much liquidity you need

Use Uniswap wBTC/ETH Pool as an example

Benchmarking to the most liquid CEXs, Uniswap is already on average 3x more liquid on a +/- 2% Depth basis
3/ Parsing through onchain transactions, we see a dozen or so 6 figure transactions per day.

Around 1 transaction/day that is >$500,000 & <$1,000,000. Don't often see larger in a single transaction.

Some traders maybe splitting transactions for better execution
Read 15 tweets
Andrew Kang Profile picture
28 Sep
1/ Oracles Usage in AMMs

Many AMMs (@synthetix_io, @Bancor, @BreederDodo, @perpprotocol, etc.) have adopted oracles to provide reference pricing, but does it really work?

I'll explain 👇 Image
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

A) Zero Slippage - @synthetix_io @CoFiXProtocol
B) Rebalancers - @BreederDodo @Bancor
C) Perpetuals - @perpprotocol @MonteCarloDEX
Read 13 tweets
Andrew Kang Profile picture
28 Sep
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
Read 11 tweets
Andrew Kang Profile picture
23 Sep
Where are we in the DeFi market?

We're definitely not at the 2018 stage of the market where we see a long bear market

Probably somewhere between First Sell Off and Bear Trap

Some analysis below.
1/ Technicals

On the drop, we retraced around a month's worth of price action. At the top, futures never were egregiously in contango, compared to being backwardated -50% APR as recently as early Jul

This indicates that market was only slightly overextended via derivs
2/ Short interest in DeFi coins continue to grow on the way down with LINK OI doubling on the drop in the last week.

But still ~30% off the OI highs in early Aug

H/T @CL207
Read 12 tweets
Andrew Kang Profile picture
21 Sep
One of the most commonly noted downsides of Optimistic Rollups as a L2 scaling solution is the 1 week exit period

This can be ameliorated by liquidity providers which market make both chains allowing for near-instant settlement

1% fee for 50% implied rate
0.30% for 15%
The implied rate is the rate of return that liquidity providers expect for locking up their capital to provide near-instant settlement (they lock their token X on L2 through the exit gateway for 1 week and provide you some token X which already exists on L1)
Probably starts near 1% fee as opportunity cost in low risk yields are high in crypto currently, but as competition grows and more capital enters this space, this will probably trend lower to 0.2 - 0.4% over the next year or two
Read 6 tweets

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