1/ Over the past year DeFi has been heavily colonized by HFT emigres. A lot of us come in with an arrogant attitude that we’re much smarter than the DeFi native folks. We naturally assume that however we did things in CeFi must be better. (🙋‍♂️I’ve certainly been guilty of this)
2/ Unfortunately I think Serum has been a victim of this attitude. AMMs have served DeFi very well. But the HFT folks behind Solana and Serum naturally assumed that limit order books must be superior because that’s how CeFi does it.
3/ CLOBs have a lot of major advantages in terms of price discovery and capital efficiency. But they’re much less resilient than AMMs. Today’s outage shows a major downside with CLOBs.
4/ When a limit order gets filled, that liquidity disappears until the market maker actively refreshes with a new order. Which is mostly fine in a centralized context where a single authority can halt trading and restart in an orderly auction.
5/ In contrast when AMMs fill trades the liquidity reprices but still remains active. This makes them much more resilient to a disorderly network partition. The price may gap, but the liquidity doesn’t disappear.
6/ This is a lesson for HFT colonists coming into DeFi thinking they know how to do everything better. (Again I’ve been quite guilty of this many times.) Don’t just assume that whatever works in CeFi is exactly what’s needed in DeFi.
7/ I think limit order books still have a lot of value to add. Better price discovery, higher liquidity at the touch, lower costs. But after today it’s pretty clear that you need a hybrid approach that combines the decentralized resiliency of AMMs.
8/ And if you’re a quant building in DeFi (I know a lot of you are on Solana), don’t just ignore what the DeFi veterans have been doing for the past four years. Solana has some amazing tech, but is often too quick to discard the hard-earned wisdom of the Ethereum community

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More from @0xdoug

31 Aug
1/ A lot of quant traders (including myself at many times) have a knee jerk instinct to believe that if a strategy is technically challenging it must mean there’s more alpha underneath.
2/ Anyone with experience will tell you this just isn’t true. Even knowing this, it’s still hard to think outside the implicit bias of hard equals lucrative.
3/ I’ve seen insanely complex strategies requiring teams of PhDs, where the alpha was competed down to next to nothing. These teams persisted picking up scraps well past the point it made any economic sense.
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