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AMMs are not price discovery mechanisms, i.e. they can only potentially help in liquidity provision in very well coupled underlyings (maybe index vs basket of s
by RandomLensman 5y ago
AMMs are not price discovery mechanisms, i.e. they can only potentially help in liquidity provision in very well coupled underlyings (maybe index vs basket of stocks).
If, for example, credit risk on a bond changes the formulaic nature of an AMM will open up huge arbitrage opportunities.
- dannyw 5y agoThere's no technical limitation stopping an AMM's pricing function from considering credit risk.
- RandomLensman 5y agoSure, it could have an algorithm that "solves" for everything, but we are nowhere near that. Also, no-one believes they can always correctly guess prices in financial markets, hence one-sided markets, liquidity gaps etc. Somehow price discovery is usually ignored in AMM circles, markets are not just about liquidity provision. Market making can lose a ton if money quickly, and right now those losses would flow heavily into predictable AMMs if they were around in traditional asset classes.