Decentralized Finance: Comparing Liquidity Pools Across Maker, Augur, Dharma, Uniswap

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Alex Evans, a research associate at Placeholder, a “thesis-driven” venture capital firm that invests in “decentralized information networks,” has argued that “the success of Maker, Compound and Uniswap,” in terms of the large amount of funds locked into smart contracts issued on their decentralized application (dApp) networks, “seems to have little to do with the range of use cases they enable.”

According to Evans, an economics and political science graduate from the University of Virginia, “there’s no type of loan that Maker or Compound can offer that two peers can’t at least approximate by trading with each other on Dharma,” a protocol for issuing and managing “generic tokenized debt agreements.”

“Leveraged Long Exposure To ETH”

In a blog post published on April 10th, 2019, Evans explains that “through scalar markets,” Augur (REP), a leading decentralized prediction market platform, can “offer leveraged long exposure to ETH.”

This is somewhat “similar to what one can get using Maker, but with many more options for users,” Evans noted. He also pointed out that Uniswap, a protocol for building decentralized exchanges which allows MetaMask wallet users to swap assets using ETH or ERC-20 tokens, has “fewer pairs than many 0x relayers, but significantly more trading volume.”

“Constraining Types Of Trades Available To Users” Helps Increase Trading Volume?

Evans questioned why decentralized protocols which provide fewer trading options had managed to attract relatively more users, while arguing that it could be “because they constrain the types of trades available to users, allowing an ‘automatic supply-side’ to consistently offer the service.”

Issuing Long And Short Shares To Self, Then Selling Off Short To Others

Going on to give the example of how a binary market is opened on Augur, Evans noted that if traders are looking to “go long ETH,” they have to “purchase a long ETH share from another user or market maker.” Alternatively, they have the option of “issuing themselves a complete set of one long and one short share and subsequently sell off the short token to another user, keeping the long token to themselves until the market settles,” Evans suggested.

However, Evans acknowledged that “these tokens have no pairs” on any centralized or decentralized exchange (DEX). Because of their limited availability, “liquidity for such long-tail assets is severely limited, making it more expensive and less convenient to trade them,” Evans noted.

“Leveraging Newly Issued Dai For ETH”

Going on to describe a similar trading process on Maker, which he considers to be a lot simpler, Evans wrote that users can “issue themselves Dai by locking ETH.” After a user has acquired Dai, they may enter “leveraged long [positions]” by “exchanging their newly-issued Dai for ETH.” This method, Evans explained, offers a high amount of liquidity which is currently accessible through several crypto exchanges.

Comparing how liquidity is generated on Maker and Augur, Evan pointed out:

Augur fragments liquidity across a large number of unique ERC20s, while Maker concentrates liquidity in a single asset, Dai. Augur is a bespoke and varied process, Maker is automatic and consistent. This greatly improves both cost and usability.

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