travis vachon

pangolin: making markets for fun and profit

In my adventures with Avalanche I've been learning more about decentralized exchanges. This education has been, strangely enough, supercharged by the recent headline-grabbing story about Reddit's r/wallstreetbets community and Gamestop's sudden and dramatic rise and fall.

To me, the most interesting aspect of the Gamestop story was the role of a firm called Citadel Securities that "buys market orders" from Robinhood, the investing app that drove much of the Gamestop buying frenzy. As the market maker, Citadel Securities is able to "front run" trades on Robinhood, sometimes submitting buy orders informed by orders submitted by their clients - ie, Robinhood's users. The fact that this would give them the ability to add momentum and scale to price movement driven by the larger community felt especially relevant after Citadel's sister firm, a hedge fund simply named Citadel, was able to take advantage of a massive Gamestop-short-related loss booked by a competing hedge fund, Melvin Capital, to buy a large portion of their competitor. The United States House Committee on Financial Services is actively investigating speculation that Citadel may have been involved in both the runup and eventual crash after Robinhood suspended trading of Gamestock's stock.

Whether it was intentional or not, watching this unfold drove home how much power liquidity providers - the people who provide the capital to "make" liquid markets - wield in our financial system. When I realized that a new decentralized cryptocurrency exchange built on the Avalanche blockchain gave me the ability to step into this role, even in a small way, I had to give it a shot.

Pangolin (and it's sister project Uniswap) provides you, me and everyone we know with access to the risks and benefits of being a market maker. By adding "liquidity pairs" of tokens to Pangolin, I can play the role of Citadel in the Pangolin exchange, keeping the system flowing, getting transactions fees in return, and earning PNG tokens that will be used to govern the exchange in the long run. Providing liquidity does expose me to a complicated kind of risk called "impermanent loss" and since I don't really understand the ins-and-outs of "liquidity farming" I've kept this a relatively small experiment, but it's certainly giving me a better return than a savings account.

I haven't totally convinced myself that decentralized market makers are less problematic than firms like Citadel, but they certainly seem promising. By being both a user and a "worker" of Pangolin I'm invested in keeping the incentives of liquidity providers and traders aligned, and have an increasing personal stake in the governance of a platform that is providing me with material benefit, and that's a pretty good look in 2021.