Thread by @0xminion

1) On AMM vs Orde book for tokenized risk protocols. During this “bear” trend, we are seeing several tokenized risk protocols such as @pendle_fi @element_fi @APWineFinance @SwivelFinance popping up in the market.

2) I believe these tokenized risk protocols could form the basis of the interest/yield rate market for #DeFi, and potentially create a #LIBOR market for DeFi.

3) There were a few proposals in the early DeFi days, such as DIPOR (LIBOR for Open Finance) @TheBlock__ and CIRI (Crypto Interest Rate Index) @MessariCrypto. However, there weren’t enough DeFi infrastructure protocols to facilitate the creation of the #DeFi benchmark rate.

4) In the traditional market, interest rate derivatives are the “most liquid financial product on the planet”, trading over $6.5 trillion per day via OTC.

5) However, with that being said, interest rate derivatives are mostly traded institution to institution, only a small percentage of the daily volume goes through the retail market via e.g. CFD type of instruments.

6) The beauty of the #DeFi world is that we leverage our knowledge from TradFi and innovate in the blockchain world; The creation of the @Uniswap based on the #AMM model is a classic example of this.

7) The AMM model x*y=k implemented by @Uniswap tackles the liquidity bootstrapping problem for long-tail assets, and creates a whole new world where market-making does not require sophisticated algorithms to do so.

8) There are also AMM and order book structures in the tokenized risk protocol sector, however, I believe AMM is better suited than order book for the current tokenized risk protocol sector for the reasons below.

9) Compostability: We call #DeFi money legos for reasons, compostability is important in the DeFi world where it creates a synergistic effect that Apps can be combined to form new types of financial services that we never thought possible.

10) Bootstrap liquidity for long-tail assets: According to a BIS report on OTC interest rate derivatives products, OTC interest rate derivatives products have averaged $6.5 trillion daily turnovers in April 2019.

11) It can be considered as one of the most liquid instruments in the financial market. However, #DeFi interest rate products can be considered as long tail assets/products due to their complexity and early stage.

12) We are still experimenting with the best ways to bring tokenized risk products to the market. So who is going to provide the liquidity on an order book? Do we know how to price 6 months compound cDAI yield correctly?Do we have an avenue for LPs to hedge these asset exposures?

13) AMM is a core competence for the #DeFi sector: One of the core competencies for the AMM model is to offer an easier way to bootstrap liquidity for long-tail assets. It offers easier pricing than the order book structure, thus making price discovery much easier for long-tails.

14) In my view, #DeFi and CeFi (DEXs/CEXs) serve as a complement to each other rather than a competition, thus each needs to build its own core competence to target its niches.

15) In an early stage, AMM liquidity bootstrapping needs > order book capital efficiency needs: There are a lot of debates on how an order book can achieve higher capital efficiency than the AMM model.

16) However, I believe liquidity bootstrapping needs are far more important than achieving a higher capital efficiency in the early stage of the tokenized risk protocols sector.

17) We are at least several years away from tokenized risk protocols to have mass adoptions from the TradFi institutions, and we are still building the essential DeFi building blocks such as tokenized risk protocols.

18) Testing in Production approach: V1 V2 V3: I believe testing in production approach/culture is best suited for the current DeFi sector. We have seen many protocols such as @Uniswap evolve from V1-->V2-->V3, adding features, enhancing security,

19) and finding ways to achieve better capital efficiency as the protocol matures. #DeFi is still early as such I believe an agile approach is way better than the waterfall approach to encourage innovations in the DeFi world.

20) #DeFi user mix is different compared to the TradiFi fixed income market: Thinking ahead of the game is valuable, however, we have a very different mix of users in the DeFi world compared to the TradFi fixed income market.

21) In the #DeFi space, we have a mixture of degen farmers, whales, smart money institutions, and experienced retail users to be at the forefront of the DeFi game, yet the TradFi fixed income market mainly consists of institutions.

22) There are also certain advantages for the Orderbook structure, such as friendly for traders, better capital efficiency. However, we have a different user mix in the #Ethereum #DeFi world than the TradFi market.

23) I believe that when we iterate through the different stages of #DeFi money legos and becoming mature enough to having TradFi institutions onboarding, we might hold different views on various aspects of the DeFi world. Until then, we ape, we die, we grow and we learn.

Okay, missing the r on the order book and *composability 😂😂😂