> it’s the return on invested capital
Got some bad news for you about AMMs... :D
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That’s exactly the point Hayden is making!
Professional market makers make much higher returns on their capital than liquidity providers make on Uniswap.
Their margin is our opportunity
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I don't think this is the right framing.
Are you implying that AMM LPs are willing to accept a % fee that is so low that sophisticated MMs (and other competing AMMs) just won't bother participating in the market?
Quote Tweet
Replying to @srndptme and @cyounessi1
The following image demonstrates how sophisticated MMs can eat into AMM fees until it is no longer viable to overcome impermanent loss.
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No—my point is that AMMs can deploy way more capital because LPs are OK with modest returns and are guaranteed their fair share of fills.
Retail investors, too, are better off trading against an AMM, because liquidity doesn’t tactically dry up.
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I agree that professional market makers undercutting the spread do ruin this nice equilibrium!
The solution to this, as for so many other problems, is to have all trading in the world go through Uniswap
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you should see what happens when a country implements 30bp fees.
(basically retail ends up gambling on options and everyone else trades futures since spot is too expensive.)
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I’m curious why you think 30bp is the only fee possible in AMM?
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AMM providers get destroyed without large maker rebates because they're forced to provide at the market, both directions, whatever that is.
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even with 30bp taker fees/maker rebates there's significant money to be made each day trading against AMMs, just doing arbs.
If fees were lower, AMMs would lose even more to that.
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Arbitrage profits are not equal to liquidity provider losses!
Ask Kyle to explain volatility harvesting to you
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They are unless the person providing in the AMM strongly things that on long timescales the assets are mean-reverty
which I think is not really what people are trying to express
and if they are then AMMs make more sense
as long as the belief is both strong and very nonspecific
Tbh if you provide liquidity and don’t understand you’re short volatility you deserve the IL? Feel like pretty much everyone, Hayden included, have always made impermanent loss a very clear risk.
Yes they are. You can simplify the situation with lps and arbitrageurs being the only 2 market participants with an external oracle. If one win the other loose.
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In this scenario, arbitrageurs win long term if the market is constantly moving in a random direction. Arbitrageurs simply trade whenever they get a better price than the oracle.
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I just mean mathematically, in the short run, it is not a zero-sum game.
ETH price goes from $300 to $310, arbitrageurs trade and make money. Market price goes from $310 to $300, arbitrageurs trade and make money. Liquidity providers now have more money than they started with.
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I’m assuming the arbitrageur is actually arbitraging—trading against Coinbase or whatever. So they make actual profits on the way up and on the way down.
The liquidity providers make money from fees. And since the price is back where it started, they make a profit.
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