Unfortunately lessons are often learned the hard way. The overwhelming consensus now is that DeFi > CeFi - thanks FTX
DeFi however is still a fraction of CeFi, 41B @DefiLlama compared to 24T in the U.S. equities market alone.
Ok so how do we get there? A thread π§΅
DeFi however is still a fraction of CeFi, 41B @DefiLlama compared to 24T in the U.S. equities market alone.
Ok so how do we get there? A thread π§΅
A key issue hindering DeFi adoption is that there is a lack of efficient infrastructure.
Large liquidity pools are not profitable to LP into on average and this problem grows in severity as the pools scale.
Does that sound like the future of finance to you?
1/n
Large liquidity pools are not profitable to LP into on average and this problem grows in severity as the pools scale.
Does that sound like the future of finance to you?
1/n
Ethereum was the first programmable blockchain. It enabled DeFi to flourish, however, in its original implementation it was unscalable due to high latency & cost.
With the merge & scaling solutions like @arbitrum & @0xPolygon, Eth is now positioned to grow & dominate.
2/n
With the merge & scaling solutions like @arbitrum & @0xPolygon, Eth is now positioned to grow & dominate.
2/n
Similarly, Uniswap was the 0 to 1 innovation that enabled an alternative to CEXs and worked within the constraints of blockchain, unlike a CLOB.
The problem is that it's generally unprofitable for retail. Why?
3/n
The problem is that it's generally unprofitable for retail. Why?
3/n
AMMs are inefficient. LPs are selling volatility or essentially taking a perpetual short straddle on the two tokens. They are hoping that fees > impermanent loss, however, it makes absolutely no sense for LPs to be compensated in fees.
4/n
4/n
Volatility ! = Volume. There is no reason that volatility and volume should be correlated. Think penny stocks - super volatile with low volumes.
In fact, when we back tested the correlation between volatility and volume in AMMs, it was on average 50% and as low as 10%.
5/n
In fact, when we back tested the correlation between volatility and volume in AMMs, it was on average 50% and as low as 10%.
5/n
What you get in large pools is depressed IV because people can sell vol but no one can buy it. If people could only sell a stock, what do you think would happen to the price?
A better model is to enable people to buy volatility from LPs and compensate them with those fees.
6/n
A better model is to enable people to buy volatility from LPs and compensate them with those fees.
6/n
In TradFi, people can write options (sell vol) and buy options (buy vol). If you enable people to long vol (gamma) from AMMs, then LPing should be on average a profitable strategy.
This is bc people are risk averse.
7/n
This is bc people are risk averse.
7/n
Sir, risk averse? Crypto is full of degens in search of high yields.
Yes this is true but still the majority of liquidity is in non algo stablecoins - max risk aversion in crypto.
MakerDAO TVL is 6.6B. UniV3 is 2.62B but discounting stables itβs closer to 1B. CRV is ~3.7B
8/n
Yes this is true but still the majority of liquidity is in non algo stablecoins - max risk aversion in crypto.
MakerDAO TVL is 6.6B. UniV3 is 2.62B but discounting stables itβs closer to 1B. CRV is ~3.7B
8/n
Due to this, in normal options markets IV has overstated HV 83% of the days since 1990. 83% of the days selling vol was a profitable strat.
Our theory is that if we created a two sided vol marketplace in an AMM retail can LP passively and expect to be profitable on average.
9/n
Our theory is that if we created a two sided vol marketplace in an AMM retail can LP passively and expect to be profitable on average.
9/n
If we compensate LPs with fees from those longing volatility, then we do not need to charge fees for swapping tokens.
We will release the worldβs first commission free DEX with scalable liquidity provisioning. Why is this important?
10/n
We will release the worldβs first commission free DEX with scalable liquidity provisioning. Why is this important?
10/n
Jeff Bezos has a famous quote βYour margin is my opportunityβ. Amazon won by cutting out middle men and offering a more convenient service. Across biz verticals Bezos is right - the trend in everything is for fees to be competed to 0.
11/n
11/n
Stock commissions in the 80βs were $45 dollars. With the advent of Robinhood and other commission free exchanges, most trading platforms now charge 0.
Rollups and alt L1s are competing gas fees to 0.
@sudoswap is competing NFT royalty fees and exchange fees to 0.
12/n
Rollups and alt L1s are competing gas fees to 0.
@sudoswap is competing NFT royalty fees and exchange fees to 0.
12/n
In fact, we believe that if DEXs are not feeless then they will never outcompete CeFi.
Uniswap has done a great job of reducing fees: the average trade a year ago used to have a 0.3% fee and now 66% of the volume is in the 0.05% fee tier.
13/n
Uniswap has done a great job of reducing fees: the average trade a year ago used to have a 0.3% fee and now 66% of the volume is in the 0.05% fee tier.
13/n
The problem is that if LPs are reliant on swap fees then AMMs can never compete with traditional exchanges like Robinhood which are feeless or CeFi.
For example, Binance charges a 0.1% fee but if youβre trading with any size you pay virtually nothing to trade.
15/n
For example, Binance charges a 0.1% fee but if youβre trading with any size you pay virtually nothing to trade.
15/n
Lower fees will drive more adoption and impermanent gains will drive more liquidity.
We will enable DeFi to be competitive with CeFi and create a better environment for retail.
Join us soon on a trip to Galaxy Gamma for our testnet launch. Coming Dec 7th π
16/n
We will enable DeFi to be competitive with CeFi and create a better environment for retail.
Join us soon on a trip to Galaxy Gamma for our testnet launch. Coming Dec 7th π
16/n
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