Thread by @KyleSamani

0/ PropAMMs are one of the most important innovations in market microstructure in years, possibly decades.

A thread

1/ To understand why this is the case, let's start by looking how market makers (MMs) quote on traditional centralized exchanges (CEXs)

2/ MMs are all physically co-located with the CEX. Each MM is running an algorithm on a box, and is connected using a uniform cable length (e.g. 50 meters) to another box, which hosts the CEX

3/ The MMs and CEX are sending back and forth large amounts of traffic. Each time an MM sends an order to the CEX - limit, cancel, market, etc. - the CEX must then communicate that all the other MMs. the other MMs then respond with their own new orders

Repeat infinitely

4/ A simple diagram

5/ Now lets consider how propAMMs work on Solana mainnet

6/ The beauty of propAMMs on Solana is that the blockchain itself *hosts* the MMs algorithm. The system doesn't need billions of messages going back and forth between MMs and the CEX

The MM algos are hosted on the same physical box as the exchange itself!

7/ A simple diagram

8/ There is an old trope in crypto that everything in a decentralized system must be slower than the centralized counterpart because of latency overhead communicating around Earth

9/ Here, once you reframe the problem, on-chain hosted algorithms actually have *lower* latency than TradFi CEXs

Why?

10/ The latency required for a propAMM to update pricing only requires electrons moving around inside a single piece of physical silicon.

11/ If the price of SOL-USD moved because of the previous market order, that information is available *immediately* to all propAMMs for the next market order.

Everything happens inside a single piece of silicon. No bi-directional communication happening between servers

12/ It's important to note that the propAMMs do require frequent oracle updates. Which is fine. That doesn't change the reality of what I've described above.

13/ What is important to understand is that MM pricing changes *in real time inside a single piece of silicon* when the exchange - in this case the Solana blockchain - hosts the propAMM's algorithm directly

14/ PropAMMs are already the dominant mechanism for quoting spot SOL-USDC on Solana, with tighter spreads than all major CEXs

I expect this market structure is going to become the dominant mechanism for on-chain trading for all spot, perps, and even prediction markets this year

15/ The biggest challenge with propAMMs is that there isn't *yet* a way to *guarantee* best execution for takers. This is because all of the propAMM algos are not public (they shouldn't be; traditional MM algos are private), and routing over propAMMs is non-deterministic

16/ However, this problem is tractable, and I expect all of the relevant aggregator teams - Jupiter and dFlow for spot, and Phoenix for perps - to implement solutions this year

17/ PropAMMs are still wildly unoptimized, and are subject to all kinds of constraints due to limitations in the Solana blockchain itself.

Solana is rolling out a ton of major changes this year that will dramatically improve the performance of propAMMs. Including:

18/

a) higher CU limits per transaction and larger tx sizes
b) higher CU limits per block
c) alpenglow, which will reduce slot times from 400ms to 100-150ms
d) doublezero, which reduces latency globally
e) application controlled execution
f) multiple concurrent leaders

19/ If propAMMs on Solana mainnet can already quote tighter than all CEXs without these improvements, just imagine how good they will become as these upgrades roll out

{fin}