Decentralization vs Fairness

The Situation in TradFi

Markets have evolved historically from a structure that made sense when humans traded among each other at special venues to a perverse system where speed is elevated above all. Specialized firms called Market Makers (MMers) provide liquidity but have to understand and protect themselves from the tricks of High Frequency Trading (HFT). Investors can nowadays generally instantly trade deep books at small spreads. What appears to be working well at first means that

  1. The fastest exchange will be the most liquid exchange.
  2. Markets for special, unpopular or particularly risky assets will not be traded by most MMers and thus only standard products will have efficient markets.
  3. Regulations and enforcements are needed to tame the worst extractive strategies and protect users, and actors must go through surveillance, registrations and licenses for each product offer.
  4. MMers and exchanges will be paid for the algorithms, tech and infra of the HFT arms race (a sort of prisoner's dilemma that wastes human resources) and still yet, more money is siphoned off by purely extractive HFT firms. This money has to ultimately come from somewhere.
  5. Those who manage to trade first in special moments, for example to exit in a market-wide crash, or for assets strongly tied to an aspect of the real world with incoming news, get vastly different prices at the cost of those who come second or later, often also including MMers (stale-quote sniping).

Decentralized markets

"Decentralized" can be understood in multiple ways:

  • The underlying infrastructure is a distributed blockchain: This usually implies a downside for speed with respect to centralized infrastructure.
  • absence of admin control of a permissionless protocol
  • referring to shared and permissionless ownership of a product, such as flat distributions of governance tokens that can be bought by anyone

What is typically not mentioned is that just because a DeFi protocol is permissionless and offers the same rights to any user, it is in practice often not fair in that technically sophisticated and professional users can have a huge advantage (for example, AMMs where orders can be frontrun), so much so, that a whole industry has evolved around extractive strategies.

The typical DeFi user in the future would treat DeFi like other chores: passively. Yet, finance functioning as the TradFi system described above requires the participation of active professionals, in particular for market making. When protocols ask normal users to take on a passive role for such tasks, they will generally be exploited: Liquidity provision in an AMM is the canonical example where providers generally suffer higher impermanent loss than what can sustainably be paid as compensation. Clearly, more complicated products would demand more active and very demanding market making. Therefore, a distinction between passive users and active specialized firms emerges, which in practice is still at odds with the ethos of treating everyone equally. Relying on specialized firms, which will be subject either to regulation requirements or free to extract, with effectively special powers is a form of centralization that blockchains do not yet dissolve.

  • Since the GLOB is less about speed, it is well suited to run on networks that are inherently slower. There is no need for blocktimes faster than a second, and the number of interactions / transactions with the GLOB are reduced to built-in algorithmic trading. This avoids blockchains spending massive amounts on infrastructure required to synch a global decentralized state fast at high TPS.

  • GLOBs level the playing field and ensure that markets are truly neutral. This will become clear in particular applications, such as prediction markets that are actually credible neutral by disabling adverse selection frontrunning and oracle extractable value (OEV), and swaps that disable these and other speed-based attacks. By providing built-in tools, they furthermore enable passive LPs to earn a spread just like a MM.

  • With GLOBs, there is no cost to create and interact instantly in a new market, on any asset, by anyone. There is no need to rely on MMers or onboard LPs.

  • Every GLOB markets can scale to any size. The more participants, the better the market will function. This needs to be compared to the current state of DeFi where AMMs have no chance to scale bigger than other exchanges due to the issues of IL and CLOBs would suffer compared to centralized exchanges, with the same professional firms able to serve both anyway.

In summary, markets can now be started for free to trade anything instantly while giving any passive user the same rights and prices as the most professional one: A truly fair market that incentivizes what counts -- a competition on price, and rewarding precisely those who predict future prices best.