Market Making and DeFi

Providing liquidity to a decentralized exchange can be a daunting task. Fortunately, several projects have tackled the issue using innovative solutions. These innovations include a slew of decentralized trading tools, a new breed of market makers and an AMM that has already proven its worth in the fast growing DeFi ecosystem.

The first thing to understand is that there are multiple types of market makers, and not all are created equal. The traditional market maker is a financial institution that guarantees to buy securities at a specific price. However, many of these providers are actually individual traders who make market savvy trades for a fee. Depending on your goals, a professional market maker may or may not be in your best interest.

One of the more notable market making achievements is the creation of an AMM, which provides much needed liquidity to decentralized exchanges. Unlike centralized exchanges where liquidity is typically obtained through an exchange intermediary, such as a third party, the new breed of exchanges is able to bypass the middleman and directly match buyers and sellers. In some cases, market makers may even gain a slice of ownership in the venture.

For example, projects like Curve, DODO, and Bancor offer their users innovative solutions to common liquidity needs. They offer a wide range of tools to help manage risk, optimize efficiencies, and bolster security. Another nifty device is the Balancer, which stretches the limits of Uniswap and expands the capabilities of AMMs in general. Similarly, the Curve ocular is a clever solution that delivers on the promise of lower rates than its counterparts. It’s not just the company name that makes the Balancer unique, it’s also the technology that allows users to create a liquid pool that can hold a wide variety of assets, from stocks to ETFs.

The market maker is probably the most important component to a successful DeFi implementation. This is especially true for a decentralized exchange that is not dependent on a central party for order matching and other vital functions. Market making has always been an important part of the business, but the advent of smart contracts has made it even easier to automate a large scale process. With a proper AMM in place, a large decentralized exchange can become a thriving business in a fraction of the time it would otherwise take. Using the right tools to manage the risk, the new breed of market making DeFi projects have made it possible for investors to enjoy a level playing field.

While the creation of an AMM has a number of advantages, it also has some drawbacks. The main stumbling block is a lack of liquidity in the market, and the cost of providing this vital service. There are a variety of ways to solve this problem, from crowdsourcing to a suite of supporting tools. Thankfully, projects such as the above mentioned Curve, CoFiX, and DODO are laying the foundations for a decentralized fintech industry that is set to explode in the coming years.


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