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Hide Not Slide‏ @HideNotSlide Apr 25

I decided to fall down the DeFi rabbit hole this week, and so far I'm pretty excited about its impact on the future of market structure. Below are my thoughts on a fascinating DeFi innovation - automated market makers:

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Hide Not Slide‏ @HideNotSlide Apr 25

To understand DeFi market structure we first need context. Where are we now? Today, *centralized* exchanges & market makers control custody, liquidity, and management of a market's order book matching buyers & sellers.pic.twitter.com/xo28ZCRD1s

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Hide Not Slide‏ @HideNotSlide Apr 25

When we trade, we trust that these central parties will do their job - to provide us liquidity, safeguard our assets, and ensure we can access our money when we need to. If you don't trust the centralized market owners, you don't participate.

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Hide Not Slide‏ @HideNotSlide Apr 25

In exchange for this service, we traders pay transaction costs in the form of commissions, market data fees, clearing fees, and sometimes wide bid/ask spreads. The central system profits mightily off these fees & controls most of its pricing.

1 reply 1 retweet 17 likes

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Hide Not Slide‏ @HideNotSlide Apr 25

Sometimes centralized market structure breaks down. The DTCC can slow down clearing of GameStop stock. Market makers can blow up when they implement buggy code. Exchanges can raise margin requirements & turn away customers.

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Hide Not Slide‏ @HideNotSlide Apr 25

In contrast, decentralized market structure performs similar tasks in a radically different way. Instead of a central party controlling order matching & custody, THE BLOCKCHAIN controls it. Smart contracts allow traders to transfer ownership without giving up control.pic.twitter.com/vMExJBfcr8

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Hide Not Slide‏ @HideNotSlide Apr 25

When you hear the word "Smart Contract", think souped up crypto code. NFTs exist because of smart contracts - souped up crypto code can link ownership of something to a coin & allows that coin to be traded freely. Like a Michael Jordan GIF or an autographed tweet.

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Hide Not Slide‏ @HideNotSlide Apr 25

Here's where automated market makers come in. AMMs are smart contracts that allow the formation of liquidity pools (LPs). Anyone can contribute coins to this LP and become their own market maker, and traders can access liquidity the LPs provide in return for a small fee.

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Hide Not Slide‏ @HideNotSlide Apr 25

AMMs are a radical concept - I think of it as YouTube for liquidity. YouTube democratized video content - ANYONE can upload a video & be seen by the world. AMMs democratize liquidity provision - ANYONE can contribute to an LP and grease the wheels of market structure.

9:36 AM - 25 Apr 2021