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0/ Some thoughts on the upcoming evolution of liquidity in the DEX market
TLDR - the DEX space is going to look and feel a lot more like the CEX space (deposit, trade, withdraw), but it will retain DEX's native non custodial and censorship resistance
TLDR - the DEX space is going to look and feel a lot more like the CEX space (deposit, trade, withdraw), but it will retain DEX's native non custodial and censorship resistance
1/ There are two core problems at hand: gas fees (which is a function of throughput), and latency
Gas fees are high now (partly because of some ponzis), but mostly because DeFi is growing!
Gas fees are high now (partly because of some ponzis), but mostly because DeFi is growing!
2/ The other challenge is latency: FutureSwap ended their alpha because of a lot of trades were just arbs, and the same is true with Synthetix and other DeFi trading platforms
Basically, they can't update their prices fast enough, so arbitrageurs wreck the liquidity providers
Basically, they can't update their prices fast enough, so arbitrageurs wreck the liquidity providers
3/ Synthetix has done a public demo with Optimism, and most of the major DeFi trading venues are all considering some sort of layer 2 solution such as @SkaleNetwork
4/ Most of the layer 2s have instant deposits, but not all of them have instant withdrawals. In fact, the ones based on ORU have 1-week withdrawals!
5/ Will the various defi protocols converge on a single layer 2 protocol and instantiation?
Very unlikely, because each of the layer 2s comes with different trade offs, and so each DeFi protocol team is optimizing for different things
Very unlikely, because each of the layer 2s comes with different trade offs, and so each DeFi protocol team is optimizing for different things
6/ This has other interesting side effects:
For example, this reduces the efficacy of liquidity aggregators like 1inch and http://dex.ag because l2 trades become non-atomic
For example, this reduces the efficacy of liquidity aggregators like 1inch and http://dex.ag because l2 trades become non-atomic
7/ Since all of these layer 2s by definition require 100% collateralization - and it's very unlikely any of them will support cross collateralization - liquidity is going to fragment and become *worse*
8/ How do you solve this problem? Not clear. Even eth 2 doesn't really solve this problem, as sharding creates the same basic problems as well
Feel free to weigh in with thoughts!
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Feel free to weigh in with thoughts!
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