In the last popular science article of the AMM series, we talked about the "net celebrity" Sushiswap's liquidity mining for Uniswap, which made him stand out overnight and become famous. It can be seen that the importance of liquidity to an exchange is like blood to the human body, and the two have a close relationship.

And what is the "liquidity" that is always talked about and repeatedly emphasized by everyone? And why can it become the core of a market, an exchange, and affect all traders?

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The liquidity of traditional finance refers to the ability of assets to be "realized" smoothly at a reasonable price, and flow from one state to another. It reflects a relationship between the time scale of an investment (how long it takes to sell it) and the price scale (a discount to fair market price).

The generation of liquidity in the traditional sense requires multiple roles to participate in "blood creation": as large as investment institutions and market makers, as small as bankers and analysts. Liquidity will also be needed in different markets: as small as a supermarket, as large as the whole of A shares, and a country needs the exchange between assets and cash as a general equivalent.

To put it simply, liquidity can be these metrics: more reasonable transaction prices, faster order transactions, more stable asset transfers, and enhanced accuracy of technical analysis. For example, in a market with good liquidity, the transaction speed of orders is very fast, the price is stable, and it is not easy to be affected by individuals who hold a large amount of funds to cause fluctuations.

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Arjun Balaji, investment partner of Paradigm, an encryption venture capital institution, pointed out that we are in the transition from market structure 2.0 to 3.0, and CeFi and DeFi will tend to converge: "Best execution requires on-chain interaction, and those who can obtain on-chain liquidity Brokers without access to on-chain liquidity will have an immediate disadvantage compared to other brokers.”

In other words, trading algorithms similar to AMM will have a deeper and deeper impact on centralized exchanges, and market makers will therefore join the DeFi field to obtain greater profits.

Facing the challenge of DeFi to CeFi, Wootrade has been looking for opportunities to connect CeFi and DeFi, such as how to transfer the underlying liquidity of the centralized market to the chain. At present, Wootrade has established liquidity cooperation with dozens of exchanges, market makers and trading teams. In the future, its product WooFi will integrate these liquidity and connect to DeFi products, such as DEX, Swap, lending and other financial products.

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The birth of AMM and liquidity mining models added a fire to on-chain transactions. However, as various exchanges such as Uniswap, Bancor, Curve, etc. adopt different AMM rules, the capital pool and liquidity are dispersed to different protocols, and the larger the transaction volume, the more transaction losses such as free losses and slippage . This is also the reason behind the rise of transaction aggregators.

Imagine that if we want to buy products online, our first choice may be Taobao or Amazon, which has a complete range of products; if we want to listen to music, we may use many singers to enter Netease Cloud or Apple Music; Many Didi or Uber......

The trading aggregator also has the same design concept, which gathers the liquidity from all over the DEX and finds the optimal trading path for users. It looks for more favorable transaction prices among different exchanges, and can even split orders and execute transactions in multiple exchanges. Such a service can help lower the barriers to entry for beginners and novices who have just entered the digital trading market.

At present, the transaction aggregation tools on the Ethereum chain include 1inch, Matcha, ParaSwap, etc., among which 1inch has an outstanding performance. It integrates the liquidity of Uniswap, Curve, 0x and other exchanges. According to Debank data, 24 hours before writing The transaction volume reached 140 million US dollars, and the average daily active users in the past 7 days exceeded 11,000, second only to Uniswap and firmly sitting on the second spot of Ethereum DEX.

Among these transaction aggregators, the core competitiveness is the transaction path algorithm, that is, whose algorithm can find the best liquidity and the best price, whoever can provide "more cost-effective services."

Current transaction aggregators usually formulate transaction execution paths in a serial, parallel or hybrid manner. "Serial" can be understood as exchanging target Tokens in several exchanges one after another to avoid high slippage in the process; "parallel" can be understood as splitting Tokens to multiple fund pools for transactions at the same time; "mixed" means To make it more complicated, you can combine the above two situations for multi-path transactions.

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The quotations of this professional market-making strategy will become oracles, called "fillable Oracles". Compared with other oracle machines that introduce prices to the chain, Wootrade provides quotations that can be traded directly. This tool can be used directly by the project party after setting relevant parameters, which is efficient and simple. The professional market-making strategy will also be opened to the C-end in the future and sold as fund products.

But is it cost-effective to move so much liquidity onto the chain, facing the high Gas fee of Ethereum? We might as well do a math problem, assuming that the Gas Price is calculated at 300gwei, the daily quotation consumes 60 ETH, and the Gas fee is about 120k US dollars. Under the condition of only charging 0.1% handling fee, if the market maker can trade about 250M of half of the ETH on Ethereum, the daily handling fee income will be as high as 250k US dollars, completely offsetting the Gas.

Binance Smart Chain has gathered many DeFi projects. Many star projects on Ethereum such as Sushiswap have also migrated to BSC, providing users with lower handling fees and faster transactions than the high Gas fee of Ethereum. Speed, a more frictionless trading experience. At present, an ecological system with the theme of DeFi, NFT, games and development has been formed on the ecological chain. The 24-hour trading volume of Pancakeswap, the largest ecological DEX, once surpassed Uniswap. Once the market-making model runs stably on the Binance Smart Chain, it will also try to deploy it on other public chains, such as Arbitrum, polkadot, and avalanche.

Liquidity has shifted from traditional finance, CeFi, DeFi, and transaction aggregators to a more competitive undertaker—the "tradable quotation" oracle machine. Which track will the hot treasure be transferred to later? We will wait and see.

In the following popular science series, we will continue to explain and introduce cutting-edge innovations in the DeFi field, such as NFT, which has recently become a hot topic of "value or bubble". Remember to pay attention to the Wootrade popular science series, and understand the blockchain in simple terms.