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.

AMM: democratize market making, long tail focus
CLOB: tighter spreads, fat tail focus
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.

See @willwarren89 explanation below:

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. Image
ps/ The exchange between @KyleSamani @danrobinson @haydenzadams @SBF_Alameda @willwarren89 @cyounessi1 is why crypto twitter was great before the "wen moon ser" and "target ser". When smart people disagree we all learn.

Follow the above and mute the moonbois!

• • •

Missing some Tweet in this thread? You can try to force a refresh
 

Keep Current with Jason Choi

Jason Choi Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!

PDF

Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @mrjasonchoi

12 Oct
Short selling in crypto

A brain dump...
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.
Read 20 tweets
4 Oct
Is yield farming over?

Is dead?

A brain dump.
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. Image
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. Image
Read 22 tweets
29 Sep
Shield mining allows any project to incentivize coverage providers on @NexusMutual.

As of this morning APY for staking for was ~200%+
1/ Just as became the de facto currency for all ICOs in 2017 and for all IEOs in 2018, shield mining transforms into an index bet on all of DeFi.
2/ Projects that are confident in their own technical chops can be rewarded extra staking rewards by providing coverage.

Speculators who want to bet on a project's security now has a way to express their view.

Users can be protected against bugs in risky, unaudited contracts.
Read 4 tweets
16 Sep
Usually not a fan of lazy clones, but @SwerveFinance is an interesting experiment given the overhang that @CurveFinance has with its launch.

Its (incentivized) growth has been pretty impressive 👇
1/ @SwerveFinance began with ~$200M TVL a week ago and has quietly climbed to $900M today with 1 single pool.

Comparatively, @CurveFinance has 8 pools totaling ~$1B in deposits. Image
2/ One of my main concerns with holding is the aggressive inflation schedule.

I've warned people about this, and those who listened avoided financial seppuku: a stunning $37 -> $1 drop.

Image
Read 8 tweets
3 Sep
.@SushiSwap is interesting, but risky!

To make it a safer experience, I'm proposing a small % of the development fund be used to reward @NexusMutual stakers.

Some context below.

snapshot.page/#/sushi/propos…
1/ During what felt like a lifetime ago (but actually 2 weeks), @YamFinance launched to fanfare, but a bug quickly led to a 90% plummet in price. Image
2/ Little did many people know, @NexusMutual was offering insurance for to cover for smart contract bug induced loss!

Even at a 90% ANNUAL premium, whoever bought protection would still be much better off than those who didn't. Image
Read 10 tweets
2 Sep
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!
Read 8 tweets

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!

Follow Us on Twitter!