The Future of DeFi Trading Ecosystem: Moving Beyond Complexity, Simplicity is the Key to Breakthrough
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The Future of DeFi Trading Ecosystem: Moving Beyond Complexity, Simplicity is the Key to Breakthrough
Centralized trading supply chains make DeFi more fragile.
Navigating Web3 tides with focused insightsAuthor: Yellow Propeller
Translation: TechFlow
Key Takeaways:
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Economies of scale lead to centralization in the transaction supply chain: The lack of standards and resulting complexity create economies of scale for solvers, searchers, builders, liquidity providers (LPs), and decentralized exchanges (DEXs), driving their centralization.
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A centralized transaction supply chain makes DeFi more fragile: Exchange operations are at the core of decentralized finance (DeFi). Even if underlying protocols are decentralized, a centralized transaction supply chain remains vulnerable to censorship and exploitation.
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Simplify solving, liquidity provision, and trading processes: To build robust and efficient financial infrastructure, we need to simplify tasks within the transaction supply chain so that even small teams can compete—enabling decentralization.
Centralization Through Complexity in the Transaction Supply Chain
If you follow trends in solving, market making, and block building, you’ll notice increasing centralization across the transaction supply chain.
However, this is not inevitable. Centralization arises from economies of scale due to the excessive workload placed on participants in the transaction supply chain.
The solution is to simplify these roles so that independent operators can effectively compete. This preserves diversity, enables decentralization, and sustains innovation across market makers, searchers, block builders, DEXs, and dapps built on top of them.
In this article, we will examine the root causes and limiting assumptions behind today’s complexity in market making, solving/searching, and on-chain trading.
Complexity Drives Centralization in Market Making
The original vision of automated market makers (AMMs) was to make market making so simple that anyone could become a market maker with just a single “deposit” action.
Yet since Uniswap v2, things have grown more complex: now you must either invest significant effort managing liquidity positions or rely on additional automation tools.
Meanwhile, active market makers capture an increasingly large share of DeFi trading volume. Notably, most trading flow is concentrated among a few teams rather than distributed across diverse participants.
Market making tends toward centralization because doing it well is extremely difficult.
The main reasons why market making is hard include:
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Trading across multiple markets: Liquidity is fragmented across various markets—including spot, futures, and perpetual contracts, both on-chain and off-chain. You must manage inventory and hedge exposure across all these venues to offer the tightest spreads and win the most volume. You also need to build and maintain multiple integrations to effectively manage risk and inventory in competitive environments.
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Defending against toxic flow: To avoid losses, you must dynamically adjust bid-ask spreads for traders, using whitelists, blacklists, or graylists. This requires constant monitoring and heuristic analysis.
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Winning the latency race: Both acquiring up-to-date pricing data (from CEXs and DEXs) and executing trades are latency-sensitive competitions. Lower latency allows tighter spreads and captures more trading flow. Latency optimization is an endless process requiring continuous improvements in networking, computing resources, and business development partnerships.
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Increasing liquidity and reducing fees: Your trading capacity depends on your liquidity depth on a given platform or chain. The lower your fees (e.g., through higher tiers on centralized exchanges), the more competitive your quotes become—and the more flow you attract.
These barriers form a positive feedback loop: existing winners find it easier to stay ahead, while new entrants—including automated market makers—struggle to enter the market.
But it doesn’t have to be this way.
Market Making Can Actually Be Simple
It's commonly believed that market making is both necessary (because it incorporates market signals) and inherently difficult (due to requirements around liquidity, low-latency infrastructure, risk management, and system integration)—so we can't avoid it. However, the complexity of market making does not stem from the intrinsic nature of the work—unlike something fundamentally complex like protein folding—but rather from zero-sum competition driven by flawed market design.
Markets suffer from three major flaws:
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Time priority: Time-priority (or ordering) mechanisms create latency races and are the primary cause of complex market arbitrage and toxic flow.
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Lack of standards: Non-uniform exchange interfaces—both on-chain and off-chain—make cross-market operations more complex than they need to be.
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Lack of coordination: Small players lack effective coordination mechanisms, giving those with large liquidity pools a structural advantage.
At its core, market making is actually simple: provide liquidity at the prevailing market price, plus a spread to cover capital costs. If prices differ between two markets, buy from one and sell into the other. Everything beyond that stems from competitive dynamics caused by poor market design—competition that provides no real benefit to end users (e.g., better prices).
Complexity in On-chain Routing and Searching
Since Flashboys, the roots of market-making complexity haven't been much of a secret. But what makes solving and searching difficult—and what separates top performers from the rest—is less understood.
Let’s break down why solving these problems is so hard:
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Liquidity indexing: For solvers, the most labor-intensive task is integrating every DEX, lending protocol, staking pool, stablecoin vault, and market maker. Integration means understanding each protocol’s internal mechanics (including its math), and mapping logs and storage slot updates to prices and swap functions.
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Routing: Designing and scaling algorithms that efficiently combine orders, route trades, and split across liquidity pools is challenging. It becomes even harder when you only have hundreds of milliseconds to act.
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Relationships: Solving also involves substantial business development. You need auction platforms to whitelist you, wallets and aggregators to integrate your service, traders to trust your API, and developers to collaborate with you. You must obtain audits, post bonds, and build brand reputation to gain opportunities.
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Countless small issues: Each auction, chain, and execution environment has unique quirks and design flaws. Many of these issues don’t directly improve user pricing. They take time to learn, adapt to, and manage.
If Solving Is Too Complex—Then Intent Tends Toward Centralization
Intent will persist. Most new DEXs, bridges, and cross-chain architectures explicitly center around solvers in their design.
Yet solving is already quite difficult. Adding inventory management, searching, or market making on top makes it impractical for most teams to handle everything within a single solver operation.
Protocols expecting solvers to do it all will struggle to attract enough participants—and may have to accept some degree of centralization.
Small DEXs Struggle to Get Integrated
Besides the largest DEXs, nearly every platform struggles to gain traction.
Many well-designed DEXs fail to achieve the total value locked (TVL) and trading volume their designs deserve.
Beyond obvious factors like branding, marketing, and resources, another reason is that even the largest DEXs face challenges getting integrated into order flow sources.
Solvers and routers can barely keep up with the biggest liquidity sources—they simply don’t have time to integrate or understand the complexities of smaller DEXs.
Even just a few hooks from Uniswap v4—say 5–10—can require months of integration work.
As a result, large DEXs get integrated and attract more traffic, while smaller ones do not. With less traffic, LP returns decline, prompting liquidity providers to exit. Reduced liquidity leads to worse prices, further decreasing traffic for smaller DEXs.
Thus, in an ecosystem where integration is required to gain traffic—but integration only happens when you already have traffic, liquidity, or brand recognition—small or emerging DEXs have almost no chance to compete.
Trading Complexity Pushes Traders Off-chain
Poor on-chain trading UX feels like a broken record. But instead of focusing on bridging or account management, let’s examine the flawed assumptions behind trading itself.
Currently, we offer order types similar to those used by professional traders in traditional finance. Yet our execution infrastructure is entirely different, with different goals (no central dependency, open access, transparent execution).
As a result, our trading environment suits neither retail investors nor professional traders:
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Too many parameters: Traders must set slippage, gas fees, limit prices, choose urgency levels, and monitor order execution.
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Complex context: Traders must also implicitly consider block timing, market volatility, priority fees, and potential MEV attack vectors—such as the cost of transaction transparency.
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Unfriendly interface: For professionals, AMM curve math, MEV bundles, priority fee forecasting, or even running a block builder present steep learning curves—only the most curious and determined firms attempt them.
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Uncertain compliance: Lack of compliant exchanges, audit logs, and trade guarantees prevents large funds from participating.
No wonder so much trading happens through intermediaries that custody assets and offer familiar, simple interfaces (like centralized exchanges, OTC desks, and Telegram bots).
To Achieve Decentralization—We Need Simplicity
Unnecessary complexity wastes resources and fuels economies of scale that favor centralization.
A centralized transaction supply chain becomes fragile, prone to censorship and exploitation.
Worse, it stifles innovation, as high entry barriers prevent new designs from launching.
Such a DeFi system is no different in substance from traditional finance.
A healthy decentralized financial ecosystem requires a decentralized transaction supply chain.
The path to decentralization is simplification.
What a Simple Transaction Supply Chain Should Look Like
A healthy decentralized transaction supply chain should have the following characteristics:
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Passive liquidity providers: Participants with the lowest capital costs (e.g., long-term holders) supply liquidity. Liquidity provision becomes a “one-click” action—easy to understand and simple enough to automate. Many people can participate.
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Open to innovation: With proper design, developers of new DEXs can gain equal access to order flow and initial user adoption. Any individual contributor in the supply chain can improve specialized components and earn traffic.
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Simplified trading: Markets are designed to be simple and intuitive, optimizing user experience. Signals are efficiently aggregated (known signals like arbitrage are resolved cheaply, novel signals are rewarded), without leaking value. Most trading is driven by directional demand (buyers and holders), and trading fees are nearly negligible.
Thus, the transaction supply chain would be both efficient (low cost, fast) and robust (decentralized, open, trustless).
Building a Decentralized Transaction Supply Chain
Complexity risks permanently centralizing the transaction supply chain, creating an exploitative, fragile, censorable, and stagnant ecosystem. Our goal is to reverse this by simplifying how markets are created, solved, and traded—thereby decentralizing the transaction supply chain. In the coming days, we will introduce three key elements toward this goal:
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A standard to combat liquidity fragmentation.
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A tool to simplify coordination between solvers and liquidity providers.
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A new market design free from latency competition and trust assumptions.
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