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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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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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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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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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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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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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I might be mistaken here. But oracle chains like $BAND and $LINK are just pulling price data from CEX. So, at least for price data, you suggest that they have no use and we might as well should use CEX?

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generally LINK/BAND/etc. aren't used as the price trades happen at -- they're used more sparingly, as e.g. an input to what a liquidation price is so yeah you lose some decentralization on that part but the core part of what price you trade at is still your call but not in AMMs

1:59 AM · Oct 15, 2020Twitter Web App