Prop AMMs Are Solana's Biggest DeFi Innovation | Chris Hermida
🎯 Summary
Podcast Episode Summary: Prop AMMs Are Solana’s Biggest DeFi Innovation | Chris Hermida
This 57-minute episode of Light Speed features Chris Hermida, co-founder of Switchboard, discussing the rise and significance of Proprietary Automated Market Makers (Prop AMMs), which he prefers to call Oracle AMMs, on the Solana blockchain. The conversation centers on how this market structure innovation is fundamentally changing on-chain trading efficiency and liquidity provision.
1. Focus Area
The primary focus is on Decentralized Finance (DeFi) market structure innovation, specifically the evolution of Automated Market Makers (AMMs) on Solana. The discussion contrasts traditional AMMs with Oracle/Prop AMMs, examining their technical underpinnings, competitive advantages, and impact on liquidity providers (LPs) and retail traders.
2. Key Technical Insights
- Oracle AMM Mechanism: Prop AMMs differ from traditional AMMs (like early Uniswap) by using oracles (like Switchboard or Pyth) to price assets based on external, off-chain price discovery (e.g., Binance). This makes them “reactive” rather than purely “reactive” to the last on-chain trade.
- Mitigation of Adverse Selection: By using external pricing, these AMMs allow liquidity providers to quote tighter spreads and are less susceptible to adverse selection (toxic flow) compared to passive liquidity in traditional AMMs, leading to better capital efficiency for LPs.
- Solana-Specific Advantage: The dominance of aggregators like Jupiter on Solana has been crucial. Aggregators route retail flow to the best execution venue, allowing Prop AMMs—which offer superior pricing for large, liquid pairs—to capture significant order flow by plugging directly into these routers.
3. Market/Investment Angle
- Tighter Spreads for Retail: The net result for the average retail user is often tighter spreads and better execution prices on Solana for major pairs (like SOL/USDC) compared to centralized exchanges, indicating a highly efficient on-chain market for these assets.
- Attraction of Trading Firms: The massive on-chain volume on Solana naturally attracts sophisticated trading firms and market makers who seek to provide liquidity and capture flow, often bringing traditional HFT secrecy and expertise into the DeFi space.
- Future Expansion to RWAs: This infrastructure is seen as critical for bringing deep, efficient on-chain liquidity to Real World Assets (RWAs) where price discovery predominantly occurs off-chain in traditional finance.
4. Notable Companies/People
- Chris Hermida (Switchboard): Guest and expert on oracle infrastructure and Solana market structure.
- Jupiter Swap: Highlighted as the dominant aggregator on Solana, acting as the essential gateway for Prop AMMs to access retail order flow.
- SOLFi (Ellipsis Labs): Mentioned as one of the first and most successful Prop AMMs, demonstrating deep technical expertise in Solana market infrastructure.
- Kamino, Orca, Raydium, Meteora: Mentioned as key players in the evolving Solana DEX landscape.
5. Regulatory/Policy Discussion
The discussion touched upon the secrecy culture adopted by the teams behind these successful Prop AMMs. This secrecy, similar to traditional HFT firms, is partly driven by the desire to protect a competitive edge and potentially mitigate regulatory risks associated with operating highly efficient trading venues.
6. Future Implications
The conversation strongly suggests that Oracle AMMs are the future standard for trading large, liquid assets across all major DeFi ecosystems, not just Solana. As more chains mature, this market structure will likely be replicated elsewhere to provide superior execution quality by linking on-chain liquidity to off-chain price discovery.
7. Target Audience
This episode is most valuable for DeFi professionals, blockchain developers, crypto investors, and market structure analysts interested in the technical evolution of on-chain trading and the competitive dynamics within high-throughput ecosystems like Solana.
🏢 Companies Mentioned
💬 Key Insights
"And I think you're seeing that really materialize on-chain. I mean, Pump's raise, if you will, and SOL, I think was just incredible to see how much, not judging it one way or another, just the actual size that happened and was fulfilled mainly on-chain, and for it, I think is a big win for the ecosystem and shows you that you can have internet capital markets, you can have people creating and issuing new assets and"
"The joke or line that I always say is, Terra and Luna are a piece, rest in peace. Anchor had terrible UX, if you had to bridge over to it, it was just not a great experience, but they still ended up having $14 billion, I think, at the peak, bridged in Anchor. Why? Because the yield was there and you just wanted it."
"If you do see that [shift to pull-based mechanism for price updates], that opens up Oracle AMMs and prop AMMs more broadly to effectively support a much broader number of assets in a much more cost-effective way and opens that up to a lot of competition."
"The thing that would make these sorts of products much less interesting, much less attractive, is quite frankly, if volume goes elsewhere or on-chain volume just falls off a cliff."
"the companies, the protocols, etc., that control that end-user flow are valuable and sort of have the most opportunity in that field."
"if you're thinking about how, what next, or what to build, I think you can't just look at that one product or you can't look at that one feature set. You have to think more broadly to who are the users that protocol is serving or that product is serving, and how can you better suit their needs while still capturing some value there."