Understand the rising hot category of Ethereum DeFi: automated market maker
Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom)Editor's Note: This article comes from
Chain News ChainNews (ID: chainnewscom)
, Author: Richard Burton, Designer and DeFi Investor, Compiler: Perry Wang, published with authorization.
Let's start with the most basic concepts.
How does the market work?
The relationship between supply and demand has been a subject that economists have studied for a long time. This relationship evolves over time as people buy and sell goods with each other.
In the stock market, market makers are responsible for matching buyers and sellers to facilitate transactions. These people make money through the spread. A spread is the difference between the price one party pays for an asset and the price another party pays for it.
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How Automated Market Makers Work
Automated Market Makers have been around in traditional financial markets for some time. They allow financiers to establish certain price relationships that must be followed. If an asset hits a certain price, a certain amount of that asset is bought.
In the traditional financial field, automated market makers are operated by humans. Humans deploy it, control it, turn it on and off. They run on centralized exchanges, which are also controlled by humans.
On Ethereum, this human control can be minimized. It's still up to humans to create some market-making bots, but after that, we can unleash them and let the market-making bots run themselves like some kind of economic creature. If designed correctly, they can be automated and unstoppable like the Ethereum protocol.
Not just automation, but autonomy.
Uniswap was one of the first market-making bots on Ethereum (of course, Bancor was the real first). In 2018, I was fortunate enough to see the Uniswap robot being built in my office.
To understand how an automated market-making (AMM) robot like Uniswap works, we need to first understand its core concepts:
📊 Market Makers
Physical humans who make transactions to form markets.
🤖 Automated Market Makers (AMMs)
Robots composed of smart contract codes are used to make markets.
🦄 Fixed Product AMMs
A robot that uses a bonding curve to determine the price at which to execute a trade and executes accordingly.
What are the curves we are talking about?
📈 supply curve
A graph depicting the relationship between the cost of a good and its supply. This curve is drawn after observing the data.
📉 bonding curve
The relationship between the price of a token and its supply, defined by a mathematical curve.
The asset supply is pooled in the liquidity pool:
🏊♂️ Liquidity pool
A smart contract that stores those tokens ready to trade.
⚖️ Arbitrage
Here, traders can profit by taking advantage of spreads or imbalances in the liquidity supply.
🔁 Exchange
Here, using Curves and liquidity pools, one token is swapped for another.
All of this leads to the concept of a bonding surface:
🌏 Bonding Surface
📐Constant & Invariant
These are mathematical functions that can be used to define various curves in a chart.
Well, the above are all the core elements of Ethereum AMM.
What projects are running on AMM?
More and more new projects are emerging in the field of automated market making. You can check out the history of the inspiration behind Uniswap to examine the kinship of these projects.
In 2018, the Uniswap project was born, aiming to compete with Kyber, 0x and Bancor, and Bancor had raised more than $200 million at that time. With the help of some bounties and loans, Uniswap lead developer Hayden Adams launched the system, blowing the competition out of nowhere. Other AMM bots are too complex to use. Uniswap works great.
Bancor 2017
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In the market share of decentralized exchanges, Uniswap and Bancor are both AMMs
Let's take a look at the current main AMM projects in Ethereum:
The first major smart contract AMM from the wild
Take the lead in experimenting with some key functional designs
Use a bonding curve to calculate prices
Uniswap 2018
Use a bonding curve to track liquidity provider contributions
Connect multiple capital pools through a hub-and-spoke model
Unfortunately adopted BNT token as its hub currency (instead of Ether)
Main goal: Decentralized protocol for token liquidity
Simpler bonding curve than Bancor
Very fuel efficient (gas)
Recommended reading:not capital efficient
Curve – 2020
Overall, extremely well built (see Hayden's November 2018 tweet launching the product)
Recommended reading:
How did Uniswap achieve a 100-fold increase in liquidity when it started as an experimental project?
Main goal: low-slippage, stablecoin-to-stablecoin transactions
Extremely capital efficient => very low slippage
The actual bonding curve formula is opaque (see my tweet for this comment)
Recommended reading:Read through the popular DeFi project Curve: why is it important? Why was it "attacked"?
Recommended reading:
Read through the popular DeFi project Curve: why is it important? Why was it "attacked"?
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Curve (aka Stableswap) Bonding Curve vs. Uniswap Bonding Curve
Ethereum will soon welcome several new AMM projects:
Balancer – expected to launch in 2020
Main goal: Decentralize Vanguard (Chain News Note: Vanguard is the world's largest no-fee fund family and the world's second largest fund management company)
Extend Uniswap's union curve to a multi-dimensional surface
But asset portfolio models can lead to liquidity fragmentation
learn more:https://medium.com/
The introduction of weights increases the gas cost
learn more:
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Balancer can create many pools of multiple tokens
Shell Protocol – Expected 2020
Trading with low slippage
High profits for liquidity providers
Weighted, multi-dimensional pooling
Granular customization of AMM behavior
Transfer arbitrage proceeds to liquidity providers
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Balancer can create a liquidity pool composed of multiple tokens
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why they work better
It turns out that Uniswap is the most efficient way to launch a liquid exchange for any asset. @UniswapExchange is "the liquidity provider of choice", which is not to say that you will no longer see other order book exchanges to support asset trading. The progress we see is something like this:
What Uniswap brings to the market is "uncensorable token issuance". If you want to list a stock on the NYSE, you need permission from several financial institutions. The cost is usually in the millions of dollars.
If you want to list a certain token on Ethereum, you only need to create a single transaction. The cost can be less than a dollar.
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Why are they running on Ethereum?
Traditional markets use order books because of their ability to operate at high speeds. People can place an order and cancel it in less than a second.
What it lacks in price refinement, it makes up for in predictability.
The market tells us that these systems are extremely valuable.
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Steadily growing transaction volume on Uniswap shows high value for AMMs
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some summary
We are witnessing the rise of autonomous automated market makers on Ethereum. These unstoppable bots are competing for liquidity against each other, as well as from traditional order book exchanges.
