Correlation trading pairs will help AMMs enter larger markets, Uniswap founder Hayden explains in a post

Odaily News: Uniswap founder Hayden said in a post on X that he cannot ignore the theory of correlation trading pairs when observing various things, and noticed that the second-largest Uniswap pool on Base is the Jito staked SOL/BTC trading pair, which aligns with the logic of correlation trading pairs.

In an article titled "Correlation Trading Pairs: How AMMs Win the Biggest Markets," Hayden stated that AMMs have the potential to become the core engine of all financial markets, and tokenization will make markets programmable, changing market types, market makers, and the assets being traded.

He said Uniswap has been operating autonomously since its launch in 2018, with cumulative trading volume exceeding $4.6 trillion, and has helped increase the proportion of decentralized exchanges relative to centralized spot trading volume from less than 1% to over 20%. As AMMs have developed, their liquidity has gradually formed a structure of correlation trading pairs.

He pointed out that AMMs initially achieved product-market fit in the long-tail asset market, and then stablecoin trading pairs developed. Due to the lower capital costs of passive strategies, the demand for professional market making in stablecoin trading pairs has been squeezed.

Hayden said traditional financial markets are dominated by market-making firms that integrate capital, trading strategies, execution technology, settlement, and distribution into a single vertical business. Citadel Securities handles approximately 25% of US stock trading volume, with net trading revenue reaching $12.2 billion last year and trading capital of approximately $21 billion.

He believes blockchain can unbundle the different components of traditional market-making businesses: code handles execution, shared services provide custody and settlement, and open-source software replaces proprietary infrastructure. The scarce factor of capital in AMMs is capital itself, and participants who can hold inventory at lower costs gain an advantage.

Hayden said liquidity providers face lower inventory risk when holding assets with similar price movements, and liquidity will deepen as a result. Ethereum ecosystem assets typically trade against ETH, Solana ecosystem assets typically trade against SOL, stablecoins trade in pairs with each other, and a few high-liquidity trading pairs are responsible for connecting different asset clusters.

He noted that once tokenized assets share the same settlement layer, any asset can trade directly against any other asset. For example, NVIDIA/USD can become NVIDIA/SPY and connect to the dollar through SPY/USD; oil companies can trade against oil ETFs or tokenized oil, and private credit can trade against tokenized US Treasury funds.

Hayden said traditional market makers typically pursue delta neutrality, reducing risk by denominating in USD and hedging non-USD exposure, which increases market-making costs. A market structure consisting of low-volatility correlation trading pairs and a few high-volatility bridge trading pairs is expected to improve market-making efficiency and reduce costs.

He said DeFi has already demonstrated this model, with ETH/USDC being one of the deepest on-chain markets because different asset clusters route through this trading pair. Passive liquidity providers focus on correlation trading pairs, while active liquidity providers compete on bridge trading pairs.

Hayden noted that correlation markets for tokenized stocks have already emerged, with 10 tokenized stocks currently trading against SPY in Uniswap pools on Robinhood Chain. In the first 12 days after launch, these pools generated $33 million in trading volume, with over 11,000 users participating, many of whom traded during US market closure hours, and some trades were executed directly between different stocks without passing through the dollar.

He also said Uniswap v4 Hooks supports market customization, which can enhance returns for liquidity providers. The DualPool Hook recently launched by Uniswap Labs deploys passive AMM funds to earn lending yields when the funds are not being used for swaps.

Hayden believes AMMs are still in their early stages, and there will be multiple ways to improve liquidity provider returns and market competitiveness in the future. He said passive liquidity will develop in a manner similar to index funds, lowering the barrier to creating and participating in markets.