AMMs are essentially an innovation around gas costs on the EVM. It is an approximation of order book without the requirement to store all the orders. I don't think this kind of optimization is necessary in tradfi markets and the additional features of a Central Limit Order Book outweigh the benefits of using an AMM imo.
My issue with central limit order books is that every asset is gatekept by the need for active market makers to provide the limit orders, it relies on money deposited at a particular exchange to be non-posted orders, it relies on stub quotes, it relies on strict regulations and deputization of exchanges to enforce behavior of market maker’s limit orders
These are expensive things to maintain.
Whereas with AMMs and liquidity pool assets, the community can provide liquidity, have a passive income stream, build new markets for the liquidity pool shares, and have routing between different asset’s liquidity pools such that the base currency isnt as important.
I like limit orders, especially for accumulation at the same price, but with the advent of this method I see more benefits. AMMs with ranged liquidity fulfills what I like about limit orders too.
Might be relevant to note that most markets are not using limit order books much (eg, FX, bonds, rates OTC). No one there would want to run purely formulaic market making as prices can gap etc.
I agree with idea/interesting concept of making market making better investible, tough.
Prices gap due to illiquidity and markets being closed, in an AMM if a price should gap people can still get it there, but I can also see the reality of the AMM preventing people from just switching to the correct prices in the bids and asks without making unnecessary fills along the way. I just think that kind of coordination is so uncommon in traditional markets that its not worth the distinction.
Illiquidity is one possible reason, news and actions are other ones (e.g. Swiss Franc peg and removal of peg in 2010s, credit events etc.). No need for markets being closed or illiquid, just people figuring out a new state or straight jumping to it - and that expresses itself in a lack of liquidity sometimes, but it's not the cause.
Yeah AMM liquidity pools suck at repricing, this got me thinking… maybe liquidity providers can just disable their particular liquidity pool share in such an event. The goal is to see what price people will buy and sell at, which is what market makers do all day every day in other systems.
(I’m sure people will try to abuse that to warp liquidity, but they already can by unwinding and removing their share.)
I would argue AMM go beyond just evading gas cost. It sounds redundant to say, but an AMM eliminates the need for active market makers; or put another way, anyone can be a market maker. I think that's an interesting thing--previously there was no very effective way for me to participate in market making (and the potential profits of such), but with an AMM it essentially becomes a passive investment.
Market making, at least in stocks, is already very well-automated. They are extremely efficient businesses; they need to, because they take million-dollar risks just in hope to make a few hundred bucks each time, and pay a lot of that in costs.
By EMH there's no such thing as free lunch or true passive income. This is especially true in trading. Profit-seeking activities with low barrier-of-entry eventually become races to the bottom. If there's easy money to be made with passive AMM, people will jump into it en masse and eventually compete on cost-saving. Much like mining, where electricity costs and how quickly you can fix mining rigs with few resources could make and break a farm.
That is true up to a point, however with the "passive" aspect you get exposed to "impermanent loss", which is a loss in value due to the relative price fluctuations between the two assets in the AMM (https://www.machow.ski/posts/an_introduction_to_automated_ma...). As in most things in finance, TNSTAAFL.
