Synthesizing the AMM vs. CLOB debate going on currently.
These are unrefined thoughts and there are much more informed MMs, LPs, devs out there than me.
So feel free to tell me if I miss anything!
1/ First:
I think it's important to think of what you can/cannot do with either to figure out what the USP is for both. Apples to oranges if compare AMM IL with CLOB spreads.
2/ AMM's gamechanging feature #1 is anyone can be a market maker + earn passive fees!
Most people who fit the LP profile probably don't care too much about IL unless asset prices diverge significantly over time, in which case fees need to be sufficient to cover.
2a/ If you want to see real numbers for the above, check out uniswaproi.com
3/ AMMs probably have strong network fx feedback loops.
Winners: More LP liqudity -> better price -> more trading -> more fees -> cover for IL over time and profit -> back to 1
Losers: Low LP liquidity -> worse price -> less trading -> less fees -> IL rekts LPs -> back to 1
4/ AMMs gamechanging feature #2 is anyone can list assets (subset of "anyone can be MM").
I can mint today and give it liquidity in an instant.
No need for complex MM bots. I think most long tail assets go to AMMs - things like social tokens, new issuances.
5/ Also recall that CFMM/CPMM are just one form of AMM.
I predict that @UniswapProtocol v3 probably incorporates different curve types, different fee params, more gas optimization.
That means pair- or feature- optimized AMMs are gonna have a hard time. Can Uniswap eat Curve?
6/ Now onto CLOB. The killer feature = flexibility.
Not everyone can earn fees and be an MM on CLOBs, but sophisticated MMs can offer tighter spreads for traders especially for liquid pairs.
7/ "But ETH CLOB dex's are super illiquid compared to AMMs now!"
If you compete with CEXs by offering the same thing at higher fees, more latency but without KYC, it's going to take time. AMMs offer a different experience. Curve + yield farming drove a lot of recent volumes.
8/ In other words, I don't think we can look at AMM volumes for past year and conclude that dex CLOBs are doomed.
9/ In summation
Where I think AMMs win: democratizing liquidity, long-tail assets, mean-reverting coins.
Conditions for winning: the main one needs to generate enough fees to account for IL over time. Less high of a barrier if most volume is from mean reverting coins.
9/ Where I think CLOB dex win: better execution cost especially for more fat tail liquid pairs.
Conditions for winning: displacing CEX by offering comparable experience with no KYC. Successfully leveraging composability with other DeFi protocols to make it market expansionary
10/ Some back of envelope envelope map:
If dex volume over take spot CEX volume, that's a 100x growth.
Figuring out whether that's likely, how it splits between AMM/CLOB, whether that's the right dichomy, or if the vision for dex is more ambitious, that's alpha.
Short sellers have been getting a lot of flack on Twitter lately.
While I'm bullish about crypto/ DeFi, here's a devil's advocate take on shorting 101 and why it's not as evil as crypto twitter make it seem to be.
Obviously not financial advice, just personal opinions.
1/ There are a lot of misconceptions about shorting. It's seen as "manipulative", even "evil".
In a space where most retails are long-biased and only want number to go up, shorting is seen as something conniving and devious hedge funds and traders do to "screw over" retails.
1/ First let's set the stage: August has been a phenomenal month for DeFi bulls.
Now we're in the hangover phase of the DeFi party, with the DeFi perp on @FTX_Official pretty much completely retracing the August froth back to square one.
2/ Amidst the rout, there's clear signs of flight to quality in yield farming.
Despite the modest returns of "only" 20-30% APY, Uniswap accounts for ~70% of all TVL in yield farms even as a new farm.
Yield farming is highly risky, but the core idea of incentivizing specific behavior is *insanely* powerful.
Let's look past the Yams, Sushi, Kimchi, Spaghetti ... and let's see yield farming for what it is:
Permissionless incentive distribution
1/ Today, any project can issue its own token, and immediately imbue it with perceived market value by listing it on Uniswap and enabling price discovery from day 1.
This enables projects to incentivize any type of user behavior it wants.
2/ It began with simple user incentives.
@synthetix_io rewarded users who mint synthetic assets with $SNX tokens, leading to explosive growth in 2019.
@compoundfinance rewarded lenders and borrowers with $COMP, leading to a 6x growth in collateral!