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Theoretical Advances in AMM (Automated Market Maker) Understanding

91 points by SkyMarshal 5y ago

vmception 5y ago
This is important to understand the gravity of AMMs. Currency was made because barter sucks. Cryptocurrencies were made because some people find currency to suck. AMMs makes barter not suck. Definitely follow advancements in AMMs, they come with some new problems that have been tolerable by the markets so far but can improve. This article is about some directions of further improvements.
- littlestymaar 5y ago
  > Currency was made because barter sucks. Mandatory note: currency was made because debt requires trust (or at least repeated interactions), there was never a “barter world before currency”. (And it's not about whether you like Graeber or not, the “barter myth” was known to be false even in the early 20th century, see Allyn Young)
  - vmception 5y ago
    I’d be interested to check those out books out, all economic thought pieces like those have plenty of criticisms from other economists but I’m open to the research. Other people believe in the chronology I presented so I think its a quick way to get the point of a new concept across. I’m open to finding a more accurate way of saying that though, if its just as simple. The key concept that I want to convey is that AMMs improve on this regardless, mainly due to the stored last price, and the routing between liquidity pools. So the required trust is even lower than what “trust-debt-glue” exists for. The AMMs practically fulfill its purpose.
    - littlestymaar 5y ago
      It's not about any individual book, there's simply no evidence of mainstream barter use in any know place or era in the world. The “barter before money” is just a fable invented by Adam Smith. Just Google “barter myth” and you'll have plenty of resources if you're interested in that subject. “Barter preceding money” is the economics equivalent of “knights fighting without a helmet” you can see in Hollywood movies.
vmception 5y ago
Question to OP, or others: do you think tradfi and things like the stock market could benefit from AMMs? No decentralization necessary, just creating markets for crowdsourced permanent liquidity. Corporate and Municipal bond markets could get a major boon from this as they already are illiquid.
- tylersmith 5y ago
  AMMs are essentially an innovation around gas costs on the EVM. It is an approximation of order book without the requirement to store all the orders. I don't think this kind of optimization is necessary in tradfi markets and the additional features of a Central Limit Order Book outweigh the benefits of using an AMM imo.
  - vmception 5y ago
    My issue with central limit order books is that every asset is gatekept by the need for active market makers to provide the limit orders, it relies on money deposited at a particular exchange to be non-posted orders, it relies on stub quotes, it relies on strict regulations and deputization of exchanges to enforce behavior of market maker’s limit orders These are expensive things to maintain. Whereas with AMMs and liquidity pool assets, the community can provide liquidity, have a passive income stream, build new markets for the liquidity pool shares, and have routing between different asset’s liquidity pools such that the base currency isnt as important. I like limit orders, especially for accumulation at the same price, but with the advent of this method I see more benefits. AMMs with ranged liquidity fulfills what I like about limit orders too.
    - RandomLensman 5y ago
      Might be relevant to note that most markets are not using limit order books much (eg, FX, bonds, rates OTC). No one there would want to run purely formulaic market making as prices can gap etc. I agree with idea/interesting concept of making market making better investible, tough.
alienalp 5y ago
With AMMs there is no advancement possible. Current AMMs (almost all of it) represent a trading strategy depends on correlation between assets. Further assets in liquidity pool decoupled from each other further it fails which happens most of the time.
jack_pp 5y ago
If DeFi is to be the finanacial service of the masses why do I have to have a math degree to understand this article?
- meowkit 5y ago
  Right, I forgot that the masses of iPhone and Android owners understand the technicalities of their devices. You don't have the requisite understanding for this abstraction layer. Get that knowledge, or wait until someone distills it for you.
- wmf 5y ago
  You don't understand regular finance either, but the sharp edges have mostly been covered over the last hundred years so you don't see them.
ruuda 5y ago
Nice write-up. I realized recently how poorly understood AMMs are, despite their apparent mathematical simplicity. I used to think of AMM swaps as analogous to market orders, and this is still the dominant view. But in the presence of MEV, swaps behave like limit orders instead. I wrote it up in more detail here: https://ruudvanasseldonk.com/2021/12/07/a-perspective-shift-on-amms-through-mev https://ruudvanasseldonk.com/2021/12/07/a-perspective-shift-...
dmitriid 5y ago
Is there anything to AMM's beyond automated currency speculation (where "currency" is some set of digital tokens)?

91 points by SkyMarshal 5y ago

This is important to understand the gravity of AMMs. Currency was made because barter sucks. Cryptocurrencies were made because some people find currency to suck. AMMs makes barter not suck. Definitely follow advancements in AMMs, they come with some new problems that have been tolerable by the markets so far but can improve. This article is about some directions of further improvements.

littlestymaar 5y ago
> Currency was made because barter sucks. Mandatory note: currency was made because debt requires trust (or at least repeated interactions), there was never a “barter world before currency”. (And it's not about whether you like Graeber or not, the “barter myth” was known to be false even in the early 20th century, see Allyn Young)
- vmception 5y ago
  I’d be interested to check those out books out, all economic thought pieces like those have plenty of criticisms from other economists but I’m open to the research. Other people believe in the chronology I presented so I think its a quick way to get the point of a new concept across. I’m open to finding a more accurate way of saying that though, if its just as simple. The key concept that I want to convey is that AMMs improve on this regardless, mainly due to the stored last price, and the routing between liquidity pools. So the required trust is even lower than what “trust-debt-glue” exists for. The AMMs practically fulfill its purpose.
  - littlestymaar 5y ago
    It's not about any individual book, there's simply no evidence of mainstream barter use in any know place or era in the world. The “barter before money” is just a fable invented by Adam Smith. Just Google “barter myth” and you'll have plenty of resources if you're interested in that subject. “Barter preceding money” is the economics equivalent of “knights fighting without a helmet” you can see in Hollywood movies.

vmception 5y ago

Question to OP, or others: do you think tradfi and things like the stock market could benefit from AMMs? No decentralization necessary, just creating markets for crowdsourced permanent liquidity. Corporate and Municipal bond markets could get a major boon from this as they already are illiquid.

tylersmith 5y ago
AMMs are essentially an innovation around gas costs on the EVM. It is an approximation of order book without the requirement to store all the orders. I don't think this kind of optimization is necessary in tradfi markets and the additional features of a Central Limit Order Book outweigh the benefits of using an AMM imo.
- vmception 5y ago
  My issue with central limit order books is that every asset is gatekept by the need for active market makers to provide the limit orders, it relies on money deposited at a particular exchange to be non-posted orders, it relies on stub quotes, it relies on strict regulations and deputization of exchanges to enforce behavior of market maker’s limit orders These are expensive things to maintain. Whereas with AMMs and liquidity pool assets, the community can provide liquidity, have a passive income stream, build new markets for the liquidity pool shares, and have routing between different asset’s liquidity pools such that the base currency isnt as important. I like limit orders, especially for accumulation at the same price, but with the advent of this method I see more benefits. AMMs with ranged liquidity fulfills what I like about limit orders too.
  - RandomLensman 5y ago
    Might be relevant to note that most markets are not using limit order books much (eg, FX, bonds, rates OTC). No one there would want to run purely formulaic market making as prices can gap etc. I agree with idea/interesting concept of making market making better investible, tough.

alienalp 5y ago

With AMMs there is no advancement possible. Current AMMs (almost all of it) represent a trading strategy depends on correlation between assets. Further assets in liquidity pool decoupled from each other further it fails which happens most of the time.

jack_pp 5y ago

If DeFi is to be the finanacial service of the masses why do I have to have a math degree to understand this article?

meowkit 5y ago
Right, I forgot that the masses of iPhone and Android owners understand the technicalities of their devices. You don't have the requisite understanding for this abstraction layer. Get that knowledge, or wait until someone distills it for you.
wmf 5y ago
You don't understand regular finance either, but the sharp edges have mostly been covered over the last hundred years so you don't see them.

ruuda 5y ago

Nice write-up. I realized recently how poorly understood AMMs are, despite their apparent mathematical simplicity. I used to think of AMM swaps as analogous to market orders, and this is still the dominant view. But in the presence of MEV, swaps behave like limit orders instead. I wrote it up in more detail here: https://ruudvanasseldonk.com/2021/12/07/a-perspective-shift-on-amms-through-mev https://ruudvanasseldonk.com/2021/12/07/a-perspective-shift-...

dmitriid 5y ago

Is there anything to AMM's beyond automated currency speculation (where "currency" is some set of digital tokens)?