Crypto exchange Binance appears to be jumping on the decentralized finance (DeFi) bandwagon, but not via a decentralized protocol.
Binance has today launched a "centralized" automated market maker (AMM) pool, which allows liquidity providers to earn interest and income from trading fees.
The AMM pool, called Binance Liquid Swap, will have different liquidity pools with the instant token swap functionality. Binance says the AMM pricing model helps provide "more stable prices and lower fees" as compared to the order book model.
This may not be entirely true. Order book exchanges allow submitting two types of orders: a market order (buy or sell a token immediately for available price) and a limit order (buy or sell a token at a specified price while your order sits on the order book).
AMM exchanges, on the other hand, use different algorithms or predefined formulae and pool liquidity together to make markets. AMM exchanges, therefore, help provide liquidity regardless of the order size.
At launch, Binance Liquid Swap will support three trading pairs for liquidity providers: USDT/BUSD, BUSD/DAI and USDT/DAI. The interest and trading fee income are not known. A Binance spokesperson told The Block that interest rate and fee income for liquidity providers would be flexible, depending upon the size of the liquidity pools and transaction volume.
Uniswap, the leading decentralized exchange (DEX) by trading volumes, follows the AMM model and distributes all of the collected trading fees (0.30%) as rewards to liquidity providers in any pool.
"We hope to further the growth of the DeFi marketplace...through a centralized AMM pool," said Binance CEO Changpeng "CZ" Zhao. "We are looking forward to...provide liquidity in instant swaps as DeFi products attract more volume and participants. And, with an incentivized pool design that benefits our community, from the community."
It is worth noting that Binance also operates a DEX and uses a periodic auction to fulfill orders on that platform, thus taking away the concept of market makers and takers. When asked why Binance has launched the AMM pool on its centralized exchange rather than on its decentralized platform, the Binance spokesperson told The Block: "Binance Liquid Swap is similar to decentralized AMM pools in the sense that it offers users easy earning power, but caters to a different group of users that prefer to use centralized exchanges."
Update: This story has been updated to include comments from a Binance spokesperson.
© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.