DEXs as DAOs – Nate Hindman

hello hello all right it is a liquid afternoon here at eat Denver there's some there's a little bit of overlap in our talks but there is some new stuff I promise so I'll try to breeze over places where where Dan is hit but as you can tell a lot of people in this space are excited about decentralize liquidity and defy liquidity in general I want to hone in specifically on liquidity based on automated market makers and so the the agenda for today is gonna go over these topics what is decentralize liquidity the landscape what people are doing to advance this financial primitive and also the kind of token ah mcc's of decentralized liquidity protocols and a little side note is you know just in terms of language I'm gonna use automated market makers and liquidity pools those terms interchangeably and also liquidity providers and stay curse I'm gonna use those terms interchangeably too so just don't get tripped up on that so just a brief background on bank or Bank and on chain liquidity protocol it performs automated decentralized exchange on a theory Amanda cross blockchains when it went live in 2017 it was the first decks based on automated market makers and then in the past few months we've seen locked liquidity grow to over 13 million as thousands of users are now staking their funds in decentralized liquidity pools on bank or 2 billion in total trade volume and there's been 2 million over 2 million in total fees paid out to stay kurz so let's just get into background it and why we care that's primitive and why it's so cool up until now pretty much every exchange relied on professional market makers and Wales to fund the liquidity needed to trade to process these traits and so this leads to liquidity sources being centralized within small handfuls of market makers and you know if these liquidity sources are shut down the exchanges liquidity dries up rendering the exchange unusable so on chain market makers enable the creation of user own exchanges where liquidity sources can be distributed across an infinite number of users anyone can easily stake liquidity on the exchange for trading fees and this creates kind of open and resilient layer of user-generated liquidity and so you know I know Dan covered some of this stuff too but just gonna breeze over it what our automated market makers anyone can can spin up one of these smart contracts they typically at this stage hold two assets in their reserves but but as we've discussed that's expanding these reserves replace order books it's you're essentially trading against code instead of trading with other humans and then the more liquidity staked the lower the cost of trading against the pool and so then when we connect these automated market makers together we get liquidity protocols and and liquidity protocols connect via common reserve token creating a liquidity network in bankers case that common reserve token is BNT and in the case of you know swap which is another liquidity protocol that kava Network token is e and this allows the automation of listing anyone can create one of these pools which lists the token in a registry the trading so the organized of order books this all happens all the trading happens with smart contracts and then revenue capture which is which is really that the key piece of this the circulation of revenue goes to stagers via pool tokens which are essentially these token eyes pieces of these decentralized liquidity pairs so you know as I said anyone can stake inside one of these market makers they can market make in just a couple clicks on the left is a zero on a platform that's integrated with bank or where you can just stake your tokens you do it with equal value and both the tokens typically and then you generate these pool tokens which generate fees off of trade volume and then as as discussed before you can also collateralize pool tokens so so we're starting to see the connection to lending protocols where you can get you know compounded returns and so typically users track pool tokens since you're effectively holding two of the reserves they're typically tracked by thinking about it as a sort of 50/50 hold plus the conversion fees that are generated by the pool and so this is a you know this is kind of metric return versus holding is showing the return you would get from holding the two assets on their own versus versus holding the pool tokens and the price growth that you see from those so this is the decentralized liquidity landscape you know sort of handpick the sort of key players here and you know starting from the bottom you can think of the stagers these could be again everyday users professional market makers they could be token teams that want a more liquid token and they're the suppliers of liquidity to the protocol layer which then tokenized as the liquidity and it exposes it to the application and the aggregation layer and what we're seeing that you know super disruptive is these aggregators blending liquidity across multiple protocols to fulfill trades and then at the top you have traders which are really driving the demand and I want to hone in again on these aggregators who have you know had a very disruptive impact in the landscape in in recent months as they developed a sort of path optimization algorithms and as you can see is different paths of the token trade are coming from in this individual shade from from engine one is coming from bank or the the sort of the engine to to be in T and then that's getting traded they're bundling that up into a trade and you know in traditional finance you can think of this as kind of smart order routing and so you know it's it's worth calling attention to to the fact that we're seeing a sort of blurring of the protocol layer and the application layer you know as you can see Khyber and 0x which really made a name for themselves as aggregators of liquidity you know really also starting to invest in automated market makers and and so that's just worth calling attention to and you know you can think of a though it's also worth calling attention to a kind of clear distinction here between aggregated liquidity and proprietary liquidity on the aggregated liquidity part we're really seeing a sort of race to the bottom right demand is always going to shift in real time to the lowest prices and the ability for aggregators to place a fee on top of aggregated liquidity is really really shrinking we've already seen khyber remove fees from its aggregated liquidity and then we've seen on the proprietary liquidity so where you sort of own the liquidity a race to the top where supply is shifting to pools with the highest yield or highest APR and so from from my perspective that the revenue potential from proprietary liquidity is significantly greater and it's why we're seeing aggregators trying to become supply siders so one inch launching its own private market making pool para swap doing the same like I said Qyburn 0x investing heavily in automated market maker technology so so we're seeing a lot of aggregators sort of blend blend into the supply side so what is the next phase of automated market makers and you know it's funny there's a kind of almost identical slide and indents in Dan's presentation that sort of shows you know how liquidity but gets liquidity driving low slippage volume fees and then and that's really how you achieve a sort of deeper pool and this kind of fierce competition among decentralized liquidity players has set off a an explosion in innovation among the protocols who are launching these sort of second generation and third generation liquidity pools that are optimized for both stagers and traders and balance the interests of both parties and that the real name of the game is sort of increasing capital efficiency and and compounding fees in in these automated market makers so I want to highlight a few areas where we're seeing a lot of innovation in this primitive you know you can think of the the fees and the weights or the reserve ratios of automated market makers as the sort of parameters and those were you know up until now mostly fixed in unis WAP it's point three percent bank or you can set the fee to whatever you want and update it we're really gonna start to see dynamic fees and dynamic weights that respond to sort of network signals the number of reserved as we spoken about is gonna you know very quickly expand from two to creating arrays of different tokens and then on slippage this is a really cool part because it kind of reminds you that the end of the day you're not really trading with humans you're trading against code and in that code you can sort of set set the conversion calculation for the contract to sort of spoof it into thinking there's way more liquidity in the actual reserves so this brings down slippage a lot and we're seeing a lot of really cool experimentation in that Bank or itself has launched a sort of virtual reserve mechanism where that's possible and then lastly on the rewards side you know up until now the primary rewards the incentive for liquidity providers were trading fees and we're seeing that really expanded to to a bunch of other different type of rewards this could be from the token project we've seen synthetics do it too you know incentivize their liquidity providers and then very you know unique to liquidity protocols with protocol tokens is you can also give protocol level rewards and and that's something I want to sort of dive into and then then the last right there is is pool token leverage so that's again taking pool tokens and staking them and collateralizing them in in places like compound and other places and so this is kind of breaking out these kind of for three different rewards for LPS you know Jarvis is a project that we work with that Bank or they've set up a liquidity pool and they're incentivizing their liquidity providers with roughly five percent of network revenue that they generate from their network and that's getting air-dropped in a weekly or weekly basis to their wallets so again for the stagers you're seeing the conversion fees as one reward the liquidity provider incentives is a second and then and then very interesting I'm sorry that's the statement was very interesting Lee Bank horse BNT stay key rewards are getting launched in the next few months and BNT stay key rewards will be voted on by the bank or community essentially it will be inflation on the BNT token and the community will then vote to which strategic pools those protocol rewards get air-dropped onto so it could be any number of pools on the network and we expect to see that really increase and drive the ROI and the incentive to stake inside those strategic pools and so the you know it's it's wick on out that the protocol reward specifically does require a sort of protocol token and this really takes us to discussing the court of court token ah mcc's of decentralized liquidity protocols and and something that often comes up a lot is why would bank or use a protocol token you know swap has gained some traction using aetherium as its base token as it's sort of network token if theorem exists within all its liquidity pools and on bank or PMT exists within all its liquidity pools so there are definite advantages and also drawbacks to having a protocol token so in terms of liquidity provision you know aetherium is a more widely held asset than BMT so this does create a little friction for users when adding liquidity into a pool but this is Mehcad this is you know being addressed with sort of new mechanisms that allow liquidity provision and exposure to only one token within the pool and and so you know when you think about protocol rewards this is something that is what would be quite inefficient to do with aetherium or a blockchain level asset but again with BNT this is generated through the anti-inflation that the community will vote on and that enables these protocol level rewards to land on these pools and then the third kind of a key area to look at and an advantage that we see is that there's a very strong correlation between protocol usage and the prices of BNT so this is key because you know many factors influence the price of evening and therefore the liquidity pools of you know swamp but you know so so on bank or staking inside bank or liquidity pools has a direct impact on the price of PMT since you must hold PMT to provide liquidity so this means that as more liquidity is added to a pool every pool on the bank or network becomes more liquid and then a final sort of key advantage of using a protocol token is cross chain liquidity instead of having to wrap eath for each pair BMT mints and destroys itself across block chains and enables cross chain conversions to occur so in any case you know as Dan as Dan said and as we agree this is not sort of winner-takes-all game the emergence of automated market makers is so disruptive that you know we believe there will be many players in the circle clear synergies between the protocols to so having a pool on both you know swap and bank or will create a stronger price Oracle Oracle it will also create arbitrage between the two pools that can be really crucial for the early days of a network and of the early days of a pool and this this chart right here is taken from Jacob Horne from from coinbase you know he forgot that the bank or logo so so I've added that form and essentially you know you look and look at you know audited decks based automated market makers as a sort of liquidity of first resort for low volume low cap tokens that are really failed by the order book based model so this is again early stage tokens we're seeing a lot of innovation in social money and personal tokens this could be you know real-world community currencies bankers experimented with different community currency pilots in Africa in different areas of the world so you know we see this this forming a sort of base layer of always accessible liquidity liquidity of first resort for the sort of early stage early stage tokens and low cap tokens of the world and this is really where we're decentralized liquidity can shine where we're seeing a lot of activity in the bull market as new networks and new tokens are coming to market and so finally you know we we have bounties here that we're encouraging everyone in the developer community both here and then also virtually on get coin to hack on our pools to you know design new new pool mechanisms there's sort of beauty of this space is that the this you know the smartest the highest yielding pools will win and can get relatively easily implemented at the protocol level and so you know we're encouraging or encouraging people there three photos there are folks from the bank or team along with myself or here to to help with hacks we also have bank or developer grants for for anyone who integrates you know bankers liquidity liquidity protocol and you could always you know connect with us on telegram and our Docs the link to our Docs is right there as well and and that is all thank you so much and and I can take any questions to if we have a few minutes I'm not sure if we do all right everyone's had enough of liquidity haven't it okay cool well thank you guys so much really appreciate the time [Music] you