Welcome to the DeFi Legos series - a series of insightful articles that provides you with deep analysis and research into different market segments. The topic today is AMM - the segment that made DeFi possible.
In this article, I will thoroughly analyze the AMM sector and give you some detailed information about:
- What is AMM? Overview about its role and attributes.
- Prediction about the future of AMM.
- Investment opportunities with AMM.
As there will be a lot of specialized insights, it is advisable to take note of some useful points for yourself. Moreover, every part is linked to another in order, so don’t skip any part. Now let’s begin.
Disclaimer: The purpose of this article is mainly for providing constructive information and personal viewpoints, not financial advice. Investing in the crypto market is highly risky, so Do Your Own Research before investing.
AMM (Automated Market Maker) is the exchange model that enables decentralized trading by using algorithms and smart contracts to determine the price of the assets. Instead of involving Market Makers in improving liquidity and price spread like the Orderbook model, AMM makes the process automated by involving users in contributing liquidity to a liquidity pool and allows trading assets through it.
The most outstanding AMM is Uniswap - the unicorn of the crypto world in 2020. The success of Uniswap started the DeFi booming from 2020 till now. Generally, AMMs will be filtered by different blockchain ecosystems, such as:
- Ethereum: Uniswap, Sushiswap, Curve,...
- Binance Smart Chain: Pancakeswap, MDEX, Ellipsis,...
- Solana: Serum, Raydium, Saber,...
Historical background of AMM
Before AMM became popular, most users could only trade coins/tokens that are listed on CEXs (Centralized Exchanges) like Binance or Huobi. With such a barrier, neither projects nor developers were able to approach users freely and efficiently. At the same time, this didn’t follow the vision of Nakamoto Satoshi (Bitcoin’s creator) about decentralization.
To aim towards DeFi (Decentralized Finance), some DEXs (Decentralized Exchanges) were released, namely Binance DEX. However, those DEXs used the Orderbook model, therefore having low liquidity and high price spread. This is a massive downside preventing the majority of crypto users from accessing DeFi.
The role of AMM in DeFi
The emergence of AMM has solved the existing pain points in the market, which led to the role of AMM in the DeFi market. AMM has benefited the market and its users in multiple ways:
- Enrich the liquidity of the whole market.
- Distribute rights to the community (developers + holders + liquidity providers).
- Secure assets (users can hold and trade assets without depositing funds to an intermediary).
And most importantly, AMM has created a decentralized environment so that the community can contribute and receive equally. The 3 indispensable participants involved in that process can be listed as:
- Developers who can freely provide liquidity for tokens and reach a large number of users without needing the approval from CEXs.
- Token holders who can propose and vote for changes in AMM protocols. Besides, holders can also be rewarded through the staking mechanism.
- Liquidity Providers who add liquidity to the protocol, and in return receive incentive rewards and a portion of the platform fees.
In regard to blockchain ecosystems
AMM and Lending are the 2 most important sectors of a DeFi ecosystem, as they are the applications to “maintain” the cash flow inside that ecosystem.
Nevertheless, AMM often plays a more imperative and attractive role compared to Lending since AMM can connect all 3 participants (Project Developers listing tokens, Liquidity Providers and Traders), at the same time introducing more incentives for users (through Farming, Trading, Staking Pool,...).
Which is why in the next part, I will analyze more on the cash flow in DeFi ecosystems and their correlation to AMM.
Strengths and weaknesses of AMMs
After understanding the definition and the role of AMM, we will now go through the strengths of a basic AMM, including:
- Anonymity: If you want to exchange assets on CEXs, you are required to provide personal information through the KYC process. On the contrary, anonymity is of the foremost importance when using AMMs, as they require nothing but your wallet address.
- Possession: With CEXs, you are not 100% in charge of your assets as you are required to deposit them into the platform. With AMMs, your assets are completely kept in your wallet (not your keys, not your coins) and are only accessible after being approved by the owner.
- Transparency: With CEXs, they can manipulate tokens’ prices to earn profits through Market Makers. Conversely, with AMMs, everything is transparent and revealed through the Smart Contract.
On the other hand, AMMs are still having a few shortcomings which explain why an enormous amount of trading volume still concentrates in CEXs. Here are some common weaknesses:
1. Network congestion
AMMs are operated on blockchains, and the transaction fee varies between different blockchains depending on their infrastructure. For some time, network congestion on Ethereum has been an insoluble problem, which has led to an extremely high gas fee and made it difficult for new users to access the DeFi market.
This problem has been partially solved by the growth of AMMs on BSC (Binance Smart Chain). However, BSC is still built on EVM (Ethereum Virtual Machine), indicating that there is a chance it can be overloaded in the future.
2. Risk of Hack & Rug pull
Hack & Rug pull are the massive barrier for DeFi users, in which:
- Hack means the situation when hackers steal users’ assets in Liquidity Pools. If the loss is insignificant, it can be compensated. In the case that the loss is too substantial, dApps will not be able to cover up and users will suffer the most after providing liquidity for AMMs.
- Rug pull means the situation when liquidity is suddenly withdrawn out of the protocol, tremendously influencing the price of tokens. Since AMMs operate based on a decentralized mechanism, they can potentially be rug pulled by sharks or individuals with harmful intentions of manipulating the market.
3. Impermanent Loss
Impermanent Loss is the financial loss that you may have to bear when providing liquidity to pools on AMMs. The more volatile the asset pair is, the larger the Impermanent Loss between holding those tokens and using them to provide liquidity becomes.
This is the main reason why a variety of users decide to hold or stake instead of farming, as the mathematical mechanism of Liquidity Pools can be complicated => AMMs cannot receive the rich liquidity from the market.
You can calculate Impermanent Loss here.
4. Front running bots
Front running is the situation when users have to trade at high slippage due to bots filling all the orders beforehand to earn profits (especially during network congestion or right after a token launch).
In order to do this, Front running bots will track all the pending orders and fill them with a higher gas fee so that miners prioritize them. This is the MEV (Miner Extractable Value) mechanism whereas miners freely select orders to confirm, which often leads to them prioritizing higher-paid orders.
Currently, there are 3 solutions for this issue: Flashbots, EIP 1559, and Chainlink FSS.
Differentiate between AMM Liquidity Center and AMM Aggregator
Sometimes you will come across the term “AMM Aggregator”. So what are AMM Aggregators, and how are they different from the conventional AMMs (or here I’ll use the term “AMM Liquidity Centers”)?
At the moment, there are two types of AMM in the DeFi market, which are AMM Liquidity Center and AMM Aggregator. Their differences can be seen as:
- AMM Liquidity Centers implement their own Liquidity Pools. They can easily create Liquidity Pools, list assets without relying on a 3rd-party.
- AMM Aggregators gather liquidity from AMM Liquidity Centers. They can integrate with Liquidity Pools from multiple AMMs (on the same blockchain) and offer the best price options after comparing them between different Liquidity Pools. However, their liquidity originates from AMM Liquidity Centers.
Some exceptional projects:
- AMM Liquidity Center: Uniswap, Pancakeswap, Serum,...
- AMM Aggregator: Matcha, Coin98 Exchange, OpenOcean,...
- AMM Liquidity Center + Aggregator: 1inch, Raydium,...
Before continuing with analyzing all the aspects of an AMM, I want to remind you of the flow of this article and why it is arranged this way:
- Prominent AMMs in different ecosystems: Help you visualize the overview of the market condition, some top-notch AMMs, and how they are divided in each ecosystem (compare horizontally - between AMMs in multiple ecosystems).
- Important AMM metrics: After knowing what those AMMs are, you have to comprehend some compulsory metrics before going into deeper analysis and evaluations. (compare vertically - between AMMs in the same ecosystem).
- Data analysis of AMMs: After acknowledging necessary metrics, the data analysis part will give you valuable insights, allowing you to make your own decisions and investments.
Now let’s proceed.
Prominent AMMs in different ecosystems
Now we will go through the AMM sector on various DeFi ecosystems, namely:
- AMM on Ethereum.
- AMM on Binance Smart Chain.
- AMM on Solana.
- AMM on other ecosystems (Polygon, Fantom, Avalanche,...).
AMM on Ethereum
Currently, Ethereum is the most developed DeFi ecosystem, so all the best AMMs are on Ethereum too. Uniswap used to be the top 1 AMM in Ethereum’s ecosystem, but Curve has grown tremendously to surpass Uniswap and take that spot.
Here are the top 5 AMMs on Ethereum. How are they operating and what are some notable points?
1. Curve Finance
Curve is an AMM for Stablecoins like USDT, USDC, DAI, UST,... The main reason why users choose Curve to trade Stablecoins is that trading assets of approximately equal value on Uniswap requires really high slippage. To leverage the current advantages, Curve Finance has expanded to a variety of Wrap-assets like BTC (renBTC, wBTC, sBTC),....
The success of Curve has revealed the massive demand of the market on:
- Trading between Stablecoins and Wrap-assets.
- Farming with a near 0 Impermanent Loss.
Besides Ethereum, Curve has also deployed Multichain on Polygon, xDAI and Fantom. However, the TVL and Trading Volume on those blockchains are not as significant as on Ethereum.
Although the TVL in Curve is higher than that in Uniswap, Uniswap still deserves to be the “King of AMM” with an exceeding Trading Volume compared to any other AMM. Specifically, after the success of Uniswap V2, the developer team has launched Uniswap V3 with 3 new features including Concentrated Liquidity, Range Orders and Flexible Fees.
The introduction of Uniswap V3’s new features has received massive support from the community, when there was a time the Trading Volume on Uniswap V3 reached $1.2B, eclipsing every major competitor like MDEX, Pancakeswap,...
In terms of available assets, Uniswap is also the DEX that supports the most tokens with 2219 tokens compared to the second-ranked DEX Pancakeswap with 1621 tokens.
Initially, Sushiswap was a fork of Uniswap V2. However, Sushiswap has gradually developed and followed its own approach to the market.
If Uniswap focuses mainly on AMM, Sushiswap has expanded to various products, namely Kashi (Lending), Miso (Launchpad), xSUSHI (Incentive for SUSHI holders),...
Furthermore, Sushiswap decided to deploy Multichain instead of operating only on Ethereum like Uniswap. Up to this moment, Sushiswap has been available on 7 chains, namely Ethereum, BSC, Polygon, Fantom, xDAI, HECO and most recently, Avalanche.
Nevertheless, Sushiswap still shows the highest efficiency on Ethereum. Even though the number of Daily Active Users on Sushiswap is comparatively lower than Uniswap, its Trading Volume still remains in the top 5, which indicates that the majority of users on Sushiswap are Whales with an incredibly high Trading Volume.
4. Balancer & Bancor Network
Balancer allows users to provide liquidity flexibly with up to 8 tokens in a pool with different weightings (60/40, 90/10, 98/2) instead of the original 50/50 like other AMMs like Uniswap.
Bancor Network allows users to provide liquidity with only a single token, and Bancor will adjust the token weightings in the pool accordingly. Nevertheless, to be protected from Impermanent Loss, users need to farm in Whitelist Pools for more than 30 days.
Additionally, Balancer & Bancor Network also implement extra features such as optimizing gas fees and transaction cost, maximizing capital efficiency through Lending protocols (Balancer) and Leverage Farming (Bancor Network).
Although they support unique features that are not seen elsewhere which benefit them with a high TVL, their products are actually not widely used as the Trading Volume is relatively low.
AMM on Binance Smart Chain
After Ethereum showed the signal of network congestion, at the same time DeFi on Ethereum was getting saturated, users have started going to Binance Smart Chain in March 2021. At that time, the BSC ecosystem had finished its DeFi Stack and was ready to receive the cash flow from other ecosystems.
Initially, the AMM sector on BSC was highly competitive with AMMs such as Pancakeswapm Julswap, Burgerswap, Bakeryswap, Apeswap,... However, after a while, their weaknesses were exposed and only effective products remained. Here are some of those remarkable AMMs:
Up to this moment, Pancakeswap is the biggest AMM on BSC and serves as the Liquidity Center for the whole ecosystem (Pancakeswap is the place where projects create Liquidity Pools, at the same time providing Liquidity Pools for AMM Aggregators).
- In terms of Trading Volume in 24h, Pancakeswap is only behind Uniswap V3 ($900M vs $1.2B).
- In terms of TVL, Pancakeswap is only behind Uniswap V3 and Curve Finance.
In addition, Pancakeswap has become a DeFi station with a wide range of features, namely IFO (Launchpad), Lottery, Syrup Pools (Stake CAKE to earn other tokens),... which not only makes Pancakeswap more appealing and attractive to users, but also increases the application of CAKE.
2. Belt Finance & Ellipsis Finance.
If there is Curve Finance on Ethereum, then there are Belt Finance and Ellipsis Finance on BSC with similar features. These 2 platforms support users with swapping Stablecoins at the lowest slippage possible.
Their TVL are $654M and $618M, respectively. Their Trading Volume is only a small amount compared to Pancakeswap.
MDEX is the first and also the biggest AMM of the HECO ecosystem. Nonetheless, MDEX has deployed Multichain to BSC.
Although the statistics that MDEX provided were believed to be not trustworthy, MDEX has proved to be quite productive with $820M TVL on BSC and about $130M Trading Volume. As BSC has slowly got saturated recently, it is understandable that these numbers have also declined significantly compared to 3 months ago.
AMM on Solana
The way AMMs work on Solana is not similar to any other ecosystem. Instead of fragmenting liquidity across multiple AMMs, Solana uses Serum as the AMM Liquidity Center for the whole ecosystem. This action has both positive and negative effects as:
- Positive effect: AMMs can utilize the rich liquidity from Serum, bringing a better experience for traders.
- Negative effect: AMMs cannot capture much value for their own tokens as Serum will take all the fees from traders.
Here are some outstanding AMMs on Solana:
- AMM Liquidity Center: SerumDEX, Raydium.
- AMM with independent Pools: Orca, Saber.
- AMM with Serum Pools: Mango Market, Open Serum, Symmetry,...
AMM in other ecosystems
After Ethereum and Binance Smart Chain succeeded with expanding their DeFi space, other ecosystems like Polygon, Fantom, Avalanche,... have followed their paths by introducing more AMMs. A few productive AMMs with considerable TVL and Trading Volume can be listed as Quickswap (Polygon), SpookySwap (Fantom with the recent skyrocketing growth),...
The success of an AMM is not only dependent on its work model, but also on the potential of the ecosystem it is deployed on. Are other dApps inside the ecosystem versatile enough to support the growth of AMMs?
Commonly, there is only 1 (sometimes 2) AMM that acts as the Liquidity Center of the whole ecosystem: Quickswap on Polygon, Spookyswap & Spiritswap on Fantom,... This is necessary to prevent liquidity from being fragmented, especially to those low TVL ecosystems.
Important AMM Metrics
Before going deeper into data analysis, you have to understand some imperative AMM Metrics. With an AMM, there are totally 5 different metrics that you need to know thoroughly, including:
- TVL (Total Value Locked): Shows the total value of the assets deposited into an AMM (liquidity providing, staking,...). Higher TVL ⇒ More liquidity ⇒ Less slippage ⇒ Better users’ experience.
- Trading Volume: Trading Volume is the total value of trades occurred on an AMM within a specific period of time, usually 24 hours. Higher Trading Volume ⇒ More fees ⇒ Incentivize users to provide liquidity.
- Capital Utilization Ratio: Calculated by the formula Trading Volume/TVL, showing the capital efficiency of an AMM. To be more specific, with the same amount of capital (TVL), the AMM with higher Trading Volume will be able to create more fees for Liquidity Providers (efficiency). The lower the ratio the better.
- Market Cap/TVL: Shows the correlation between Market Cap and TVL, therefore indicating which protocol is broadly trusted by the community (high TVL) but is still undervalued (low Market Cap). The higher the ratio the better.
- Daily Active Users (DAU): Shows the number of active (or in other words, “actual”) users interacting with the protocol every day. This metric can be used to see if an AMM actually attracts a large number of users.
- Number of Pairs & Tokens: Shows the total number of tokens the platform supports. This statistic indicates how attractive an AMM is to projects (asset creators) and users (traders). Most projects will choose to list their tokens on Liquidity Centers of that ecosystem.
Now we will analyze the real-time data of these metrics to evaluate and get valuable insights from them.
Data analysis of AMMs
The data above gathers the information of some top-ranked AMMs in different ecosystems, ranking in terms of descending TVL. There are 4 metrics that I have mentioned earlier, including:
- Trading Volume.
- Capital Utilization Ratio.
- Market Cap/TVL.
The crypto market is growing at an incredibly fast pace, and so is the data above. In this part, don’t emphasize too much on those data, but rather on how to analyze them to adapt to the market’s changes.
Here are some insights that I have summarized into bullet points:
TVL in Ecosystems Ranking
Before analyzing the cash flow in AMMs, you have to know which ecosystem the cash flow is staying in because they are strongly correlated. The growth in TVL of an ecosystem will stimulate that of AMMs inside the ecosystem.
Ranking: Ethereum (#1), Binance Smart Chain (#2), Polygon + Fantom + Solana (#3),...
⇒ From here, you can narrow down the cash flow into some top-tier ecosystems, which are also the environments for AMMs to develop.
TVL in AMMs Ranking
Curve (#1), Pancakeswap (#2), Sushiswap (#3), Uniswap (#4), Uniswap v3 (#5).
The ranking of TVL in AMMs is closely related to the TVL in the whole ecosystem. Blockchain ecosystem’s TVL increases ⇒ AMMs’ TVL increases.
Although the cash flow in Terra is gigantic, Terra focuses mainly on developing the Lending sector instead of AMM, so the cash flow in AMMs only revolves around Ethereum, BSC, Polygon and Solana.
After the market crash on May 19, 2021, Ethereum has had the fastest recovery speed ⇒ Ethereum is still the first destination of the cash flow.
In addition, Binance Smart Chain and Polygon are getting saturated while Solana and Fantom are growing rapidly in terms of TVL ⇒ Skin in the game opportunities.
Market Dominance Ranking
The AMM sector has a high dominance rate when 25% of the top AMMs take up 75% liquidity of the market whereas the other 75% only account for 25% liquidity ⇒ the AMM market is highly competitive. To find the potential of AMMs in the 75% portion, you have to closely follow their performance as well as the cash flow inside that ecosystem.
Curve is currently the AMM with the highest TVL (#1), which is three times as high as that of the #2 protocol (Pancakeswap), suggesting that the demand for farming Stablecoins is immense. Even though the APR is relatively low, most whales don’t even need a high APR, as to them, safety is of the utmost importance.
Trading Volume Ranking
Uniswap V3 (#1), Pancakeswap (#2), Sushiswap (#3), Uniswap V2 (#4), MDEX (#5).
Most AMM protocols have been deployed on Ethereum and Binance Smart Chain. Uniswap V3 has an overwhelming Trading Volume compared to other projects in the niche.
Tracking the growth in Trading Volume can help you define where Active Users in the ecosystem are staying at.
Daily Active Users
Despite the fact that the Trading Volume on Uniswap V3 is the highest among all, the highest number of Daily Active Users is seen on Pancakeswap. This shows that most users on Pancakeswap are Retail Traders while on Uniswap are Whales as the gas fee on Ethereum always remains at a high level.
This also explains why the trend Play to Earn started with Axie Infinity (on Ethereum) but tokens with the fastest growth have been on BSC.
Capital Efficiency Ranking
Uniswap v3 (#1), MDEX (#2), Raydium (#3), Pancakeswap (#4), Quickswap (#5).
The Concentrated Liquidity feature of Uniswap V3 has been improving the protocol’s application, whereas with the same amount of capital, Liquidity Providers on Uniswap V3 can earn more thanks to the Concentrated Liquidity mechanism.
Market Cap/TVL Ranking
Curve (#1), Balancer (#2), Orca (#3), Quickswap (#4), TraderJoe (#5).
From my perspective, the metric Market Cap/TVL does not reveal many insights for us to seek investment opportunities. However, this statistic can reveal which protocols are being undervalued compared to others.
The Market Cap of Curve is really small in regard to its reputation and prestige in the eyes of investors.
Nevertheless, to thoroughly analyze their productivity, you should track their data for a period of time, not at a specific point of time, which can help you comprehend their progress better. Here is my statistical table in a 6 month period:
In this table, I have tracked the TVL and Daily Trading Volume of top-tier AMMs at 3 different time marks. The insight I could extract from that was:
Ever since the market collapse on May 19, 2021, AMMs on Ethereum have recovered more quickly than those on BSC. This can be proved through the TVL and Trading Volume on Uniswap, Sushiswap (Ethereum) in comparison to Pancakeswap, MDEX (BSC).
Therefore, it can be clearly seen that the recovery speed of AMMs is faster where there is a more enormous cash flow, which then will flow into AMMs in other ecosystems.
By relying on this analysis, you can easily make your investment decisions.
And that is what I can conclude by listing the data over a period of time. However, the success of an AMM depends on a variety of other factors, such as:
- Effective work model.
- Reasonable Tokenomics and Incentives.
- Network Effect.
Network Effect can be a fairly new term for you. Nonetheless, it plays an essential role in the growth of AMMs as it helps them leverage the support from the community. That is why now I’ll analyze more deeply into Network Effect and how it can affect the development of AMMs.
Definition: Network Effect is a situation such that a product or service becomes more valuable as more people use it.
Let’s take a look at the chart above and go through how Network Effect works:
- For an AMM to start operating, Liquidity Providers (1) need to be incentivized to generate liquidity for the protocol.
- More liquidity (2) ⇒ Attract projects to create Liquidity Pools ⇒ More available assets (3.1).
- More liquidity (2) ⇒ Lower slippage ⇒ Attract more users (3.2).
- More users + more assets ⇒ More fee/Revenue (4) ⇒ Attract more Liquidity Providers (1).
- More Revenue ⇒ Develop project ⇒ More features (5) ⇒ More projects (6.1) + More users (6.2).
In a nutshell, for an AMM to successfully develop, it needs to introduce an efficient work model to incentivize Liquidity Providers, therefore attracting more projects (asset creators) and traders. This will create a flywheel on loop, which means that if any element in that flywheel stops improving, other elements will not be able to continue growing.
AMM Evolution Timeline
The AMM segment has developed for quite a long time with various modifications. In this part, we will go through the evolution of AMMs to gain more understanding about this field, thus being able to predict their future.
First Period: The advent of Uniswap V2
Launched in 2018, Uniswap was one of the first protocols to apply the AMM mechanism. However, it was only until the DeFi wave in September 2020 that Uniswap actually became noticed. Uniswap emerged as the unicorn of the crypto market and day after day had a bigger impact on the market.
The factors that helped Uniswap thrive can be summarized as:
- Traders can swap with small liquidity ⇒ better experience than using Orderbook.
- Liquidity Providers can earn profits from Uniswap ⇒ attract users, increase liquidity.
- Projects can freely list tokens (permissionless) ⇒ A wide range of pump/dump tokens ⇒ make noise for the product.
At that moment, Uniswap was a phenomenon of the crypto market when various achievements were accomplished every day, and there was a time when the Trading Volume reached $1B, surpassing Coinbase and stood in the top 5 Exchanges with the highest Trading Volume.
Second Period: The booming of AMM across different ecosystems
Ever since the success of DeFi on Ethereum in general and Uniswap in particular, other ecosystems have quickly deployed their native AMMs to attract the cash flow. The Tron ecosystem took the first shot with JustSwap, whereas Binance Smart Chain then introduced Pancakeswap, Solana released Serum,...
Nevertheless, the quantity of AMMs born during this time was high but their quality was not. They focused on releasing the products as fast as possible, without designing them elaborately, which is why those AMMs could not attract Liquidity Providers and Traders.
At the same time, this is also the period that witnessed the emergence and skyrocketing growth of numerous AMMs, such as:
- Ethereum: Uniswap, Curve, Balancer, Bancor, KyberDMM, DODO,...
- BSC: Pancakeswap, Belt, MDEX, Ellipsis, Bakeryswap,...
- Solana: Serum, Raydium, Orca, Saber,...
- Polygon: Quickswap,...
- Fantom: SpookySwap, SpiritSwap,…
Third Period: Additional features
From my point of view, the crypto market is in this process, which means there are myriads of newly developed projects, but if they do not implement any innovative features, they will sooner or later become “obsolete”.
As a result, besides the basic features like Swap, Farm,... AMMs have integrated their products with various fresh features:
- Innovative Liquidity mechanism: Uniswap V3, Kyber DMM,...
- Launchpad: Pancakeswap IFO, Raydium AcceleRaytor,...
- Deploy Multichain: DODO, 1INCH, Curve, Sushiswap, MDEX,...
- Lending: Sushiswap Bentobox, Synthetix Loans,...
- Derivative: Sushiswap Kashi,...
- Staking Reward: vDODO, xSUSHI,...
- NFT: Pancakeswap, Bakeryswap,...
Implementing new features is the prerequisite to attract & retain new users as it creates more value for that AMM, removing the belief that AMMs are used only for swapping assets.
Nevertheless, not every additional feature is productive and receives support from the market:
- Low productivity: Lending, Derivatives, NFT.
- High productivity: Launchpad, Multichain, Innovative Liquidity mechanism,...
Lending & Derivatives on Sushiswap, for instance, still cannot attract numerous users. NFT integration has only worked with Bakeryswap so far. As a result, if you want to find investment opportunities based on the protocol’s features, you have to understand the productivity of those features thoroughly.
Anticipate the future of AMM
Based on the statistics analyzed above, in this part, I will give you some anticipations and predictions about the next move of the AMM sector, so you can make your own investment decisions.
Here are some anticipations:
- AMM is a highly competitive segment of the market, so even though more and more AMMs are emerging, it is nearly impossible for them to flip the top-tier AMMs.
- Major AMMs will have the tendency to expand into a DeFi Station to capture more value to the protocol: Pancakeswap (Launchpad, Lottery, Prediction), Bakeryswap (NFT), Raydium (Launchpad),...
- The next trend for DEXs can be Derivatives or Margin trading, instead of simply Spot like current AMMs. This can start with Perpetual, dYdX,...
- Multi-chain can be a broadly used approach for AMMs in the near future to expand their influences similar to Curve, Sushiswap,...
- The problem with Multi-chain is Fragmented Liquidity. Protocols cannot take advantage of the rich liquidity from Ethereum and BSC to bootstrap their products on other blockchain platforms like Fantom, Avalanche,...
- Smaller ecosystems like Fantom, Avalanche will continue to support AMMs to extend their DeFi space, and we will need to keep track of their performance closely if we want to invest in them.
Investment opportunities with AMMs
Seek hidden gems on Pancakeswap (high risk - high return)
With low-cap retail investors, investing in AMM tokens on Ethereum is incredibly expensive. Instead, pay close attention to AMMs on BSC. Even though the trend on BSC has become gradually saturated, there are still opportunities to invest in.
During recent times, BSC has witnessed the tremendous growth of Play to earn platforms, namely MyDefiPet, CryptoBlade, Faraland, Mobox, DungeonSwap,... Although this trend can be regarded as “easy come, easy go”, their ROIs are impressive. Thus, seeking hidden gems on Pancakeswap (BSC) or even Quickswap (Polygon), Raydium (Solana) can be a choice.
Farming is the approach that helps you earn through liquidity providing on AMMs. You can receive incentive rewards and platform fees by farming. However, to safely farm, you have to notice 3 factors:
- Impermanent Loss.
- The amount of fees across Liquidity Pools (correlated to the trading volume).
- Thorough understanding of the token used to farm.
For instance: To farm the AVAX-PNG pair on Pangolin, you have to swap ½ AVAX to PNG. Nonetheless, this pair has not seen a significant Trading Volume => Cannot create revenue for Liquidity Providers, not to mention the PNG token is highly inflationary => High risk of Impermanent Loss => Farming cannot generate any profits.
Farming on AMMs at their early stage is also a potential method, as their starting APRs across Liquidity Pools are usually extremely high. However, as more users begin to provide liquidity and farm, the less the APR will be.
That is why you have to seize the opportunity as soon as there are announcements on the product launch (normally through Twitter). An ideal period of time to farm is usually 1 weak. Afterwards, you can take profits or use earned tokens to continue farming.
Here is an example of the initial incentive rewards from Saber on Solana. After 2 weeks, I earned $100 profit with a starting capital of $2,000 (5% gained). With higher-cap users, the profit will be more enormous.
Invest in AMM tokens
This approach is the most simple and most popular way for you to make a profit. Here are a number of native tokens across AMMs in different ecosystems:
- Ethereum: Uniswap (UNI), Sushiswap (SUSHI), Curve (CRV),...
- Binance Smart Chain: Pancakeswap (CAKE), MDEX (MDX), Ellipsis (EPS),...
- Solana: Serum (SRM), Raydium (RAY), Saber (SBR), Orca (ORCA),...
- Polygon: Quickswap (QUICK), Dinoswap (DINO),...
- Fantom: Spookyswap, Spiritswap,...
Nevertheless, before investing in these tokens, you have to look over these factors:
- Market Cap ⇒ Possible growth.
- Work model + Tokenomics ⇒ How the platform captures the value for its token.
- Cash flow ⇒As AMMs will be the first destination of the cash flow.
For example: In a month, SBR (Saber) has grown from $0.04 to $0.98 (2350%). How could the price of SBR skyrocket so quickly?
- The Market Cap of Saber was insubstantial at about $30M only.
- The TVL in Saber increased to #2 in Solana ⇒ Effective work model ⇒ Attract users efficiently.
- A massive cash flow got into Solana ⇒ Saber, Raydium, Serum benefited from it.
It is worth following the cash flow to define where it is going, since not all ecosystems are going to rise at the same time, but rather from the developed ones to the developing ones that have enough infrastructure to receive the cash flow.
After predicting where the cash flow is coming to next, you can “take a bet” by investing in major AMMs on that blockchain as they will be the center to receive the cash flow and new users. Not to mention top-notch AMMs are the ones that have enough conditions to expand their products.
- Pancakeswap introduced Syrup Pools, Launchpad, Lottery,...
- Bakeryswap introduced NFT Issuer, NFT Marketplace,...
- Raydium introduced Launchpad (AcceleRaytor),...
Tracking the cash flow does not only help you invest in AMM native tokens, but also improves your chances of seeking hidden gems. In my viewpoint, after BSC & Solana received the market’s cash flow, Fantom might be the next destination as it has just witnessed a TVL surge from $1.5B to more than $14B in just a week.
Frequently updating the news on AMMs supporting IDO Launchpad like Raydium, Pancakeswap,... is the chance for you to change your position in this market, should you be able to find a potential project.
However, Launchpad platforms usually require users to stake their native tokens before participating in any token sales. In a short period of time, this can lock your funds so remember to carefully calculate the risk/reward before joining.
Retroactive rewards are given to early supporters after testing and using AMM platforms at an early stage. This is an effective way for AMMs to attract early users as well as reward actual adopters of the product.
Up to this moment, some prominent retroactive rewards from AMM can be listed as:
- Uniswap with 400 UNI ($10,000).
- 1inch with 600 INCH ($1,920).
- Or most recently, dydx with up to more than 10,000 dydx ($200,000+).
If you have missed these opportunities, you can still try other platforms that have not released their native tokens, such as Metamask, Matcha (0x), Opensea,... By simply experiencing their products, you can possibly have the chance to receive retroactive rewards.
To conclude, here are some insights on investment opportunities in the AMM sector:
- The AMM sector has a high dominance rate (a minority of prominent AMMs take up a majority of Liquidity and Trading Volume).
- Follow the cash flow across different blockchain ecosystems to anticipate investment opportunities with native AMMs.
- Pay close attention to AMMs with enough conditions to expand their products with more features.
- Skin in the game and earn through farming, staking,...
I hope it has helped you in gaining more valuable insights into this sector, and how you can make a profit by taking advantage of AMMs.