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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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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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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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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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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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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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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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20) You lose some money on it, but sure, that's fine, it's the price of liquidity. What if you program an AMM to do "smart" pricing/trades/etc.? If it's really custom -- it's not really an AMM, it's an on-chain algo trading firm. Which is awesome!

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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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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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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.

10:40 PM · Oct 14, 2020Twitter Web App

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You are not trying to understand the point he is trying to make. Genius.

Black Code Capital

@BlackCodeGroup

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The yields (token rewards) are the only thing keeping some of our capital in AMMs on Uniswap. Once distribution is over, its back to order book based market making. The real opportunity in this space is options market making.

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Balancer multi-asset, non 50/50 pools help. Also, IL is basically the same P&L as a call overwriting strategy in which you’re long underlying and selling covered calls. You’re substituting future gains for current income which is not unreasonable at all.

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butterz.btc.eth.link

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thanks! just bought 100K $ZRX

Joey Wong王祖兒

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What do you think about grid trading with a large range? MM have to pay for the trade while LP get paid for it.

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Sitting duck, same as AMM

LeslieisHODLing

@LeslieisHODLing

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Few. Unfortunately.

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LeslieisHODLing

@LeslieisHODLing

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You are talking from a market maker point of view. For takers it's great! I see the entire curve and there's no way to effectively customize your level at a certain price - everyone needs to show the same terms.

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Misses one point, which is that orderbook-based exchanges don't guarantee instantaneous execution unless you're the taker. If you're the maker, you have to wait to get filled, which makes it impossible to execute with composability in a smart contract.

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For an AMM transaction, a miner deterministically changes bytes in memory corresponding to balance and moves onto the next line.