Hayden Adams Highlights Role of AMMs in Major Market Transformation
Distinguished crypto industry figure, Hayden Adams, pointed out in a blog post how automated market makers (AMMs) hold the potential to transform the largest global trading markets. This post, which came as Adams’s first in over two years, projected a future where tokenized assets would trade against one another rather than against traditional dollars. As a result, Adams argued, it’s likely that AMMs will rise to prominence.
A former trader from XTX Markets countered Adams’s assertion by stating that the value of AMMs will eventually drop to zero. Still, he concurred with the fundamental premises of Adam’s thesis.
Basis of the Debate
Adams’s post has created quite a stir since it was published, quickly garnering over 200,000 views and hundreds of likes and comments. The central claim of the blog post argued that onchain liquidity has now structured itself into clusters, organically. On-chain liquidity providers incur fewer losses when the assets they possess move in tandem— naturally incentivizing the formation of clusters. He further proposed that the concept of tokenization would permit a similar structuring in the case of equities.
The Extension to Index Funds and Market Making
The Uniswap founder made this assertion on the 50th anniversary of the formation of index funds. He drew parallels between passive liquidity provision displacing professional market making and the manner in which passive investing, over time, replaced active management. He cited Citadel Securities, an industry giant, as an example of how AMMs could be a game-changer, interpreting their massive trading volume and revenue as more of a sign of entrenchment rather than a measure of efficiency.
Adams’s Cost of Capital Mechanism
According to Adams, the cost to capital stands as a significant element of his argument. In essence, he claimed that an investor needing to hold NVIDIA and SPY can maintain exposure for free, whereas an issuer paying market makers for quoting its asset incurs what could be termed as a negative cost of capital. The higher the correlation, the smaller the gap between a passive AMM curve and an active strategy, making it easier for undercutting.
The Objection and Counterarguments
Brian Huang, the co-founder of an on-chain portfolio app called Glider and ex-trader at XTX Markets, disagreed with Adams. Huang raised objections about execution and distribution, pointing out, among other issues, that AMMs do not segregate the orders’ flow and that managing inventory on-chain involves modeling network congestion and payment of gas.
Expanding on these arguments, he asserted that retail participants should not be involved in market-making activities, suggesting that retail traders trading among each other would be counterintuitive. He also suggested most retail investors fail to comprehend how AMMs work, criticizing the high yields advertised on thin pools.
Alternative Models
Many industry figures proposed alternative models to what Adams suggested, criticizing the post while acknowledging its solid argumentation. Katia Banina, the CEO of a trading venue called Bebop, was among those who questioned Adam’s proposition, arguing that people trade financial assets against dollars by choice, as dollars are used for acquiring goods and services.
The Uniswap Model and Future Work
Adams concluded his blog, indicating his potential to write a more extensive version that would delve deeper into traditional financial analogies. He underscored the success of Uniswap, which consistently took millions in fees and hundreds of thousands in revenue.
To conclude, while Hayden Adam’s post has stirred a buzz in the crypto world, the future of AMMs and ultimately the transition of major markets will certainly depend on the evolution of tokenization, cost of capital mechanisms, and how well these new systems can accommodate real-world assets.
