Conversation

SBF
@SBF_FTX
Replying to
@SBF_FTX
5) Now, though, there's way more. But it's not all "natural". Most volume--and TVL--in DeFi comes from yield farms, one way or another: projects dropping their tokens on their users. Whatever you think of it, it means that the reported usage numbers are heavily incentivized.
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SBF
@SBF_FTX
6) People are using AMMs because they're being actively paid to. But that doesn't have to be unique to AMMs: you could also drop yield on an orderbook, or stakers, or pretty much anything else. And once that yield goes away, how much volume and TVL will remain? It's unclear.
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SBF
@SBF_FTX
7) Anyway--most people see the big problem with AMMs being "impermanent loss". What's IL? It's the fact that, if you provide liquidity in an AMM and prices move, you lose value. It's "Impermanent" in that, if you keep providing and prices revert, you get your value back.
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SBF
@SBF_FTX
8) Lots of projects are trying to fix IL. Some change the curve. Some have insurance, or options, or hedging. Many have yield. Do these help? Maybe, but probably not much. Do they fix IL? Nope.
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SBF
@SBF_FTX
9) Why is that? Because IL isn't some misparamaterization. IL is just a PC euphemism for "doing bad trades". Here's where IL really comes from. ------ Say that you put 1 ETH and 400 USDC in an AMM, and currently ETH is worth $400. Say it's 30bps taker, 30bps maker rebate.
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SBF
@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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Ethan Buchman (🐝,🦇)
@buchmanster
Replying to
@SBF_FTX
and
@SBF_Alameda
So you still get paid a fee, but not up front, which just means things might have moved against you in the meantime and you might not want to offer the trade anymore? What if LPs could set limits on when their liquidity is available?
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