Problem Statement

DEXs like Uniswap v3 lack a sophisticated & decentralized market making infrastructure to harness the true potential of concentrated liquidity

Legacy AMMs lack the efficiency to rival their CEX counterparts

Most crypto asset trading volume today still occur on CEXs. These have shown time and time again that their custodial nature make them prone to attacks and fraudulent behaviour, ultimately resulting in high risks leading to users losing their funds. Decentralized Exchanges (DEXs) such as Uniswap, Balancer or Curve emerged as the to-go-solutions that made trading crypto asset work in a non custodial fashion with a concept called AMMs. Typical AMMs, provide a one-size-fits-all bonding curve that aim to make price discovery of assets simple by having so called Liquidity Providers be the Makers of the market.

While being simple and easy to use, especially as a Liquidity Provider, these AMMs lack efficiency, as Market Makers cannot express their own strategies that decide how and when their inventory should be sold. This leads to liquidity being used in a very underoptimized fashion resulting in high liquidity costs as a lot of liquidity is required to be present for a relatively small amount of trading volume to be facilitated.

Next generation AMMs are more efficient, but too complex

Meanwhile, the concentrated liquidity nature of Uniswap V3 provides a solution to the low capital efficiency of legacy AMMs. However, this gain in efficiency comes at a cost of substantially higher complexity and risks. Without a layer on top of these concentrated AMMs that helps to realise the liquidity efficiency potential while making it accessible to a wider audience, DEXs like Uniswap v3 will still lack behind their centralised counterparts.

Traditional Market Making solves the complexity for CEXs

This layer which is built on top has long been present in traditional CEXs. This is the reason why they still have the vast majority of trading volume of crypto assets today. For most assets, CEXs still provide significantly tighter spreads and more efficient asset allocation. The primary reason for this is because CEXs have access to a mature ecosystem of institutional market makers. Even though traditional market makers are custodial, non-transparent and expensive, market participants like protocol teams still have to use them today as they are the only way to gain deeper liquidity on exchanges.

Well, at least until now...

Last updated