Odaily Planet Daily News: Uniswap founder Hayden posted on X that correlated trading pairs are forming. The top five trading pairs by volume involving tokenized SPY serve as "bridge" pairs connecting other common base pairs, subsequently linking primarily to tokenized stocks with higher correlation. These markets feature global accessibility, programmability, low costs, and 24/7 operation.
Uniswap founder Hayden posted on X:
I have been working at the forefront of DeFi for nine years. It is a fascinating field with limitless depth and the potential to transform capital markets.
I have always believed that AMMs hold tremendous potential, but for the past decade, one question has persisted: Can this entirely new market structure truly become the core engine of all financial markets?
After years of evolution and development, the path for AMMs to achieve global dominance is becoming increasingly clear. To understand this, we need to go back to 1976.
Tokenization transforms market makers.
This month, index funds celebrate their 50th anniversary. When Jack Bogle launched the first index fund in 1976, he hoped to raise $1.5 billion but ended up raising only $11.3 million. Competitors called it “Bogle’s folly” and posted posters claiming index funds were un-American. They believed a fund that made no decisions could never outperform professionals paid to make them. Today, the majority of U.S. fund assets are allocated to passive investment vehicles.
I’ve been thinking about this lately, as the tokenization “fool’s errand” is coming to an end. The U.S. Securities and Exchange Commission has approved tokenized stocks for trading on Nasdaq and the New York Stock Exchange. DTCC, which handles nearly all securities settlement in the U.S., also conducted a live pilot of tokenized transactions in July. Nearly all related activity is described in the same way: viewing tokenization as an infrastructure upgrade.
The same market, faster and cheaper, and always open. These statements are all true, but I believe the framework of infrastructure upgrades obscures a larger transformation. Tokenization makes markets programmable, changing the very nature of markets, market makers, and what is traded.
In 2018, I created Uniswap, an automated market-making protocol. Anyone can deposit two assets into a shared liquidity pool and earn fees from every trade, while prices adjust along a curve as users buy and sell. Since its launch, Uniswap has operated autonomously, achieving over $4.6 trillion in cumulative trading volume and helping increase the share of spot trading volume on decentralized exchanges from less than 1% to over 20%.
As AMMs like Uniswap continue to evolve, their liquidity has formed a pattern that most financial markets have yet to notice: correlated trading pairs.
The area with the easiest results.
To succeed in all areas, you must first succeed in one. AMM found product-market fit in the long-tail market, as most assets had previously been ignored by professional market makers. On Uniswap, anyone can create a market with a single transaction, allowing issuers and early supporters to become the first liquidity providers.
Stablecoin trading pairs then emerged. For example, with USDC/USDT, a good passive strategy can approach optimal performance, and the lower capital cost is sufficient to cover the gap. This is also why professional trading firms no longer participate in market-making for these stablecoin exchanges—passive AMMs have lower costs.
High profitability and lack of competition.
Traditional financial markets are entirely dominated by market-making firms. These firms integrate capital, trading strategies, execution technology, settlement, and distribution into a vertically integrated business. This structure developed for valid reasons: assets existed in separate, isolated systems, settlement was slow, and each function required dedicated personnel, making it logical for a single institution to handle all functions.
When scaled sufficiently, all fixed costs are covered. Citadel Securities handles approximately 25% of U.S. stock trading volume and generated a record $12.2 billion in net trading revenue last year with approximately $21 billion in trading capital.
Most people view these figures as proof that the system is functioning effectively, while I see them as a sign of market rigidity.
Break business dependencies.
Blockchain introduces competition at every level, separating previously bundled services. Transaction execution is handled through code, while custody and settlement become shared services accessible to anyone. Tasks that once required proprietary infrastructure are now accomplished through open-source software.
In AMMs, capital is a scarce input, and the advantage lies with those who can hold inventory at the lowest cost. Trading firms require higher returns to cover their operational expenses, so liquidity providers willing to accept lower returns gain a competitive edge. Most market makers hedge their entire price exposure, and hedging incurs costs; therefore, investors who already hold the relevant assets can bear this exposure at no additional cost. For asset issuers, the cost of capital is negative, as issuers typically pay fees to professional market makers to provide liquidity for their new assets.
In short, DeFi and AMMs lower the barriers to market making, opening the market to a broader range of participants. Their advantages may stem from various sources, such as lower capital costs, willingness to hold inventory exposure that professional institutions typically hedge, or even direct support from asset issuers themselves.
But all of this depends on one question: Can automated strategies perform well enough to sustain this system?
Liquidity follows correlation.
Recently, I spoke with one of the largest institutions in the financial sector. They asked what the most common base trading pairs in DeFi are. I explained that Ethereum-based assets typically trade against ETH, Solana ecosystem assets trade against SOL, and stablecoins are paired with each other, with only a few high-liquidity pairs acting as bridges between these clusters.
This model was not designed by anyone but emerged naturally, partly because liquidity providers tend to perform better when the assets they hold move in the same direction. Correlation means liquidity providers face lower inventory risk, enabling deeper liquidity. As assets become tokenized, the world’s largest markets will restructure in the same way.
Traditional markets currently cannot do this. Necessity has led to the vast majority of settlements in traditional markets being conducted in U.S. dollars. Assets exist in isolated systems, with fiat channels like SWIFT and Fedwire serving as the glue that holds the entire system together. But blockchain is a more expressive form of glue. Once assets are tokenized, they can share the same settlement layer, enabling any asset to trade directly with any other asset.
NVIDIA/USD can be converted to NVIDIA/SPY, with SPY/USD serving as a bridge to USD. Oil companies can trade with crude oil ETFs or tokenized crude oil. Private credit can be traded with tokenized Treasury fund assets. Tokenization also enables markets across different asset classes, which is extremely difficult or even impossible with traditional financial infrastructure.
Delta neutrality is an inefficient approach.
Traditional market makers typically aim to achieve "delta neutrality," a term traders use to describe strategies that are denominated in U.S. dollars while minimizing non-dollar risk. When market making on volatile assets, they often incur option premiums to hedge against non-dollar risk. This is one of the key factors contributing to higher traditional market making costs.
Connecting low-volatility "correlation pairs" through a small number of high-volatility "bridge pairs" can lead to multiple efficiency gains. Most importantly, if market makers genuinely wish to hold the underlying assets, market-making costs will be lower and efficiency 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 using lower inventory costs.
Specifically, if someone is long NVIDIA, they are likely also long SPY. The efficiency gap between passive and active strategies for NVIDIA/SPY is much smaller than for NVIDIA/USD.
Connected liquidity.
If trading occurs between stocks and SPY, all trades that begin or end in USD will be routed through the same trading pair: SPY/USD. These bridge pairs still require significant expertise, but there are far fewer of them, and they handle sufficient trading volume to justify professional institutions investing resources.
DeFi has proven this. ETH/USDC is one of the most liquid on-chain markets, as every cluster routes through this trading pair. Passive liquidity providers supply liquidity to correlated pairs, while active liquidity providers compete around bridge pairs.
Investors can still buy and sell all assets using USD, as trades are automatically routed through multiple liquidity pools. Liquidity will concentrate where risk is lowest, rather than being forced to remain constrained by traditional infrastructure. This drives the deepest markets toward correlated trading pairs—the very area where AMMs already hold an advantage.
The RWA-related trading pair already exists.
On-chain correlation liquidity initially came from crypto-native assets. However, the first correlation markets for tokenized stocks have already emerged: ten tokenized stocks are trading against SPY in Uniswap liquidity pools on Robinhood Chain.
Within the first 12 days, these liquidity pools generated $33 million in trading volume, with over 11,000 unique users participating—much of the trading occurring during U.S. stock market closures. Some trades directly exchanged one stock for another without involving U.S. dollars at all.
Notably, we are also beginning to see Memecoins paired with “related” stocks, such as pairing an Elon-themed Memecoin with Tesla stock or a hot dog-themed Memecoin with Costco stock. It’s unclear how strong the price correlation actually is, but I think “feeling” can also count as another form of correlation.
AMM will succeed.
Relevant trading pairs are only one part; the other part is the design and customization of AMMs.
Uniswap v4 Hooks enable comprehensive market customization, significantly enhancing returns for liquidity providers. For example, our recently released DualPool Hook allows idle passive AMM funds to earn lending and borrowing yields when not used for swaps.
Although Uniswap's trading volume has reached approximately $4.6 trillion, I believe AMMs are still in their early stages, with many opportunities ahead to enhance their competitiveness. Inside Labs, among partners, and other participants in the ecosystem, numerous initiatives are being developed to improve returns for liquidity providers. More details will be released soon.
In 1976, the argument against index funds was that a fund making no decisions could not outperform paid professionals who actively make decisions. Fifty years later, a fund making no decisions has outperformed about 90% of professionals. More importantly, index funds have democratized investing and improved the lives of ordinary people. I believe passive liquidity will follow a similar path to success, having an even greater impact by dramatically lowering the barriers to creating and participating in markets.