The shortcomings of AMMs

Despite the rapid growth of AMMs, there are still some shortcomings that need to be addressed.

Donex Finance
3 min readMar 2, 2023

Decentralized Finance (DeFi) has become one of the most popular and fast-growing sectors in the crypto industry. Automated Market Makers (AMMs) are at the core of the DeFi ecosystem, providing liquidity for trading pairs on decentralized exchanges. Despite the rapid growth of AMMs, there are still some shortcomings that need to be addressed.

High Slippage & Low Capital Efficiency

One of the most significant shortcomings of current DeFi AMMs is high slippage. Slippage is the difference between the expected price of a trade and the actual price at which the trade is executed. The higher the slippage, the more costly the trade becomes. In traditional centralized exchanges, slippage is minimal, but in DeFi, it can be quite high due to the illiquidity of some assets.

DeFi AMMs also suffer from low capital efficiency. In AMMs, liquidity providers (LPs) provide their assets to the liquidity pool and earn fees for providing liquidity. However, the capital utilization in these liquidity pools is often low, as only a fraction of the total pool is used for trading. This leads to low returns for LPs, making it less attractive to provide liquidity.

Donex Finance tackles these problems by applying Concentrated Liquidity. In traditional AMMs, liquidity providers have to provide liquidity across a full range of prices, resulting in a lower capital efficiency. With Concentrated Liquidity, LPs can concentrate their liquidity around a specific price range, reducing slippage and improving capital efficiency.

High Gas Costs on Ethereum

Another significant shortcoming of DeFi AMMs is high gas costs on the Ethereum network. Gas fees are the fees paid to miners to process transactions on the blockchain. The high demand for transactions on Ethereum has led to an increase in gas fees, making it uneconomical for small investors to participate in DeFi.

Donex Finance tackles this problem by deploying on Starknet, a Layer 2 network which reduces gas fees and improves transaction speed. By leveraging Starknet, users can enjoy a seamless DeFi experience without having to worry about high gas costs.

Impermanent Loss

Impermanent loss is a phenomenon that occurs when LPs provide liquidity to an AMM. Due to the volatility of the assets in the liquidity pool, the value of the LP’s assets changes over time. This can result in the LP losing some of their assets when they withdraw from the liquidity pool. While some protocols offer solutions to mitigate impermanent loss, it is still a significant risk for LPs.

Donex Finance tackles this problem by allowing LPs to concentrate their liquidity around a specific price range. By concentrating their liquidity, LPs can minimize their exposure to impermanent loss, resulting in higher returns and less risk.

Limited Asset Support

DeFi AMMs currently support only a limited number of assets. This limits the trading options for users and makes it difficult to diversify their portfolio. The limited asset support is also a result of the illiquidity of some assets, making it uneconomical to provide liquidity for those assets.

Donex Finance seeks to establish partnerships in the Starknet ecosystem to increase the support and boost liquidity for a wide range of assets including ERC-20 tokens, stablecoins, synthetics and tangible assets. By supporting a wide range of assets, users can diversify their portfolio and take advantage of the full potential of DeFi.

Conclusion

While DeFi AMMs have revolutionized the crypto industry, they still suffer from several shortcomings that need to be addressed. High slippage, gas costs on Ethereum, low capital efficiency, impermanent loss, and limited asset support are just a few of the challenges facing the DeFi ecosystem. However, with the ongoing development of Donex Finance these challenges are likely to be addressed in the near future.

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Donex Finance
Donex Finance

Written by Donex Finance

Seamlessly trade, swap and stake digital assets on #StarkNet.

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