There have been plenty of discussions on AMM v.s. orderbook, most of which focus on the technical parts: capital efficiency, price discovery, etc. However, few seem to have realized that the battle between AMM vs orderbook is way more than just a technical choice of financial trading business. Orderbook is the technology adopted by the old “financial aristocrats”, a.k.a. Wall Street, to rule and expand their financial empire. In contrast, AMM is the fintech of the people, by the people, for the people!
Let’s look at three exchange trading scenarios, in which liquidity is provided in different ways.
The traditional way: This is typical in traditional finance: liquidity for exchange trading is usually provided by a privileged class, the so-called Designated Market Makers. This privileged class is usually closely connected to the exchanges in the name of market-making licenses. With the licenses, they usually enjoy a series of privileges and advantages:
Crypto centralized exchanges: While many centralized crypto exchanges still follow the old wall street traditions, there is something new. Bitmex, for example, differentiates the parties of a transaction into two sides: a maker and a taker. While the taker pays the taker fee (e.g., 0.075%), the maker receives part of it (e.g., 0.01%) as “maker rebate”. Also, everyone can see the whole orderbook on Bitmex. Essentially, Bitmex has dropped the identity threshold and substantially democratized the market-making business. So anyone making a quote into the orderbook is part of the market-making business and thus shares its profit. So far, things have somewhat improved: the club’s door is now open to the Main Street people. However, whether you can join the party or not depends on how well you can dance. Marketing-making on Bitmex is not easy at all. In fact, it’s way beyond the ability of average Main Street people.
AMM by DeFi: AMM has (almost) completely removed the threshold for providing liquidity to trading: you don’t have to be a skilled expert, let alone an “aristocrat”. The only skill you need to master is operating a web3 wallet, e.g., Metamask. For the first time in history, AMM has made it possible for Main Street people to participate in liquidity-providing of trading business. This is the case for Uniswap, Curve, Balancer, DODO, Sushiswap in the spot trading sector, and also the case for Deri, Perp, GMX in the derivative trading sector.
Let me summarize the requirement to provide liquidity for trading:
In case 1, due to the privilege and skill bars, a handful of companies have monopolized the business. This cash-printing-machine business made them colossal wealth, which further strengthened their monopoly. Essentially, they have become a class of financial aristocrats.
In case 2, even though the privilege bar is dropped, it is still largely the same bunch of people from case 1 doing the business. If you know the big players of crypto market making, you know what I am talking about. After all, that is what they have been doing for decades. Even without the privilege threshold, their skill advantage still puts them on a significant edge. This skill advantage is based on how to play with orderbooks. That is why orderbook is the technology adopted by the old “financial aristocrats” (a.k.a. Wall Street) to rule the financial empire on the old lands and expand it to the crypto new lands.
In case 3, usually one can participate in the liquidity-providing for whatever trading objects with a few clicks. As this procedure barely requires any expertise in market making, it really opens up the door for Main Street people.
Transaction fees generated by the USDC-ETH pool on Uniswap V3. Anybody can participate in the liquidity-providing and share these fees without market-making expertise. (Screenshot taken from info.uniswap.org as of 2022-6-25)
In short, AMM is the fintech of the people, by the people, for the people!