The future of trading is onchain

AMMs are not just safer but also are cheaper to run and have a lower cost of capital.

Therefore, trading will move onchain.

Nobody wants the counterparty risk anymore

Over the last weeks, I heard several times that now tradfi institutions are pushing on-chain.

Post FTX, now Bybit, it's simply sound business practice to not risk it with centralised trust anymore.

Increasingly, institutions see custody less as a service and more as a regulatory burden.

Don't trust, verify – is suddenly obvious.

But it's not just risk; AMMs are also structurally more efficient.

AMMs charge you less

Exchanges charge you a spread to cover two costs:

• Operational Cost: To build and run the exchange.
• Cost of capital: To make liquidity providers profitable.

For both, AMMs are cheaper.

AMMs are cheaper to build and run

Blockchains incentivise AMMs to be frugal:

• Small & effective code: You pay for every line of code on-chain. Also, complexity increases your attack surface. So you need to be efficient and cannot afford feature bloat.
• No way to add humans in the loop: Protocols can and want to be composable and permissionless. As a result you won't add humans in the loop, because you can't. A protocol has hardly any operational cost at all after its deployed.
• Inherit trust for free from the chain: AMMs do not need to engage in the business of "creating trust" (beyond their audit). They inherit trust guarantees from the chain for free.
• Low customer acquisition cost: If you are composable and offer the best price (or yield) then routers and LPs will give you the flow your design merits. You don't even need a UI.

Centralized exchanges, on the contrary, need to add ever more features to compete, including services with humans in the loop. Since they are not composable, they have to offer everything under one roof, and they can't inherit trust but need to build it through marketing, brand, audits and compliance.

This makes AMMs vastly cheaper to build run.

AMMs have lower cost of capital

AMMs get liquidity cheaply from passive hodlers, while centralized exchanges pay for winner-takes-all competitions that incentivize expensive participants.

Centralized Exchanges pay more for liquidity

Centralized exchanges run central limit order books with time priority (CLOBs).

Providing liquidity on CLOBs is an adversarial, winner-takes-all, game. As a result, only professional teams can participate – and much of their energy does not go into better prices but instead into one-upping the next guy (with lower latency, better adversarial predictions, and better talent).

Professional teams need to make it worth the risk and effort, and typically need a return of > 50% on their capital against USD.

Therefore, tokens like ETH are a liability to professional market makers that they need compensate with higher fees.

As a trader, you pay for these costs.

AMMs pay less for liquidity

However, decentralized exchanges are built for passive liquidity provisioning. Profits are shared equally amongst all depositors – and sophistication has limited or no payoff.

As a result, anyone can provide liquidity.

Including those to whom holding the asset, like ETH, is not a liability because they are long the asset.

So AMMs can get deposits from those with the lowest cost of capital.

And so you pay a lower fee.

Composability has no intermediation cost

Isolated systems (like a CEX or e.g. Hyperliquid) – require arbitrageurs with capital to intermediate between their market and others. You pay the operation and capital of that intermediary.

But DEXs, being composable, don't pay for intermediation amongst each other.

Composability is self-reinforcing

Defi is built on AMM liquidity: Lending markets and stablecoins need AMMs for liquidations and stability, perp protocols for leverage, staking for fast exits, etc..

If defi grows, the demand for AMMs does too.

The roadblocks that held AMMs back are about to go

Structurally, AMMs are more effective – and we expect most liquidity (even tradfi assets) to move on-chain. But why hasn't it happened yet?

Exogenous friction and some remaining design flaws made AMMs temporarily less attractive. The friction mainly was:

• Regulatory uncertainty: Many are simply trade on CEXs because they can't take an incalculable risk in the absence of clear rulings.
• Gas cost: Until recently, few chains were cheap enough for it to make sense to use AMMs for small to medium trades.
• MEV: The cost of frontrunning, sandwiches and LVR added a lot of extra cost that increased the effective spread and cost of capital.
• UX: Its just a pain to click and wait. And AMMs interfaces are un-familiar to most traders.

Gas is almost not a concern anymore with blobs and rollups.

MEV is decreasing rapidly, especially with newer designs (like Turbine or Angstrom) protecting you against LVR.

And UX is quickly improving, with faster blocks, user sessions (e.g., see App Session showcase by Ithaca.), and orderbook interfaces to AMMs.

Conclusion

AMMs have a structural advantage to provide a better price. The remaining friction points of AMMs (MEV, gas and UX) will disappear soon.

The future of trading is onchain.