AMMs today are the most successful products in DeFi. The massive trading volumes of Uniswap testify to the power of permissionless AMMs.

But AMMs like Uniswap are exceedingly simple. While simplicity is at first a virtue — it’s much easier to bootstrap and secure a simple product — it also eventually becomes a liability. Over time, it will be harder and harder for Uniswap to keep pace with the cutting edge of algorithms.

Uniswap uses only a single variable in determining its pricing: the quantity of assets it holds in inventory. Smart market makers care about their inventory, but they also care about external volumes, historical price data, and real-time volatility. …

Uniswap today is the single largest “exchange” on DeFi. It routinely posts volumes larger than most centralized exchanges. Uniswap has revolutionized DeFi, brought billions of dollars in trading volume, and sparked a Renaissance in AMM (automated market maker) design. In my previous post, I explained how Uniswap works and why AMMs are dominating DeFi trading volume.

But I believe it’s inevitable that Uniswap is going to be unbundled.

I know this is a bold claim. So what comes after Uniswap?

To understand where this market is going, you first have to understand the the four key features that Uniswap bundles…

Imagine a college friend reached out to you and said, “Hey, I have a business idea. I’m going to run a market making bot. I’ll always quote a price no matter who’s asking, and for my pricing algorithm I’ll use x * y = k. That’s pretty much it. Want to invest?”

You’d run away.

Well, turns out your friend just described Uniswap. Uniswap is the world’s simplest on-chain market making operation. Seemingly from nowhere, it has exploded in volume in the last year, crowning itself the world’s largest “DEX” by volume.

If you haven’t paid close attention to what’s happening in DeFi in the last year, you’re probably wondering: what is going on here? …

Haseeb Qureshi

Investor at Dragonfly Capital. Formerly Metastable, @Airbnb, @earndotcom. Writer. Effective Altruist. Former poker pro. One always finds one's burden again.

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