Market Making in DeFi

Max
Max
Dec 24, 2020 · 4 min read

KeyTango- The easiest way to get started with DeFi.

KeyTango is a Web3 application made for those who are struggling with complex UI/UX that looks straight out of the Bloomberg terminal, which acts as a frictionless gateway to popular DeFi products and services ready to be unraveled within a couple of clicks. Unlike Yearn, which takes some familiarity with deep DeFi as granted, we offer easy to grasp and navigate UI/UX, that empowers you with tailored content and suggestions based on your level of experience and your blockchain history

In today’s series, we’ll be taking a closer look at some of the key concepts in Market Making. You may be familiar with the term when it comes to the traditional financial world, but you’ll definitely need a speed boost to grasp the term’s position in the DeFi domain.

Market Making (MM)

In essence, Market Makers define liquidity and depth indicators in financial markets. They monitor the price of assets they are making in real time and they seize the opposite to the market trend which is often found in an advantageous position. Simply put, when most traders on the market try to sell an asset, market makers would buy it, and when most traders on the market try to buy an asset, market makers would sell it.By doing so, market makers play a regulatory role in asset price while preventing unpredictable spikes in price due to poor liquidity.

Traditionally, a market maker is a firm or individual who actively quotes two-sided markets in a security, providing bids and offers (known as asks) along with the market size of each. The most common type of market maker is a brokerage house that provides purchase and sale solutions for investors in an effort to keep financial markets liquid. However, DeFi allows any investor to market make using Automated Market Makers.

Automated Market Makers (AMMs)

You can think of an automated market maker as a robot that’s always willing to quote you a price between two assets. Some use a simple formula like Uniswap, although more sophisticated approaches such as the ones handled by Curve, and Balancer among others are gaining popularity in parallel with time..

On AMM-based decentralized exchanges, the traditional order book is replaced by liquidity pools that are pre-funded on-chain for both assets of the trading pair. The liquidity is provided by other users who also earn passive income on their deposit through trading fees based on the percentage contribution of the liquidity pool.

Not only can you trade confidently using an AMM, but you can also become the “house” by providing liquidity to a liquidity pool. This allows essentially anyone to become a market maker on an exchange and earn fees for providing liquidity.

Players in the market

-Uniswap

Uniswap was the first true decentralized AMM to enter the market in November 2019. Uniswap allows for anyone to deploy a liquidity pool on the network, and enables any other trader in the ecosystem to contribute liquidity.

-Balancer

Balancer is considered to be the pioneer of AMMs recently released onto the market. Balancer functions similarly to Uniswap but also offers industry-first, dynamic features that enable the protocol in having a broader arsenal of AMM use-cases.

-Curve

Another yet fresh AMM protocol to enter the DeFi ecosystem in early 2020 was Curve Finance. Curve has admin-only generated liquidity pools where everyone can contribute to these pools, but they have one big distinction; Curve’s liquidity pools only support stablecoins.

Curve’s decision to focus on only stablecoins is a feature and not a limitation. By offering stablecoin only liquidity pools, the exchange is able to complete large trades with low slippage due to its concentration of deposits in its limited amount of pools.

Conclusion

AMM technologies are providing primitives for accessing immediate liquidity for any digital asset. Not only do AMMs create price action in previously illiquid markets, but they doso in a highly secure, globally accessible, and non-custodial manner.

While AMMs are not spearheading the fintech ride, the innovations around greater capital efficiency, multi-asset pools, and mitigating impermanent loss provide the necessary infrastructure to attract large-scale traditional liquidity providers that have been looking for a viable angle to tap into DeFi.

About keyTango

Want to learn more about DeFi with keyTango? Sign up for our beta at keytango.io, and stay up-to-date with our latest developments, and get whitelisted for our upcoming token sale. Have friends that don’t like to read? You can find the relevant video explainer at the official keyTango youtube channel.

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keyTango provides the easiest way to get started with DeFi.

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