A Battle for Liquidity
“Thy who controls the liquidity, controls the DeFi universe.”
- Anonymous DeFi Degen, 2022
To those familiar with legacy finance, it comes as no surprise that it is a capital-intensive business. Banks rely on deposits to transfer value via withdrawals, remittances, and credit services. Stock brokerages use stocks held by one customer to enable short-selling by another. Insurance firms collect premiums from those insured to pay out claimants.
DeFi is not dissimilar in this regard, except instead of paying a centralized financial entity to provide these services, value (read: profit margins) accrues to token holders in the form of a shared project treasury, reduced supply of tokens via burning or buybacks, inherent demand for governance tokens to redistribute value, or a combination of the above. In this way, users (often token holders as well) become their own bank, creating a flywheel effect that has propelled DeFi markets to where they are today.
Automated Market Making and Deep Liquidity Pools
DeFi’s first big stride came from disrupting how markets are made on a decentralized exchange (DEX). In lieu of relying on traditional market makers via the order book model, Uniswap1 piloted the Constant-Product Automated Ma...Reports you may have missed
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