A look at the evolution of on-chain market making

Automated market makers (AMM’s) have a been zero-to-one innovation in DeFi. First proposed by Bancor in 2017 and later popularized by Uniswap in 2018-2019, on-chain AMM’s have been instrumental in driving DeFi growth and adoption over the past several years. Using just a simple constant function market maker, Uniswap was able to briefly surpass some of the largest centralized exchanges in liquidity and volume. 

First-generation AMM’s were wildly successful in bootstrapping on-chain liquidity and attracting massive amounts of passive capital for liquidity provisioning. The main drawback, however, is that the relatively simple market making logic used by these applications suffers from poor capital efficiency.