Orbs VP Ran Hammer Says Future of Defi 'Hinges on Liquidity Aggregation'

Liquidity Aggregation Key for Defi Protocols

In his written responses sent to Bitcoin.com News, Hammer stated that these aggregators, such as Uniswapx, Cowswap, or Jupiter, “outsource the complexity of routing to a network of third-party fillers, also known as solvers.” These solvers execute swaps using on-chain third-party liquidity sources, enabling them to improve execution prices on most trades.

However, as the defi ecosystem moves towards the much-needed liquidity aggregation, Hammer identified the current fragmented state of this landscape as the “most significant hurdle” preventing defi protocols from competing with centralized exchanges ( CEXs).

Meanwhile, the vice president of Orbs also shared advice on what new defi users need to do to protect their transactions in this current bull market. He also offered his thoughts on why he foresees on-chain derivatives as the next big narrative in defi. Below are Hammer’s responses to all the questions sent.

Bitcoin.com News (BCN): What are your observations on defi, particularly trading on decentralized exchanges ( DEXs), as we enter a new bull market with a more robust and capable defi infrastructure than the previous cycle? What do you believe is holding defi protocols back, or what prevents them from competing with centralized exchanges?

Ran Hammer (RH): DEXs (most notably automated market maker ( AMM)-based DEXs) serve as the most basic building block in the defi puzzle. At their core, these DEXs aim to provide users and other composable protocols with the best possible prices when executing trades—a goal closely tied to liquidity. However, the landscape of on-chain liquidity is highly fragmented, spanning across various chains, multiple AMMs within each chain, and diverse pools within those AMMs.

While people tend to focus on UI/UX issues as the main hurdle for DeFi adoption, I actually believe that this fragmentation of liquidity within DeFi has become the most significant hurdle, directly impacting users through unfavourable exchange rates and significant adverse price impacts on their swaps.

BCN: Fragmented liquidity has been a significant issue across decentralized exchanges ( DEXs). As the defi ecosystem continues to expand, do you think it could offer better prices than AMMs? If so, could you explain how?

RH: In the past, it appeared that most DEXs were primarily concerned with maintaining liquidity and volume within their pools. However, it’s now increasingly clear that the future of defi hinges on liquidity aggregation. This shift is evident with the emergence of dominance by aggregators such as 1inch Fusion, Jupiter, Cowswap, UniswapX and others.

These aggregators optimize trades by tapping into all available liquidity sources and in some cases, outsourcing the complexity of routing to a network of third-party fillers, also known as solvers. These solver networks execute swaps using on-chain third-party liquidity sources, enabling them to improve execution prices on most trades.

BCN: Orbs’ Liquidity Hub claims to offer better pricing and an enhanced user experience for DEX users. Typically token swaps are said to search for the best route within a DEX’s liquidity pools, which might be limited. So, what does the liquidity hub do differently to improve liquidity wherever needed?

RH: Liquidity Hub, an L3 infrastructure protocol developed by Orbs, serves as an optimization layer above the AMM, harnessing external liquidity to offer improved price quotes and minimize price impact. This technology empowers individual DEX UIs to remain competitive in the era of aggregated liquidity.

Unlike traditional swaps confined to a DEX’s limited liquidity pools, Liquidity Hub enhances the process by tapping into additional liquidity sources:

1) On-chain solver auction: Third-party solvers who compete to fill swaps using on-chain liquidity like advanced AMM pool routing or via their own private inventory.
2) Decentralized orders via API: Decentralized orders, are accessible using API. Enabling institutional/professional traders, such as market makers, to submit bids and compete to fill swaps.

Liquidity Hub can only improve a trader’s experience. If Liquidity Hub isn’t competitive, meaning it would only execute at a worse price for the user or can’t execute at all, the swap will be routed through the AMM contract directly as usual. So this essentially turns the DEX UI into a meta aggregator, while generating revenue for the AMM and allowing the AMM to focus on building up their pools.

BCN: We are in a new bull market and there will likely be a large number of people dabbling with defi for the first time. Could you explain to them what the Maximal Extractable Value (MEV) is and why traders should protect their transactions?

RH: MEV, or Miner/Validator Extractable Value, occurs when individuals incentivize block producers (miners or validators) to manipulate transactions during block creation—either including, re-ordering, or excluding them.

The Orbs team delved deep into MEV dynamics while developing Liquidity Hub.
The graph below, leveraging Dune Analytics, scrutinizes Quickswap’s trade performance over an extensive period, which is similar to other DEXs like Pancakeswap or Uniswap. On the x-axis, we have the percentage of price impact suffered per trade, while the y-axis represents volume.

Price impact embodies two facets. Negative price impact affects users swapping tokens at prices worse than the market, typically retail traders. Conversely, positive price impact benefits users trading at prices better than the market, usually institutional arbitrageurs. Arbitrageurs vie for positive price impact trades as they are profitable. Transaction ordering falls within the purview of chain validators, effectively sharing a portion of the profit with them via MEV.

Liquidity Hub trades take precedence over AMM trades (assuming similar user prices) and aren’t reliant on chain validators for ordering. Consequently, Liquidity Hub’s role is to mitigate MEV losses and redistribute them among users, LPs, and solvers.

BCN: According to a recent report by CCData, crypto derivatives hit a record-high trading volume of $6.18 trillion in March. However, the share of crypto derivatives in the total market activity declined for the sixth consecutive month to 67.8% in March. Can this be attributed to the so-called bull market effect where retail participants boost the spot trading activity on CEXs as prices skyrocket? Also, do you believe that the on-chain derivatives could be the next big narrative in defi?

RH: Top centralized exchanges like Binance, OKX, and Bitfinex show that perpetual futures trading volumes can be an order of magnitude higher than spot trading. Derivatives’ appeal lies in leverage, sometimes up to 100x, which amplifies trading positions. However, decentralized exchanges ( DEXs) contribute only 2% to total crypto derivatives trading due to low capital efficiency.

We at Orbs believe that on-chain derivatives will be the next big narrative in DeFi! Just as Liquidity Hub provides an RFQ optimization layer for DEXs (spot market), Orbs is also looking to expand its offering for the on-chain derivatives market.

BCN: Most of the time, the AMMs can attract liquidity through external incentives. However, that doesn’t make the ecosystem more sustainable because it requires a constant flow of extra tokens. How do you view the role of AMMs in the future of defi?

RH: As I said, a DEX is the cornerstone of any defi ecosystem. For a DEX to thrive and fulfil its purpose, it needs two key components: access to deep liquidity and competitive swap prices (like those offered by Liquidity Hub), and sustainable tokenomics.

In the past, many DEXs relied on liquidity farming to attract liquidity. While effective initially, this approach often led to high sell pressure and what’s termed a “death spiral.” Recognizing its unsustainability, most DEXs have shifted to alternative models. Many now adopt the v(3,3) model, pioneered by Andre Cronje, which aims to maintain token value through mechanisms like voting, escrow, fees, and incentives.

However, tokenomics is a multifaceted issue involving incentives, game theory, and regulation. We can expect to see more innovative ideas emerge in this space as it continues to evolve.

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