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Order Book vs. AMM, should XRPL add built-in AMM support ?


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The XRPL implements autobridging to augment liquidity between IOU pairs by injecting offers from the synthetic order book IOU1:XRP+XRP:IOU2 into the direct IOU:IOU offers.

I'm not a trader or a market maker so I'm probably not the best person to comment on how useful this automated market making thing would be or how likely it would be to improve or bootstrap liquidity. In fact, I'm still a little confused as to how precisely it works. I need to read up more on it.

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There is something called 'Impernanent Loss' that comes with AMM. The fact of the matter is, if you provide liquidity to an AAM, you invest equally in both assets.

AMM does only allow you to take equal position between two assets and a big loss in the one asset will have its reflection on the other asset. (And of course vice versa for a profit). But I must say I am intrigued with the way they work. And in the end if both assets are on par again at what you started with, then you have no loss or win, and only the fees are added to your investment.

My principle of market making is that if 2 assets are equally likely to go up or down, then it makes no difference if you sell the one asset to the other, and hence you are good to make market with those 2 assets. But the reality is that often those assets are not equal in risk. I am doing some AMM on Ethereum and I suffer from IL because the counterpart ETH has been rising like crazy. It's all relative of course. My investment was ETH and I went from ETH into AMM pools. So in comparison with ETH my investments went down even though measured in USD they went up. So ... bad investment ... but that's all in the game 

 

n.b. AMM will definitely be available on Flare, so if not natively on XRPL, it will be available on Flare via FXRP

Edited by jn_r
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3 hours ago, jn_r said:

There is something called 'Impernanent Loss' that comes with AMM. The fact of the matter is, if you provide liquidity to an AAM, you invest equally in both assets.

Not in AMM implementations with oracles.

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1 minute ago, tulo said:

Not in AMM implementations with oracles.

I've heard about those, but imo if those would really work as proclaimed, they would put Uniswap instantly out of business (which has not happened). The money has to come from somewhere ... Do you have a maybe a link with some more info ?

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13 hours ago, jn_r said:

There is something called 'Impernanent Loss' that comes with AMM. The fact of the matter is, if you provide liquidity to an AAM, you invest equally in both assets.

AMM does only allow you to take equal position between two assets and a big loss in the one asset will have its reflection on the other asset. (And of course vice versa for a profit). But I must say I am intrigued with the way they work. And in the end if both assets are on par again at what you started with, then you have no loss or win, and only the fees are added to your investment.

My principle of market making is that if 2 assets are equally likely to go up or down, then it makes no difference if you sell the one asset to the other, and hence you are good to make market with those 2 assets. But the reality is that often those assets are not equal in risk. I am doing some AMM on Ethereum and I suffer from IL because the counterpart ETH has been rising like crazy. It's all relative of course. My investment was ETH and I went from ETH into AMM pools. So in comparison with ETH my investments went down even though measured in USD they went up. So ... bad investment ... but that's all in the game 

 

n.b. AMM will definitely be available on Flare, so if not natively on XRPL, it will be available on Flare via FXRP

I market make this way and if an asset is going to outperform I take profits in the asset that is going up. That way you're simply selling and buying back ethereum. 

My entire strategy is not the actual trading but ensuring I never run out of the better performing asset. 

You'd be surprised how many orders fill if you have a lot. I've had hundreds of thousands of orders fill. 

I have made mistakes, before the spark giveaway I was collecting all profits in XRP to maximise the spark snap shot. I didn't have time after the snapshot to make enough BTC to last me after BTC hit 150,000 XRP. I'm not trading on account of that and that's counter to my strategy. Either it's best to hold. Otherwise you want to trade so often you  collect enough profits to continually trade. 

Luckily I can hold the little bit of BTC I have left, I locked my eth in a 2 years mining contract. I'm lucky to have spark coming and I can trade that. 

You don't blindly market make, it's intense strategy that involves constant adjustments. 

One thing to consider it that even though people say they will hold. They get tempted to sell. If you know you need as many assets as possible to keep trading then you don't sell. No reason to sell if you're earning interest. 

Which brings me to another point. You don't trade everything at one price point. You keep the majority of your coins in reserve and preferably earn interest on it somehow.

Plus if you get stuck with fiat. Then market make fiat. If sudden news makes a coin a good buy, you then have even more fiat to buy back in. It's a long term strategy that requires careful planning. 

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56 minutes ago, jargoman said:

I market make this way and if an asset is going to outperform I take profits in the asset that is going up. That way you're simply selling and buying back ethereum. 

My entire strategy is not the actual trading but ensuring I never run out of the better performing asset. 

You'd be surprised how many orders fill if you have a lot. I've had hundreds of thousands of orders fill. 

I have made mistakes, before the spark giveaway I was collecting all profits in XRP to maximise the spark snap shot. I didn't have time after the snapshot to make enough BTC to last me after BTC hit 150,000 XRP. I'm not trading on account of that and that's counter to my strategy. Either it's best to hold. Otherwise you want to trade so often you  collect enough profits to continually trade. 

Luckily I can hold the little bit of BTC I have left, I locked my eth in a 2 years mining contract. I'm lucky to have spark coming and I can trade that. 

You don't blindly market make, it's intense strategy that involves constant adjustments. 

One thing to consider it that even though people say they will hold. They get tempted to sell. If you know you need as many assets as possible to keep trading then you don't sell. No reason to sell if you're earning interest. 

Which brings me to another point. You don't trade everything at one price point. You keep the majority of your coins in reserve and preferably earn interest on it somehow.

Plus if you get stuck with fiat. Then market make fiat. If sudden news makes a coin a good buy, you then have even more fiat to buy back in. It's a long term strategy that requires careful planning. 

Ah yes, so if I understand correct if one asset goes up in value, you buy back the difference in amount that you own that asset less. Sounds like a strategy that could work. It's only pretty expensive on Ethereum. But that would be not that much of a problem you could also buy back at Binance or so. But also, wouldn't you always buy at the premium price? Because once you spot that you have to buy some extra from an asset, the market price did already increase for that asset.. 

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24 minutes ago, jn_r said:

Ah yes, so if I understand correct if one asset goes up in value, you buy back the difference in amount that you own that asset less. Sounds like a strategy that could work. It's only pretty expensive on Ethereum. But that would be not that much of a problem you could also buy back at Binance or so. But also, wouldn't you always buy at the premium price? Because once you spot that you have to buy some extra from an asset, the market price did already increase for that asset.. 

No I collect profits in that asset. If I sell eth. I have a choice. Buy back the same amount I sold, or buy back the amount plus the extra profit. Then when I sell the eth, I have a similar choice. Do I sell enough eth to cover the amount spent to buy and leave the profit in eth or do I sell the principle and the profit to lock in fiat profit. 

I don't trade much fiat. I'm rather crypto, they all eventually go up if you pick the right ones. 

 

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5 hours ago, jargoman said:

Ok sure, but you auto bridge the liquidity directly to the orderbook when everything is said and done. 

The orderbook liquidity and AMM liquidity should stay seperate. But you could make the order taking  synthetic (is that the right word?) When an order is placed in the orderbook or liquidity is changed in the AMM pool, it can be deterministically calculated if the trade is better matched on the orderbook or on the AMM or if orders in the orderbook are now matched with the values in the AMM.

 

also, if (but for me it's still a big if) if combining AMM with an Oracle price would be better, than of course you can use the price as determined in the orderbook in the AMM

Edited by jn_r
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