What role should the AMM play in the RWA field?

At present, the mainstream AMM is not suitable as the main market of RWA due to the inconsistency of the economic model, and should be positioned in the convenience layer of small transactions, and the main liquidity should be handled by mechanisms such as issuance, order book and auction. This article is based on an article written by @sanqing _rx and is compiled, compiled and contributed by Foresight News. (Executive summary: DEX market accounted for more than 25% of the "record high" in May, decentralized trading is becoming a trend? (Background added: Christie's can buy a house with cryptocurrency, a new milestone in the RWA track) Real-world asset (RWA) is becoming a key narrative for Web3 going mainstream. However, introducing trillion-scale real assets on-chain, only completing tokenization is the first step, and how to build efficient and stable secondary market liquidity for them is the real challenge that determines its success or failure. As the cornerstone of DeFi, the automated market maker (AMM) is naturally expected to be high, but can it be directly copied into the world of RWA? Summary (three-sentence overview) Conclusion: The current mainstream AMMs ( centralized liquidity, stablecoin curves, etc ) are not suitable to act as the "main market" of RWA. The biggest hurdle is not the curve model, but the economic model of LP ( liquidity providers ) which is unsustainable in a low-cycle, highly compliant, slow-priced RWA environment. Positioning: Issuance/redemption, KYC order book/RFQ, and regular auctions should be set as the "main roads" of RWA liquidity; AMM retreats to the "convenience layer" and only undertakes small, daily, and convenient secondary turnover needs. Method: Through the combination of "narrowband market making + Oracle sliding belt / Hook + income bridging", the original income ( such as coupon, rent ) of RWA is truly transmitted to LP, supplemented by perfect risk control and information disclosure. First, AMM should not be the "main market" of RWA RWA pursues a predictable, measurable and settleable core financial vein. Although the AMM mechanism of continuous quotation is very innovative, there are three inherent challenges in most RWA scenarios: the natural transaction is not warm, the information heartbeat is slow, and the compliance path is lengthened. This makes the LP's return on trading fees alone appear unusually thin, while at the same time exposing itself to the risk of impermanent losses. Therefore, our core view is that AMMs should not act as the RWA "main market", but should become the "last mile" of liquidity. Its role is to allow users to easily exchange small assets anytime, anywhere, improving the user experience, but the core functions of large transactions and price discovery must be handed over to other more suitable mechanisms. Second, why AMM can be successful in the crypto-native world? To understand the limitations of AMM in the RWA scenario, first understand what are the cornerstones of its success in the crypto-native world: Trading from non-stop: 7×24-hour global markets, plus permissionless cross-market arbitrageurs, any spreads are instantly smoothed out, creating continuous trading activity. Extremely composable: Almost anyone, any protocol can become an LP or participate in arbitrage without threshold, forming a strong network effect and traffic self-reinforcement. Volatility is business: High volatility brings a lot of trading demand and arbitrage opportunities, and the transaction fees generated give LPs the opportunity to "outperform" impermanent losses. When we try to replicate these three points in the RWA space, we find that the entire foundation has changed: the frequency of transactions has been significantly reduced, the pricing heartbeat has been extremely slow, and the threshold for compliance has been greatly raised. "Pricing heartbeat" refers to the "frequency of trusted price updates", which is the key to understanding the difference between RWA and crypto-native assets. Crypto-native assets: Heartbeats are usually second-level ( exchange quotes, oracle feeds, ). Most RWAs: Heartbeats tend to be daily or even weekly ( fund net worth updates, property valuations, auction prices, ). The slower the heartbeat of an asset, the less suitable it is for a continuous pool of quotes with long-term hanging depth. Third, in the RWA scenario, the economic account of the LP is uneven The "annualized sense of return" of LP's investment mainly depends on three things: the transaction rate, the weekly rotation intensity of the funds in the effective price range, and the annual repetition of the trading rhythm. For RWA, this account is difficult to settle because: Weekly turnover rate is generally low: "Funds deposited in the pool" are rarely "activated" by high-frequency trading, resulting in scarce fee income. Opportunity cost is too high: There are substantial coupon or risk-free interest rates in external markets. LPs use the same principal to directly hold the RWA asset itself ( if it can be ), it is often more cost-effective than providing liquidity. Risk-return imbalance: In the context of low fee income, LPs also bear the risk of impermanent losses ( relative to the loss of unilaterally held assets ) and the risk of being "plundered" by arbitrageurs due to feeding delays. On the whole, LP's economic model is naturally at a disadvantage in RWA AMM. Four Structural Frictions: Pricing and Compliance In addition to the economic model, there are two structural issues that hinder the adoption of AMM. Misalignment of pricing cadence: RWA's net worth/valuation/auction is a "slow heartbeat", while AMM offers real-time tradable quotes. This time difference gives people with the most up-to-date information a huge arbitrage window where they can easily "eat" the spread of an unreasonable LP on the AMM. Compliance cuts composability: Compliance requirements such as KYC, whitelisting, and transfer restrictions lengthen the path of funds in and out, breaking the DeFi "everyone can participate" Lego brick model. This directly leads to the segmentation of liquidity and the lack of depth. "Plumbing" of cash flow: RWA's cash flows, such as coupons or rents, are either reflected in the rise in net worth or need to be paid directly. If the AMM/LP mechanism does not design a good income capture and distribution path, the LP may not get this due cash flow, or it may be diluted in the arbitrage process. V. Applicable Boundaries and Practical Cases Not all RWAs are incompatible with AMM, and we need to categorize and discuss them. Friendlier: Assets with a short duration, daily net value, and high price transparency ( such as IMF shares, short-term treasury bonds, interest-bearing certificates, ). These assets have a clear hub price and are suitable for providing convenient exchange services with narrowband AMMs. Less friendly: Assets that rely on offline valuations or infrequent auctions ( such as commercial real estate, private equity, ). This type of asset has a slow heartbeat and serious information asymmetry, which is more suitable for order book / RFQ and regular auction mechanism. Case: Plume chain Nest's arbitrage window Background: The nALPHA, nBASIS tokens of the Nest project have AMM pools on Curve and native Rooster DEX. Initially, the redemption process is fast ( about 10 minutes ), but the token price is updated about once a day, sometimes more slowly. Phenomenon: Due to the "daily change" of the net value and the AMM "second report", when the new net value was announced, the AMM price failed to keep up in time, resulting in an arbitrage window of "buying at a low price on the DEX → immediately applying to the project party for redemption → settled at the updated higher net value". Impact: Arbitrageurs profited, while AMM LPs suffered all the impermanent losses, especially those that provided liquidity more out of the price range. Review and repair suggestions: Review...