Why DEXs?

Building a complete understanding of a product and its place in the market can reveal unnecessary risks

The gm Portfolio is focused on decentralized exchanges which will be the majority of its core positions. Why DEXs?

At this early stage of the DeFi arc, the products that have found the highest level of product-market fit are DEXs, perpetual swap platforms, and lending platforms. Other niches, such as options and insurance, are still very much in their infancy.

So why focus more on DEXs and not on lending platforms or perpetuals platforms? Because they have additional layers of risk that DEXs do not. Anything that involves collateral can blow up from liquidation failure like MakerDAO did in March 2020, necessitating, at the very least, rescue via token dilution. And any protocol that uses outside price discovery risks oracle failure.

If I was the founder of a lending or derivatives protocol, I wouldn’t sleep easy at night. I would toss and turn, haunted by visions of a gaggle of ineffective liquidation keepers laughing at me instead of doing their job. I bet Hayden Adams suffers no such nightmares.

The universe has demonstrated a knack for finding weak spots in DeFi protocols and bludgeoning them with a sledgehammer. Smart contract risk is hard enough to manage on its own. It’s all the more difficult to manage additional layers of risk on top.

(Note that some DEXs do have collateral and/or additional layers of risk on top: THORchain has collateralization of synthetic assets, Bancor once had impermanent loss protection, etc. In addition, this bias of favoring DEXs as core portfolio positions is simply a starting point in portfolio construction.)

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