Defi market making is a burgeoning industry in the decentralized finance space. AMMs, aka Automated Market Makers, have become a staple of the decentralized exchange industry, and are an excellent means of facilitating the exchange of assets at a desired price. However, market makers must be cautious about the risks involved. Among other things, borrowing inventory from other participants is a major challenge. In addition, the market maker must be mindful of the risks posed by price fluctuations. If the market maker is uninformed, he may not be able to make the best of a situation.
Besides using smart contracts to automate trading activities, market makers will also participate in liquidity pools. These pools provide the market maker with the ability to pool funds to trade and act as a counterparty. The market maker will earn a passive return on capital, and the popularity of the pool determines how much revenue the market maker will earn from fees.
Other innovations are worth noting, such as the Opium protocol, which uses meta-transactions for order matching. This has the benefits of being faster, cheaper, and more scalable than the traditional layer-2 technology used by order books. Using meta-transactions reduces the risk of human error and allows for more transactions to be conducted per second.
Besides, the STOverse platform, a security token issuance and management platform, is designed to help security tokens gain a foothold on the DeFi exchanges. Licensed by FINMA, the Swiss regulators, it is a regulated venture that will also attract institutional investors. It is a promising start for a new breed of financial intermediaries.
There are many other innovations to be found in the DeFi ecosystem. An example is the Automated Market Maker, a cleverly engineered system that pools liquidity and gives users a price quote for each token. Unlike the centralized order book, the DeFi market maker uses algorithms to trade on multiple exchanges.
Another important innovation is the use of a smart contract, which eliminates the need for human intervention and allows for transactions to be completed in a matter of seconds. Even the largest market makers are limited in terms of capital. They cannot serve the entire market, so they must work with partners to provide liquidity. Whether the market maker is using the best-of-breed methods or partnering with an exchange, he is ensuring that the right people have access to the liquidity they need.
A number of new protocols have come to the market in the last year, some of which have stood out in their own right. One is the Serum DEX, which is attempting to implement a hybrid model. Others are experimenting with new trading rules.
Several of the more notable innovations have already been implemented by other projects. For instance, the Uniswap V3 has returned to order book principles in a more manageable way, while the FTX Serum DEX is seeking to implement a hybrid model. Likewise, the dYdX has implemented a similar mechanic.
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- Source: Plato Data Intelligence: PlatoData.io