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Oct 15, 2020

Great thread! High margin professional tradfi market makers are the definition of the entrenched and extractive middlemen defi promises to replace and democratize. I love watching it happen in real time 💜

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Cyrus Younessi

@cyounessi1

Oct 15, 2020

Super interesting technical discussions on both sides of the AMM debate tonight(@SBF_Alameda and @KyleSamani vs @danrobinson). There are also plenty of practical reasons for Uniswap's strong PMF, though. Here's the bottom line for me, as an active Uniswap LP:

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hayden.eth

@haydenzadams

Oct 15, 2020

Reminds me of a convo w/

@scott_lew_is

in the early days of Uniswap where we discussed professional market makers getting outcompeted by passive pooled LPs that would happily accept much lower margins :)

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and

Out of curiosity -- how much margin do you think professional MMs make on an average trade, in bps?

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I would assume some hilariously tiny amount! The point isn’t the margin per trade, it’s the return on invested capital

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and

I think that's not right, though it's a bit subtle. Say MMs make 1bp on trades, and 30%/year. Your claim is that AMMs make 0.5bps --> 15%. (Arbitrary numbers.) The problem is that AMMs would *actually* make -3bps --> -90%/year. So to stop that AMMs charge who taker fees.

2:29 AM · Oct 16, 2020Twitter Web App

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So they charge 30bps taker fees. That then significantly depresses volume, partially killing the product. But further -- it means that retail takers *always* lose another 30bps, whereas smart takers make a bit by trading when markets move. So AMMs actually just tax retail.

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I know it feels weird -- that creating a structure for retail to outcompete MMs on providing ends up having the opposite effect -- but it does. It ends up being great for HFT takers, and terrible for retail takers, even though HFT takers lose the tiny providing edge they had.