As each day passes, I think about possible ways we can break free from the control of centralized exchanges and on/off ramp services.
The latter is undoubtedly going to be the hardest piece to crack, given the nature of the system needed for its facilitation. KYC will probably always be a thing here and the only way to not be known is to fake an ID, but that's just too much work(trouble) for the average person.
But there's far more control issues facing crypto than on-ramp services, and at the top of the list of centralized liquidity. Over the years, DeFi, through decentralized exchange solutions have attracted a great deal of liquidity and volume, but it's not nearly where it's supposed to be, not just in a general trading sense, but as a known feature.
Think about it for a second, when people hear the name “Binance” in a token listing news, they are generally excited because it means “high liquidity” attraction.
You can't say the same for Uniswap or any other decentralized exchange. Matter of fact, the reverse is what comes to thought and that's that listing will underperform, volume-wise.
As much as it is a technical fault, it's also a branding problem and both need work.
Build It, Make It Community-Powered
I initially was going to title this piece “Decentralized market making is an urgency to scale DEX listings” but I figured that decentralized market making already exists, but it's just not designed and branded to serve the concept of having a “market maker.”
The market makers on a decentralized exchange are specific to each trading pair, meaning that they differ across the board, just as with centralized exchanges.
The problem however, is that with a centralized exchange, end users generally aren't thinking of market makers as separate bodies to each pair, but rather, a collective serving the exchange in entirety.
It's pretty ironic that we think that of a centralized platform but not of a decentralized platform.
Now I'm not going to sit here and pretend I know the inner workings of a centralized exchange because one can't truly know. But if I were to make any guesses, it's every project to its own market makers that are paid to do what they do best.
However, due to general branding of exchanges and emphasis on market influence, sentiments swift towards positive corners when listings are announced by specific players, essentially attracting various market markets and individual traders across the board.
So evidently, it's technical and branding.
Incentives Changes Everything
What we want to do is build an entire integrated incentive protocol for what we can call “Instance Liquidity.”
What this is, essentially, is a sort of standby liquidity solution for new token/market launches. The general idea is to provide an efficient alternative liquidity solution for new project tokens to hit the market, thereby restricting how much we have to be reliant on centralized exchanges.
In the way I've thought it, there isn't currently something like this.
We could employ a DAO-approach to instant liquidity or work with individual time-lock contracts with unique customizations that are adjustable at any given time, manually, or autonomously by secondary smart contracts.
Given that the process has to be as smooth as possible, each maker has to be ever willing to risk their liquidity in fresh markets in return for protocol and project-offer incentives.
Whilst both approaches, realistically, will require locking liquidity into a smart contract, only one will come with less friction and risk.
A DAO approach will require consensus of each liquidity provider to support each fresh listing using a single strategy - each time, whilst the individual approach will not require consensus and each maker deploys liquidity with their own set strategies, autonomously through active market tracking and incentive and sentiment analysis, this could include concentrating the liquidity to a certain price level, which controls capital risk exposure but also reduces their potential income from fees, protocol rewards and project-allocated incentives.
A well thought out design should generally allow liquidity providers to decide a minimum liquidity injection by project teams they are comfortable with, and this would generally also determine the initial price range.
At the same time, the protocol design also has to allow projects to decide how their allocated rewards for market makers is distributed. Generally, free flowing makers would get a higher share whilst all concentrated liquidity gets less for playing safe and depriving the market of liquidity at specific price points.
With the right design and branding, this becomes a whole new piece of work for value flow and we can rival exchange volumes as market makers now have far more open incentives void of centralized bottlenecks and projects can worry less about compliance and take those large payments made to exchanges to incentivize instant liquidity, decentrally.
Posted Using INLEO