Learn about the game-changing DEX and the faith-horse Uniswap in one article

BTC0.0₂₀

ETH0.0₂₀

HTX0.0₂₀

SOL0.0₂₀

BNB0.0₂₀

BTC0.0₂₀

ETH0.0₂₀

HTX0.0₂₀

SOL0.0₂₀

BNB0.0₂₀

Learn about the game-changing DEX and the faith-horse Uniswap in one article

WOO Network

2021-03-23 06:40

本文约2744字，阅读全文需要约11分钟

This article is the first in the series of AMM automated market makers, and will focus on decentralized exchanges and Uniswap.

The recent currency circle can be said to have witnessed one big show after another. First, on January 2, Bitcoin broke through 30,000 US dollars, and on January 8, it broke through the highest mark of 40,000 US dollars in history. According to OKEx data, Dogecoin DOGE, which has always been favored by Elon Musk, soared to 0.084USDT on January 29, with a maximum increase of 1057%, and its market value soared to 20 billion.

As early as July 2020, Dogecoin skyrocketed once because a Douyin was blocked by Trump, and the price doubled. This surge is inseparable from the recent "GME War", and it also injects a magical force into the opening of 2021.

secondary title

rise up wall street

Just at the beginning of this month in the United States, under the leadership of some retail investors, some retail investors broke through the defense line of the top hedge funds and raised the stock price of a stock GME. . This company, Game Stop, was originally a company that sold game discs. It was facing a crisis of being completely replaced by video games, so it was shorted by many Wall Street institutions.

In order to defend their beliefs, retail investors with "childhood memories" and "nostalgia complex" united in the "rebellion" in the capital market to buy a large number of stocks to do more, making Wall Street's financial giants such as Citadel, Citron (Citron) Research) and Melvin Capital (Melvin) were surrounded and hit, with a total loss of 70 billion. In the end, Melvin Capital was cut off and left, and Citron also stated that it would no longer set foot in the short-selling research for 20 years. The huge momentum of this movement has attracted the attention of the world's major media.

Afterwards, some analysis pointed out that this fight seemed to be retail investors being guided by public opinion against institutions, but it was actually a fight between institutions because retail investors did not have enough power to drive spot stocks soaring. At the same time, due to the rapid rise of stock prices, market makers had to buy a large number of stocks in order to reduce risks and hedge, so they were "forced" to become an ally of retail investors.

After a carnival, whether it is institutions, retail investors or market makers, the ultimate winners of the capital game may not be many unknown retail investors, but the amazing resilience they have shown in the process is astonishing, and there are indeed many people because of The "junk stock" of GME has changed its fate: some have paid off their loans, and some have been redeemed from the brink of death.

"I can finally write my mom a check for my sister's Lyme disease"

"Thank you (who organized this campaign) for saving my best friend"

secondary title

Market-making liquidity of "crowdfunding"

In the Internet age, when the black-box operations of large institutional investors are increasingly being supervised and criticized, the small decisions of retail investors can also gather together and affect the profit distribution of the entire market.

In the digital cryptocurrency market, the birth of the decentralized exchange (DEX) can best prove the innovation of user trading methods. AMM (Automated Market Maker) is one of its most critical and innovative technologies. Some people call it "the third largest blockchain invention after Bitcoin and Ethereum".

It enables users to interact with asset pools on the blockchain in a completely decentralized and non-custodial manner, providing liquidity for exchanges while earning income. All-weather "everyone can make the market" has become a reality.

The AMM supported by Ethereum technology mainly includes 3 constant function models: CPMM (Constant Product Market Maker), CSMM (Constant Sum Market Maker) and CMMM (Constant Mean Market Maker). Among them, the popular DEX exchanges Bancor and Uniswap use the function algorithm of CPMM.

secondary title

Uniswap: A little wild horse

This minimal function is its automatic market-making model, also known as the Constant Product model. It depicts the underlying logic of a market supply and demand relationship: the smaller the quantity of a certain commodity, the higher the price; the larger the quantity of a certain commodity, the lower the price. Therefore, Uniswap's genius trading model can also be condensed into a Chinese idiom: rare goods can live. That is to hoard rare goods and wait for them to be sold at high prices, or in other words: Rare things are more expensive.

If the goods are regarded as this constant K, then X on the left side of the equation can be regarded as the stock of this kind of goods, and Y representing the price is inversely proportional to X Y = K/X (the larger X is, the smaller Y is; X The smaller the value, the larger the Y). In Uniswap, X and Y are called trading pairs, and the sum of X and Y forms a Liquidity Pool. Because the constant K is fixed, X coins and Y coins show a trade-off relationship, and the more X coins are sold, the cheaper X is; the more X coins are bought, the more expensive X is, until X Insufficient inventory requires arbitrageurs to intervene.

Functional model of Uniswap

The genius of Uniswap lies in its automated liquidity. It is like a "vending machine". Registered users do not need KYC, zero operating costs, and zero startup costs. This simple curve also breaks the traditional concept that the market price must be determined by both buyers and sellers. In such a model, the price is determined by the ratio of holdings of goods X to goods Y. In terms of transaction volume, even if the daily transaction volume at the peak is still far behind that of centralized exchanges, it is still one of the most promising stars in DeFi projects.

Here I have to mention the story behind Uniswap. Its founder, Hayden Adams, does not know how to write codes or smart contracts. He is just an ordinary laid-off electrical engineer. One day in the second half of 2017, I accidentally saw an article on Reddit by V God of the blockchain. This article conceived the infinite future of the newly upgraded decentralized exchange, which suddenly ignited the current situation. Young people at the bottom of their lives. He decided to start from scratch as an automated market maker, challenging the centralized trading platform that "covers the sky with one hand".

After just over two years of evolution and competition, from its official launch on November 2, 2018 to today, Uniswap has become a "unicorn" in the DeFi field, with a cumulative transaction volume of more than 58 billion US dollars in 2020 , an increase of 15,000% over 2019, occupying nearly 40% of the assets in the DEX market, and is currently the world's largest decentralized exchange and the fifth largest encrypted spot trading venue in the world.

Uniswap founder Hayden Adams

This unicorn is like a steed challenging centralized exchanges, galloping along with the strong spiritual mission of its supporters—challenging the authoritative status and written rules of centralized exchanges, and the original intention of Bitcoin’s creation Coincidentally.

Looking at its development prospects dialectically, of course AMM also has its disadvantages. Because the currency price generated under its operation mode is separated from the external market price, due to the change of inventory after each transaction, arbitrageurs are required to come in to make a difference until it matches the external market price again. In the end, the profit of arbitrageurs comes from the dividends and price differences that provide liquidity, which sometimes leads to impermanent losses, that is, the tokens they pledge will lose value, and the return is not as good as simply buying and holding.

This is also the reason why AMM has been questioned and cannot become mainstream: because of the lack of intermediaries in decentralized transactions, the lack of market makers to make price differences, and free losses, the best liquidity cannot be obtained.

DEX has a long way to go, and it still needs many heroes who uphold the faith to explore together. The latest information shows that Uniswap's V3 in 2021 will continue to improve the AMM experience and make traders' trading activities smoother. And its "rival" Sushiswap also takes improving liquidity as its main goal, trying to increase the increase by 10 to 20 times. Sushi, who has always cherished the power of the community, is also trying to use it to explore more products of DEX, which undoubtedly increases the possibility of more income for community users.

In the next article, we will focus on Sushiswap, Dodo and other AMM star projects. Remember to follow Wootrade and continue exploring together.