Defi Market Making – New Models For Faster, Cheaper and Simpler DeFi Market Making

In the decentralized finance (DeFi) ecosystem, market making is a vital and critical process for creating liquidity. Without it, there would be no place to trade DeFi digital assets. But it is also a process that can be inefficient, expensive and slow. That’s why there is a lot of interest in new models for defi market making that can make the process faster, cheaper and simpler.

Traditional exchanges require buyers, sellers and a central reserve of assets. A decentralized exchange or DEX, on the other hand, uses algorithms to crowdsource liquidity and execute trades via smart contracts. This is what makes it possible for a DEX to operate on a much smaller budget than a traditional exchange and still be highly profitable.

AMMs are the key technology that enables this decentralized liquidity. Automated market makers (AMM) enable a DEX to operate without the need for buyers and sellers, and they create liquidity pools using tokens. The AMM’s algorithm then constantly supplies the pool with these tokens, based on a constant product construct, so that trading can take place in an automated and permissionless way.

To date, it’s been the AMMs that have dominated the DEX landscape. Uniswap, Sushiswap and Balancer alone currently account for around 70% – 80% of all DEX trading volume. But how is it that these sophisticated MMs have been able to gain so much market share while lacking the advanced predictive ability of their counterparts in the traditional finance industry?

What’s more, most of these AMMs have yet to demonstrate a viable business model that can transition them from pre-revenue speculation into post-money sustainability. As a result, the AMM community is at risk of a liquidity washout similar to that seen in 2021, when staking rewards were cut by 40%.

Fortunately, a number of initiatives have started to tackle the problem of sustainable, profitable AMMs in the DeFi space. The Symbiosis Finance protocol, for example, allows users to swap between different blockchain networks using a single token. Staking SIS tokens — the platform’s governance token — gives users access to liquidity on other platforms, so they can “farm for yield” and maximize their returns. Whether these and other projects succeed will depend on how well they implement best practices from the business world to help DeFi move from an experimental, fringe technology to the mainstream financial tool it can become.

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