Conversation

SBF
@SBF_FTX
Replying to
@SBF_FTX
10) You're announcing to the world: "Hey! Anyone want to buy at $401.20 or sell at $398.8? If so, go for it!" So what happens? Well, you sit there, and wait. And wait some more. And then ETH moves down 60bps, so selling at $398.8 is good. So someone sells to you.
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SBF
@SBF_FTX
11) You're a sitting duck: making an unmoving two-sided market 60bps wide, expensive and slow to cancel, and waiting for market to move more than 30bps. At which point your market is now bad, and someone trades against it. That's "impermanent" loss.
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SBF
@SBF_FTX
12) In a normal orderbook, the bids are people who actively want to buy at that price. In an AMM, the bids are... everyone in the pool, at the market price, no matter what that price is. Not people expressing an opinion about the price. Just sitting ducks.
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SBF
@SBF_FTX
13) Hedging, options, etc. don't help. The problem isn't "risk" per se. It's that you're doing bad trades; trades with negative expected value. Paying fees to hedge can't fix bad trades, it can just even the outcomes: locking in a small loss. The curve doesn't change this.
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SBF
@SBF_FTX
14) The only saving grace here is that the takers pay you 30bps on all trades. So rather than _constantly_ getting picked off, it only happens when markets move more than 30bps. 30bp fees are way higher than most exchanges! But they _have_ to be, or else IL would skyrocket.
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SBF
@SBF_FTX
15) This means that any "benign" taker -- someone who just needs to put on a position at a reasonable price -- has to pay that same 30bps. It's really inefficient. What if an algo set the price? Well either:
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SBF
@SBF_FTX
16) a) that algo is a CEX oracle --> just trade on the CEX b) that algo is on-chain tradeable --> that algo is the DEX, recurse on it c) that algo is something else, and likely garbage. So how can AMMs even exist then? It basically has to be one of the following.
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SBF
@SBF_FTX
17) a) The liquidity providers are making a mistake, and bleeding to IL but don't realize it. b) Volatility is so low that IL is close to 0, so fees can be small too. E.g. Curve. c) There's _so_ much random taker flow that it's > IL. But still AMM/IL is worse than orderbooks
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SBF
@SBF_FTX
18) or, finally: d) someone is paying you to use the AMM, e.g. yield. So in summary, either the LPs are losing; the retail takers are losing; or someone is paying the system to compensate for those. And when that yield goes away, you're back where you started.
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SBF
@SBF_FTX
19) What if you just really need easy liquidity? Yeah, that's totally legit. That's the clearest use case for AMMs: You have a token, you want liquidity for it. You don't want to bother with an MM. So you just put some tokens in an AMM and don't worry about it.
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SBF
@SBF_FTX
Replying to
@SBF_FTX
21) Note that reducing gas costs and blockchain latency does help some: it at least makes it cheap to add/remove liquidity, so you can stop providing when you want if markets start moving. But overall: The problems with AMMs run deep.
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SBF
@SBF_FTX
22) AMMs force you to always make two-sided markets at mid. That strategy does not generally do so well. And throwing math at it, or synthetic hedges, or whatever, doesn't really help. So much yield has gone to them that we forget they weren't popular before.
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SBF
@SBF_FTX
23) But in the end, except in a few cases that play to their strengths (stablecoin<>stablecoin, new project that needs easy liquidity, etc.)-- --you can't really fix AMMs, you can just make them a bit less bad. The past is orderbooks. So, I think, is the future.
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