In a riveting blog post published Monday night, Hayden Adams – the mastermind behind the creation of Uniswap – asserted his belief that Automated Market Makers (AMMs) would eventually rule the world’s largest markets once tokenized assets begin trading amongst themselves instead of against fiat currency. This assertion met with resistance from a former XTX Markets trader by Tuesday afternoon, with a rebuttal that claimed AMMs would eventually become worthless.
The Core Standpoint
Despite their disagreements, most people who refuted Adams’ point of view acknowledged the validity of his primary mechanism – that if assets that usually move together are paired, it reduces the risk for liquidity providers. Critics primarily raised questions regarding demand and permission – whether there will be adequate interest to trade these pairs and if the liquidity providers that Adams’ model anticipates will actually be authorized to supply the necessary liquidity.
Adam’s blog post, “Correlated Pairs: How AMMs Win the Biggest Markets”, garnered significant interest with over 229,000 views, 885 likes, and 142 replies in less than a day. The crux of his article was that on-chain liquidity has naturally organized itself into clusters, such as Ethereum assets against ETH, Solana assets against SOL, and various stablecoins trading against each other. This arrangement, Adams argued, occurred naturally because liquidity providers lose less when the two assets they hold move concurrently.
According to Adams, tokenization of assets allows this natural pattern to rearrange equities as well. It catalyzes a shift from NVDA/USD to NVDA/SPY, with SPY/USD becoming the bridge back to fiat currency.
Retrospection and Observation
Adams positioned his arguments around the 50th anniversary of the first index fund. Proposed by Jack Bogle in 1976, his First Index Investment Trust closed its public offering with a disappointing $11.3 million, falling far short of the $50 million to $150 million target. Nevertheless, index mutual funds and ETFs today claim a 53.7% domain, amassing $21.88 trillion against $18.83 trillion in active funds.
Drawing parallels, Adams suggested that passive liquidity provision, much like passive investing, will replace professional market-making. He highlighted Citadel Securities, which handles almost 25% of US equity volume and posted record net trading revenue of $12.2 billion from approximately $21 billion of trading capital. For Adams, these figures suggested entrenched industry practices rather than evidence of a functional system.
His primary argument revolved around the cost of capital. Market makers hedge price exposure and foot the bill for the hedge. Passive AMM curves, Adams asserted, come closer to active strategies in situations where assets have high correlation, thereby making it easier to bypass market makers.
Dissenting Voices
Brian Huang, an ex-trader at XTX Markets and currently the co-founder of on-chain portfolio app Glider, strongly disagreed with Adams. Huang contended that market makers need the flexibility to place and cancel orders across thousands of assets at diverse depths, a feature unavailable on AMMs.
As per Huang, AMMs do not segregate order flows – implying that all participants receive the same pricing regardless of scale or status – a situation he finds problematic. He finally overturned Adams’ democratization argument by claiming that retail participants should avoid making markets since trading against other retail participants usually doesn’t yield expected results.
The Question of Demand, Not Supply
Katia Banina, the CEO of trading venue Bebop, commended Adams for his post but disagreed with his proposed structure. She argued that traders invariably trade financial assets against dollars because dollars are globally accepted currency for goods and services. She noted that if major pools for NVDA were paired with SPY, traders would have to pass through two pools & pay two fees, making the process more expensive & complicated.
AMMs and Their Market Appeal
Despite these objections, several experts see mileage in Adams’ plan. Derek Barrera, founder of liquidity-management protocol Steer Protocol, agreed that generating volume would be challenging despite the low impermanent loss on correlated pairings. However, he recommended employing them to maintain depth between correlated markets and attract multi-hop flow during price volatility.
In conclusion, Adams’ views have ignited stimulating discourse over the potential role that AMMs could play in reshaping world markets. The clash of concepts – between traditional market-making and the emerging era of digital assets – is setting the stage for fascinating developments in the world of finance. As blockchain technology continues to disrupt markets and democratize finance, AMMs very well might have a distinctive part to play.
