Marginal ft. Kodiak: The Future of AMMs in DeFi

Marginal ft. Kodiak: The Future of AMMs in DeFi

May 27, 2024

May 27, 2024

In our recent Twitter Space conversation with KodiakFi, Berachain's native liquidity hub, we discussed the pivotal role of AMMs (Automated Market Makers) and their future in DeFi. At Marginal, our smart contract infrastructure underpins this ecosystem, and our mission to power offchain leverage trading aligns with KodiakFi's commitment to providing robust liquidity pools. So, this was a collaborative dialogue with valuable insights directly from the source. The key points from our conversation with Kodiak will help you gain insights into the latest AMM developments in DeFi.

How Pivotal Are AMMs in DeFi?

AMMs have catapulted DeFi into a new era, shattering barriers and democratizing liquidity and trading access on a global scale. They break down the capital and knowledge constraints typical of traditional exchanges in TradFi, allowing a more diverse group to engage in the market. By pooling assets in a liquidity pool, they facilitate trading pairs with a constant product market-maker algorithm, enabling the accumulation of trading fees without requiring the vast capital of traditional market-making. This process makes liquidity bootstrapping easier, as AMMs employ pooled assets to execute trades, improving market liquidity and resilience while lowering the entry threshold for newcomers.

The current market cycle favors developing and growing leverage trading AMMs, and that's something our CTO Civita believes. "I really do think this is kind of a cycle to do leverage AMMs. You see a couple of competitors to us. In addition to just us, right? But I don't think there's like a derivative winner, a derivative AMM winner yet."

Truly, no platform has yet emerged as the clear leader in the derivatives AMM space. The market is still open, and the competition is ongoing, with no definitive frontrunner having taken the throne as the definitive solution for leverage-based AMMs.

Looking at Concentrated Liquidity (Uniswap v3 Model)

Concentrated liquidity came with Uniswap v3, enabling liquidity providers to allocate capital within specified price ranges. This creates more capital efficiency, which can potentially increase fee earnings. But while this model allows any liquidity provider to maximize returns on capital by accruing fees from trades occurring within these ranges, it also introduces a complexity of sorts, particularly for retail users who may not know how to allocate their liquidity strategically.

"The difficulty of Uni v3 is that there's pretty much an infinite number of ways for you to set up a unique Uni v3 position. So you can set it at various price ranges and also select different price or fee tiers," notes **BearTic from KodiakFi. " I think that's what makes it very complex for a lot of retail users to understand how to provide liquidity on a concentrated liquidity DEX," BearTic continues, pointing out the increased complexity that comes with this granular control.

To address this, some automated market maker (AMM) platforms are developing liquidity management tools that help users manage their investments more effectively, though not without their own layers of risk and dependency.

Hyperstructures—Fully On-Chain, Unstoppable Protocols

Hyperstructures are disrupting the DeFi space, offering fully on-chain, unstoppable smart contracts and protocols that operate independently of any off-chain inputs. These structures are critical because they ensure that operations can continue uninterrupted under any circumstances—the very ethos of Marginal.

"Marginal is a DeFi hyperstructure that's perfect for both long tail mean speculation, but also one-click leverage on mid-large cap tokens," says **Twap, Strategy & Ops Manager at Marginal.

The design of hyperstructures makes them censorship-resistant and immune to control by any entity. This aspect of hyperstructures maintains the integrity and security of dApps, especially in a space where TradFi systems are vulnerable to interference.

Marginal Protocol’s Emergence in DeFi

Marginal is a pioneering peer-to-peer AMM focusing on physically settled perpetuals. Our platform facilitates direct interactions between traders without the need for intermediaries, thereby reducing costs and potential points of failure.

"Marginal is fully on-chain and transparent. You can basically verify everything, right? So it's a case of 'verified, don't trust us,'" TWAP continues. "We really hope it's a watershed moment for on-chain derivatives and for LPs. For once, there's actual deterministic safety. With Marginal, LPs are always guaranteed to get back the amount of liquidity they lent to traders."

Keep in mind that Marginal introduces permissionless leverage markets to create a more inclusive environment in long-tail asset trading. Being permissionless allows a broader range of volatile digital assets to be leveraged, diversifying trading options while also enhancing liquidity across DeFi.

Charting the Future of AMMs in DeFi

AMMs have a promising future in DeFi. New innovations are springing up to improve efficiency and expand functionalities. Consider 3 key areas:

  • Mathematical Innovations: Added to the automated market maker equation, new algorithms are being developed to optimize price curves and improve capital efficiency. The goal is to refine how LPs provide liquidity, making it more responsive to current market price conditions.

  • Product and Feature Innovations: Upcoming features such as leverage options and limit orders will broaden the utility of AMMs and furnish traders with more risk management and strategy deployment tools.

  • Infrastructure and Cross-Chain Innovations: There is a growing trend towards integrating AMMs with other blockchain infrastructures and enabling cross-chain functionalities. This expansion will facilitate a more interconnected, fluid DeFi ecosystem, allowing for seamless asset transfers and broader interoperability among different platforms.****

Automated market makers have undeniably changed the DeFi environment by making liquidity provision smoother and markets more resilient. Platforms like Marginal and Kodiak are driving innovations that promise more inclusive, user-centric, and secure trading environments. The trajectory of AMMs points towards a future where DeFi is a predominant choice for trading and investment. The question now is how quickly the rest of the world will adapt to these groundbreaking advancements.

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