An overview of what is happening in the crypto markets, summarised daily by Crypto Finance AG Senior Trader Patrick Heusser in the market commentary.
Market commentary
Good Morning!
Today's topic is liquidity pools, and their potential use case in the traditional finance world.
Connection between the two financial universes
In my Monday Market Commentary, I talked about bridges between the two finance universes: traditional and DeFi. One of the potential bridges I am very excited about is liquidity pools. Head of Crypto at VISA, Cuy Sheffield, put it very nicely in the following short thread. Click on the image or here to read the full thread.
1/ Here's my rough attempt at explaining why automated market makers (AMMs) are interesting to a non-crypto audience
h/t @HendoVentures
— Cuy Sheffield (@cuysheffield) September 27, 2020
In a world five to 10 years down the road, I think it will be possible for every citizen to put some of their assets into liquidity pools and earn fees on the back of them. This is quite the opposite of how the revenue/cost stream currently works for "normal" citizens. They are charged fees from their bank, and (in some shape or form) the bank can even profit from the holdings (assets) that have been deposited with them. Please note: for institutional clients such a revenue share model does exist, but to be able to participate you need a very large portfolio.
This is especially true for the lesser liquid assets such as small cap stocks, or (to be a bit more fancy) insurance policies (which you currently cannot trade in traditional finance, but you can in DeFi). Exchanges will become obsolete and banks will need to find a way to connect to service providers that offer gateways to these liquidity pools, because most "normal" citizens will probably not interact directly with liquidity pools.
Risks
Additionally, you need to think about the risks you take in grabbing some of that revenue when you participate in a liquidity pool. Here is where things gets a bit more complicated. Andrew Kang tries to describe it in the following short thread:
1/ There seems to be a common misconception that AMMs won't work because LPs can be constantly arbitraged
Let's clear that up.
— Andrew Kang (@Rewkang) September 28, 2020
In case you want to get into the nitty gritty details, you should read the Medium Understanding Uniswap Returns on the revenue model of UNISWAP (one of the largest DEX - liquidity pool providers).
And last but not least, I want to add one more comment, just to make sure that I have been perfectly clear.
Not everything in DeFi is SUSHI, PIZZA, PASTA, and PICKLE. There are concepts behind DeFi that make a lot of sense and have a real chance of being adapted to the traditional finance world.
