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Arbitrage, automatic market maker, DeFi, Defi community, DEX, Ethereum, impermanent loss, liquidity pool, liquidity provider, Sam Bankman-Fried, transaction volume, no exchange
A recent Consensys report stated that the volume of decentralized exchanges (DEX) surged in the third quarter of 2020, thanks to their adoption of automated market makers (AMM). According to the report, DEX using AMM (a software that uses algorithms to create token trading pairs) now occupy 93% of the market.
Thanks to the use of AMM, Uniswap’s transaction volume in September reached $15.4 billion, nearly $2 billion higher than Coinbase’s transaction volume. Before you start using AMM, use the order book first.
The Consensys Defi report asserts that the use of AMM depends to a large extent on “what is considered a valuable way to reduce opportunities for human error or manipulation and to leave clear audit trails for regulators.”
According to an excerpt from the report, the market maker software “successfully proved that AMM is ready in the mainstream market-so much that the total value of AMM on Ethereum exceeds $4 billion.”
The main difference between AMM and order books is that liquidity providers do not compete with each other for order flow. All liquidity providers only obtain liquidity at a price determined by an algorithm that applies to everyone. The entire order flow is proportionally distributed to all liquidity providers.
However, despite DEX support, many people in the Defi community are still opposed to AMM. CTO Dmytro Volkov of CEX.IO explained this, he pointed out a key point:
“(A) AMM creates an inefficient market! Arbitrageurs profit from the inefficiencies of liquidity providers, which means that liquidity providers suffer losses (or lost profits) to make it possible. This makes this Such markets are very attractive to arbitrageurs because the profits they provide are basically risk-free.”
Volkov also pointed out that “inefficient liquidity providers have to contend with arbitrageurs, who are professional or very experienced traders with fast, high-quality arbitrage algorithms.” According to him, this situation The results are predictable, and professional traders will prevail.
Therefore, although the Defi report attributed the increased number of DEXs to the use of AMM, Volkov believes that current liquidity providers using this market-making technology only use this feature for “simple” purposes, although they may Will cause losses.
Sam Bankman Fried (SBF), CEO of FTX, reiterated the same inefficiency, tweet The argument in October was that “liquidity providers made a mistake and lost to Impermanence Loss (IL) but didn’t realize it.” The CEO said that AMM exists “because the blockchain does not support the throughput of orders. He believes that IL is just a “PC euphemism for bad transactions.”
IL is when the liquidity provider causes a temporary loss of funds due to the fluctuation of the trading pair.
In his long Twitter post, SBF finally came to the following conclusion: “AMM forces you to always trade in both directions in the middle. This strategy usually does not work well. Moreover, mathematical operations on it, synthetic hedging, etc., will not help. .”
At the same time, John David Salbego, the founder and CEO of Arrkey X, praised AMM’s “mathematics, algorithms and initial premises”, but believed that “AMM in its current state has no practical use cases or sustainability.”
Salbego usually shares the same views as SBF and Volkov, but he also worries about other issues that plague AMM, such as high ETH gas fees, arbitrage, market price fluctuations, and the risk of non-performance. Not surprisingly, as Salbego said, IL is seen as another obstacle.
“In addition, I do think that controlling your IL is another major challenge that hinders the development of this technology, but I see some cool projects working on solutions, and it does look promising.”
However, other participants such as Viacheslav Akhmetov, head of the Mercuryo.io blockchain, are still hopeful about its prospects. Akhmetov pointed out, “AMM is still emerging and many new things can be introduced.”
Others believe that using different blockchains may produce better results. They still admit that the current popularity of the Ethereum blockchain makes it difficult to switch between chains.
What is your opinion on the role of AMM? Share your views in the comments section below.
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