The Aori Thesis
We at Aori believe that the future of on-chain trading lies in the fusion of traditional finance's best practices with DeFi's fundamental principles. As Automated Market Makers (AMMs) have illuminated both the strengths and weaknesses of current decentralized trading systems, our approach seeks to harness their insights while setting the stage for a more robust, efficient, and innovative financial ecosystem. By separating trading and clearing, Aori creates a custody-less high-frequency trading environment that not only addresses the vulnerabilities of centralized exchanges and the shortcomings of AMM’s but also paves the way for a new era of scalable and efficient, DeFi products. We aim to cleanse the crypto ecosystem of inefficient structures, reintroduce the ideals of non-profit exchanges, and expand the horizons of what's possible in the space.
Capitalism by definition necessitates the creation of efficient structures. During the most laissez-faire period in trading’s history, the period between 1880 and 1990, there was a revolution in the format of trading venues. In which monolithic entities handling, custody, trading, and clearing, saw a gradual evolution into a structure of entities which handled individual components, of trading, clearing, and custody. Wherein trading was executed on “exchanges” that you know well today like the CME, NYSE, or COMEX.
Clearing is a less familiar term in crypto because we understand clearing as an atomic function that happens on the blockchain, so for our sake we can understand the clearing entity as essentially the firm that intermediates the trades back to the custodian of the underlying traded assets. And lastly we all understand custodian as crypto custodians fulfill a virtually identical role as traditional custodians like BNY Mellon or State Street.
This separation is important. By forcing all the individual roles and responsibilities of market participants into one smart contract or corporate entity, massive negative externalities begin to occur as we’ve seen not only in CeFi...
$8B from FTX
$3B in BTC from Mt. Gox.
$196M from a hot wallet exploit on Bitmart
...but also in DeFi...
$600MM in "impermanent" losses on Uniswap V3
$115MM on Mango markets
$70MM on Curve/Vyper pools
By compressing the entire stack into a single platform, the scope of exploitation as well as centralization risk grows by orders of magnitude. The ideal exchange according to our thesis is structured like that of the separated structure as mentioned previously. Aori is the rebirth of the mutually beneficial exchange, or the “Non-Profit” exchange like the CME and NYSE of the 20th Century. The spiritual successor of the open outcry exchange. A home for the makers.
If there’s one thing undeniably agreed upon by both the most avid critics and fierce lovers of the cryptocurrency world, it’s that it’s rife with parasites. Both well and ill intentioned ones. The problem is, the ill intentioned ones are easy to identify. It’s the well intentioned ones that just ain’t so. As Mark Twain wisely said:
It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.
A prime example of this is Automated Market Makers (AMMs). On the surface, AMMs present an appealing proposition, promising "guaranteed liquidity." However, a deeper analysis reveals inherent design flaws that their proponents seem reluctant to acknowledge. Three primary issues with AMMs currently stand out:
- Impermanent Loss
- Front and back running due to blockchain limitations, aka Sandwich attacks.
While debates around these issues are open, the fact that no AMM has effectively addressed these challenges after several years suggests that these problems might not just be difficult but potentially insurmountable. This raises questions about the scalability and long-term viability of AMMs as trading infrastructure. For a more robust system to emerge, it's essential to confront and understand these inherent flaws. The crypto community has been grappling with these challenges for years, yet not only has the pace of resolution been slow, the focus has seemed to be only on mitigating these issues as opposed to uprooting the systems in which they’ve manifested. So how do we replace these systems?
To address these fundamental issues, we believe something akin to "Adverse Selection" is the most viable solution. By making direct forms of LVR more pronounced and accessible, therefore intensifying the focus on these issues, the evolution of more resilient and efficient systems is accelerated.