Correlation Trading Pairs to Propel AMM into Larger Markets, Founder Explains

Odaily Planet Daily reports that founder Hayden stated on the X platform that he cannot ignore the theory of correlation trading pairs while observing various phenomena. He noted that the second largest liquidity pool on Base is the Jito staked SOL/BTC trading pair, which aligns with the logic of correlation trading pairs.

In an article titled "Correlation Trading Pairs: How AMM Can Win the Largest Market," Hayden expressed that AMM has the potential to become the core engine of all financial markets, with tokenization making markets programmable and changing the types of markets, market makers, and trading assets.

He mentioned that since its launch in 2018, AMM has operated autonomously, with a cumulative trading volume exceeding $4.6 trillion, and has increased the proportion of decentralized exchanges in centralized spot trading volume from less than 1% to over 20%. As AMM develops, its liquidity gradually forms a structure of correlation trading pairs.

He pointed out that AMM initially matched products with markets in the long-tail asset market, followed by the development of stablecoin trading pairs. Due to the lower capital costs of passive strategies, the demand for professional market making in stablecoin trading pairs has been squeezed.

Hayden stated that traditional financial markets are dominated by market-making firms, which integrate capital, trading strategies, execution technologies, settlement, and distribution into a vertical business. These firms handle about 25% of U.S. stock trading volume, with net trading revenues reaching $12.2 billion last year and trading capital around $21 billion.

He believes that blockchain can break down the different segments of traditional market-making businesses, with code responsible for execution, shared services providing custody and settlement, and open-source software replacing proprietary infrastructure. The scarce element of capital in AMM is the capital itself, and participants who can hold inventory at lower costs have an advantage.

Hayden explained that liquidity providers face lower inventory risk when holding assets with similar price trends, which deepens liquidity. Ethereum ecosystem assets typically trade with ETH, Solana ecosystem assets usually trade with SOL, and stablecoins form trading pairs with each other, while a few high liquidity trading pairs connect different asset clusters.

He noted that once tokenized assets share the same settlement layer, any asset can trade directly with another asset. For example, Nvidia/USD can transform into Nvidia/SPY and connect to USD through SPY/USD; oil companies can trade with oil ETFs or tokenized oil, and private credit can trade with tokenized U.S. Treasury funds.

Hayden mentioned that traditional market makers typically pursue delta neutrality, reducing risk by pricing in USD and hedging non-USD risks, which increases market-making costs. A market structure composed of low volatility correlation trading pairs and a few high volatility bridging trading pairs is expected to enhance market-making efficiency and reduce costs.

He stated that DeFi has already demonstrated this model, with ETH/USDC being one of the deepest on-chain markets, as different asset clusters route through this trading pair. Passive liquidity providers are responsible for correlation trading pairs, while active liquidity providers compete on bridging trading pairs.

Hayden noted that the correlation market for tokenized stocks has emerged, with 10 tokenized stocks trading with SPY in the liquidity pools on Chain. In the 12 days leading up to the launch, these liquidity pools achieved a trading volume of $33 million, with over 11,000 users participating in the trades, many of which occurred during U.S. market closures, with some trades completed directly between different stocks without going through USD.

He also stated that v4 Hooks support market customization, which can enhance the earnings of liquidity providers. The recently launched DualPool Hook will utilize passive AMM funds to earn lending income when funds are not used for swaps.

Hayden believes that AMM is still in its early stages and will enhance the earnings of liquidity providers and market competitiveness in various ways in the future. He stated that passive liquidity will develop in a manner similar to index funds, lowering the barriers to creating and participating in markets.

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