Uniswap founder Hayden: Correlation trading pairs will drive AMM into global financial markets Odaily Planet Daily News: Uniswap founder Hayden stated in an article on X platform that correlation trading pairs are forming. The top five tokenized SPY trading pairs in terms of trading volume are the "bridge" trading pairs that connect other common underlying trading pairs, and then mainly connect tokenized stocks with high correlation. This type of market is characterized by globalization, programmability, low cost, and 24/7 operation. Uniswap founder Hayden stated in an article on X platform:. I have been working at the forefront of DeFi for 9 years. This is a fascinating field with infinite depth and the ability to transform capital markets. I have always believed that AMM has enormous potential, but over the past decade, a question has persisted: can this new market structure truly become the core engine of all financial markets? After years of evolution and development, the path of AMM towards global dominance is becoming increasingly clear. To explain this, we need to start from 1976. Tokenization changes market makers. Index funds celebrate their 50th anniversary this month. When Jack Bogle launched the index fund in 1976, he hoped to raise $150 million, but ultimately only raised $11.3 million. Competitors refer to it as "Bogle's foolishness" and post posters claiming that index funds do not align with American values. They believe that a fund that does not make any decisions cannot defeat professionals who pay to make decisions. Nowadays, the majority of US fund assets are allocated to passive investment vehicles. I have been thinking about this recently because the 'moment of foolishness' of tokenization is coming to an end. The US Securities and Exchange Commission has approved the trading of tokenized stocks on NASDAQ and the New York Stock Exchange. DTCC, responsible for almost all securities settlement work in the United States, also conducted a tokenization trading trial in July. Almost all related activities are described in the same way: tokenization is seen as an infrastructure upgrade. Same market, faster, cheaper, and always open. These statements are all correct, but I believe that the framework of infrastructure upgrades masks even greater changes. Tokenization makes the market programmable, changing the form of market existence, market makers, and the objects of market transactions. In 2018, I created Uniswap, which is an automated market making protocol. Anyone can deposit two types of assets into a shared fund pool and earn transaction fees from each transaction, while the price will adjust along the curve as users buy and sell. Uniswap has been operating independently since its launch, with a cumulative trading volume exceeding $4.6 trillion and driving the proportion of spot trading volume on decentralized exchanges from less than 1% to over 20%. With the continuous development of AMMs such as Uniswap, their liquidity has formed a pattern that most financial markets have not yet noticed: correlation trading pairs. The easiest areas to achieve results. To achieve success in all fields, one must first succeed in a certain field. AMM has found a point of convergence between its products and the market in the long tail market, as most assets were previously unable to gain the attention of professional market makers. On Uniswap, anyone can create a market through a single transaction, and issuers and early supporters can become the first liquidity providers. Subsequently, stablecoin trading pairs emerged. Taking USDC/USDT as an example, a good passive strategy can approach the optimal level, and lower capital costs are sufficient to cover the gap. This is also the reason why professional trading companies are no longer involved in market making for these stablecoin exchange transactions, as the cost of passive AMM is lower. High profits and lack of competition. The traditional financial market is entirely dominated by market making companies. These companies integrate capital, trading strategies, execution technology, settlement, and distribution into a vertically integrated business. The formation of such an architecture has its reasonable reasons: assets exist in independent systems, settlement speed is slow, and each function requires someone to complete it, so an institution is responsible for all functions. When the scale is large enough, all fixed costs can be covered. Citadel Securities handles approximately 25% of US stock trading volume and generated a record breaking net trading revenue of $12.2 billion last year with approximately $21 billion in trading capital. Most people see these numbers as proof of the effective functioning of the system, while I see them as a manifestation of market consolidation. Breaking business bundling. Blockchain introduces competition at various levels, breaking down previously bundled businesses. Transaction execution is completed through code, and custody and settlement have become shared services that anyone can access. The work that used to require proprietary infrastructure has now become open source software. In AMM, capital is a scarce input, and the advantage belongs to the party that can hold inventory at the lowest cost. Trading companies need to obtain higher returns to cover their operating expenses, so liquidity providers willing to accept lower returns can form a competitive advantage. Most market makers will offset all price exposures, and hedging incurs costs, so investors who already hold related assets can bear this portion of exposure for free. The capital cost of asset issuers is negative, as they typically need to pay fees to professional market makers to provide liquidity for their new assets. In short, DeFi and AMM have lowered the market making threshold and opened up the market to more participants. Their advantages may come from multiple sources, such as lower capital costs, willingness to bear the inventory exposure that professional institutions typically offset, or even directly from the asset issuer itself. But all of this depends on one question: can the automation strategy perform well enough to support this system? Liquidity follows correlation. Not long ago, I had a call with one of the largest institutions in the financial field. The other party inquired about the most common underlying trading pairs in DeFi. I explained that Ethereum based assets are typically traded with ETH, Solana ecosystem assets are typically traded with SOL, stablecoins form trading pairs with each other, and only a few high liquidity trading pairs serve as bridges between these clusters. This model was not designed by anyone, but naturally formed, partly because liquidity providers usually perform better when their assets change in the same direction. Correlation means that liquidity providers face lower inventory risks, thereby deepening liquidity. With asset tokenization, the world's largest market will also restructure in the same way. Traditional markets are currently unable to achieve this. Due to necessity, the vast majority of settlements in traditional markets are conducted in US dollars. Assets exist in isolated systems, and fiat channels such as SWIFT and Fedwire are the glue that maintains the entire system. But blockchain is a more expressive adhesive. After the asset is tokenized, it can share the same settlement layer, so any asset can be traded directly with other assets. The Nvidia/USD can be converted into Nvidia/SPY, and then used as a bridge to connect the US dollar through SPY/USD. Oil companies can trade with crude oil ETFs or tokenized crude oil. Private credit can be traded with token treasury bond bond funds. Tokenization can also enable markets across different asset types, which is extremely difficult or even impossible for traditional financial infrastructure. Delta neutrality is an inefficient approach. Traditional market making companies typically attempt to achieve 'Delta neutrality'. This is a trader's statement about pricing in US dollars and minimizing non US dollar risks. When making markets for volatile assets, they usually pay costs through options to reduce non US dollar risks, that is, to hedge. This is one of the high cost links in traditional market making. Forming assets into low volatility "correlated trading pairs" connected by a few high volatility "bridge" trading pairs can bring multiple efficiency improvements. The most important point is that if market makers truly wish to hold underlying assets, the cost of market making will be lower and the efficiency will be higher. The higher the correlation between trading pairs, the smaller the gap between passive AMM strategies and the most complex active strategies, making it easier to compete with active strategies with lower inventory costs. Specifically, if someone is bullish on Nvidia, they are likely to be bullish on SPY as well. Compared to Nvidia/USD, the efficiency gap between Nvidia/SPY's passive AMM strategy and active strategy is much smaller. Connected liquidity. If stocks are traded with SPY, all trades starting or ending in USD will be routed through the same trading pair, namely SPY/USD. These bridge trading pairs still require a high level of professional expertise, but their quantity is much smaller and they carry sufficient transaction traffic, which is worth investing resources in by professional institutions. DeFi has proven this. ETH/USDC is one of the most liquid markets on the chain, as each cluster routes through this trading pair. Passive liquidity providers provide liquidity for related trading pairs, while active liquidity providers compete around bridge trading pairs. Investors can still buy and sell all assets in US dollars, as trades are automatically routed through multiple fund pools. Liquidity will be concentrated in areas with the lowest risk, rather than being forced to stay in places limited by traditional infrastructure. This will drive the deepest market shift towards correlated trading pairs, which is precisely the area where AMM already has advantages. Related RWA trading pairs already exist. Chain related liquidity initially came from encrypted native assets. But the first relevant markets for tokenized stocks have emerged: 10 tokenized stocks are traded with SPY in the Uniswap fund pool on Robinhood Chain. In the first 12 days, the trading volume of these fund pools reached $33 million, with over 11000 users participating in trading, with a significant amount of trading occurring during the US stock market shutdown. Some transactions directly exchange one stock for another without going through the US dollar. It is worth mentioning that we have also started to see trading pairs between Memecoin and "related" stocks, such as pairing Elon themed Memecoin with Tesla stocks and hot dog themed Memecoin with Costco stocks. It is currently unclear how much correlation they have in terms of price, but I think 'feeling' can also be considered as another type of correlation. AMM will achieve success. Correlation trading is only one part of it, the other part is the design and customization of AMM. Uniswap v4 Hooks support comprehensive market customization, which can significantly improve the return of liquidity providers. For example, our recently released DualPool Hook allows passive AMM funds to be used to earn lending income when they are not redeemed. Although Uniswap's trading volume has reached approximately $4.6 trillion, I believe AMM is still in its early stages and there are many paths in the future to enhance its competitiveness. Labs, partners, and other participants in the ecosystem are building many solutions to increase returns for liquidity providers. More content is about to be released. In 1976, the reason for opposing index funds was that a fund that did not make any decisions could not defeat professionals who paid to make decisions. 50 years later, funds that do not make any decisions have defeated about 90% of professionals. More importantly, index funds have made investment more accessible and improved the lives of ordinary people. I believe that passive liquidity will achieve success through a similar path and have a greater impact by significantly lowering the threshold for creating and participating in the market.