Uniswap V3’s AMM revolution sets the stage for DeFi’s next big liquidity shift

The advantages of AMM

AMM automated market makers introduced the concept of“Lazy market-making”, completely overturning the traditional market-making model. The assets in DeFi are placed in contracts called“Liquidity pools”, through which various traders can trade. This automatic behavior is determined by the asset prices in AMM according to predefined mathematical formulas. One of these formulas is UNISWAP’s constant product Formula X * y = k, where x and Y represent the reserves of two tokens in the pool, respectively, and the multiplication of the two tokens must always be equal to the constant k.

The death of traditional market makers

The traditional financial market maker doesn’t just mean the equation X * y = K. In traditional central limit order book (Clob) markets, market makers specialize in placing buyer and seller orders. When a user trades on FTX, the counterparts may not be the target trader, but the market maker. Most high-frequency trading firms, and even banks, allocate a portion of their portfolios to market-making activities. Prominent market makers include Two Sigma, Citadel and Jump Trading.

Why Uniswap is the most promising DeFi exchange

Uniswap is DeFi’s flagship product. The Uniswap V3 is reminiscent of a Silicon Valley marketing strategy. Uniswap founder Hayden Adams made a big splash on Twitter prior to the launch. While this does bring a lot of attention to V3, it also shows that the governance of the protocol is very centralized. The community never participated in the production of V3. No one had the opportunity to raise any legitimate concerns about the new system.

The Battle of the liquidity king, the starting point of the next cycle

Liquidity plays an important role in DeFi. So how exactly do automated market makers get liquidity? A common approach is to encourage users of AMM platform to lend out crypto assets in exchange for the opportunity to earn passive income. This means that anyone with cryptocurrencies can lend them to the right liquidity pool and earn some decent returns for their troubles. Attracting as much liquidity as possible is important because it minimizes the slippage caused by large orders.

Summary

One of the latest trends in AMM’s development is the concentration of liquidity. This feature is designed to increase the efficiency of the price adjustment mechanism, minimize slippage and allow liquidity providers to earn higher fees. Centralized liquidity allows LP to allocate assets to specific price ranges. By combining multiple concentrated liquidity positions, LPs are able to create individual price curves and customize them to its liking. This also allows them to earn transaction fees based on the liquidity provided by a particular price range rather than the total pool liquidity.

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SuperChain Capital

SuperChain Capital

SuperChain Capital is a venture capital and investment banking service organization oriented towards ecology and value in the crypto sector.