TL;DR: Serum DEX is the plumbing and infrastructure for financial projects building on the Solana ecosystem. Protocols with any trading-related features benefit by sending their bids and offers to Serum DEX’s central limit order book (CLOB). The advantages are Solana’s ultra low costs and latency, combined with Serum’s liquidity which is bolstered by some of the largest market makers including Alameda and Jump. $SRM holders benefit when projects add liquidity and volume to Serum DEX, as DEX fees go towards buy and burn. This model showcases how Serum will flourish. Our friend, Raydium Protocol, is an illustrative case.
DeFi moves at lightspeed and it can be hard to keep afloat.
Many exciting projects are being built on the Serum DEX. The ecosystem is flourishing and we can point to many promising initiatives.
Last year, the Serum team developed a number of consumer-facing proof of concepts apps, including DEX GUIs, Pools, and AMMs. While these initiatives demonstrated Serum’s potential as a budding ecosystem, the longer-term focus has always been to inspire entrepreneurs to build their own products on Serum.
Serum Swap represented a significant milestone for Serum, demonstrating just how powerful AMMs can be when swaps are cheap and fast. As Serum continues to evolve, the ecosystem will rely on the community to take advantage of Serum’s frontend proof of concepts and to take them to the next level. Serum will then focus on building its underlying protocol, refining its backend capabilities to become the most efficient ‘piping’ for DeFi to support greater liquidity and composability.
For this reason, Serum Swap was recently deprecated and swap volume will from now on be directed to specialised AMM applications, including Raydium. Participants will be allowed to safely withdraw liquidity from existing pools indefinitely.
What does this mean for the Serum ecosystem and $SRM? The simplest possible answer is: not much.
We hope to provide a sufficiently in-depth explanation in our new blog series. Coincidentally, this is also an opportunity to revisit the purpose behind Project Serum, its long-term ambition, and what’s in store for $SRM holders.
The key takeaway: Serum DEX is the plumbing and infrastructure for financial projects building on the Solana ecosystem. Protocols with any trading-related features benefit by sending their bids and offers to Serum DEX’s central limit order book (CLOB). The advantages are Solana’s ultra low costs and latency, combined with Serum’s liquidity which is bolstered by some of the largest market makers including Alameda and Jump. $SRM holders benefit when projects add liquidity and volume to Serum DEX, as DEX fees go towards buy and burn. This model showcases how Serum will flourish. Our friend, Raydium Protocol, is an illustrative case.
The Serum DEX
At one level, the value offered is straightforward: a high throughput and low latency DEX with an on-chain order book brings a trading experience similar to that of a CEX, with the additional features of being non-custodial and allowing users to choose the price, size, and direction of their trade. Sub-second settlement and ultra-low transaction costs, thanks to Solana and its scalable design, cements the DEX’s future as an effective trading venue.
Another level of value incorporates familiar partnerships: Wormhole, for example, is a cross-chain bridge that allows users to convert between ERC20 and SPL tokens, meaning users can take advantage of Solana’s costs and speeds when settling back into the Ethereum network.
Such features make Serum close to pure DeFi without the fundamental tradeoffs between speed and decentralization, characteristic of predecessor DeFi initiatives (which we commend and owe much to). The value accrued to Serum token ($SRM) token holders comes from $SRM’s utility and governance functions, as well as DEX fees, which go towards buy and burn. Volume and burn sizes in Serum have been increasing consistently.
The above observations concern only the DEX, however. What of our ecosystem? And what exactly is meant by ‘the Serum ecosystem’?
The Serum Ecosystem
“Composability is one of the most powerful features of DeFi. Newly built DeFi applications can automatically integrate with others as if they were native.”
Phrases like this are done to death. So is the observation that “the resulting sum is greater than the parts” stitched together through composing. What this greater sum looks like, however, may still be a surprise for many.
The ultimate vision for Serum was, and still is, reaching a billion users and a $1 trillion dollars on-chain.
Allow us the grand premise that Serum is the candidate and live DEX for this ambition. What kind of an ecosystem, then, would a billion such users want? What kinds of services and products would be offered?
We leave you to imagine what this resulting ecosystem would look like (and a significant driver for Serum’s ambition is indeed imagination). The following observation may help paint the bigger picture:
A central limit order book (CLOB) matches all bids and offers according to order price and (then) time priority. The matching between buyer and seller is fundamental to all types of financial transactions. For fungible tokens, we believe CLOBs provide the most capital efficient markets.
Consider a popular alternative, the Automated Market Maker (AMM), which pools liquidity and allows users to trade against them, with prices determined (usually) by an equation that considers the supply of the pooled tokens (x * y = k). While we appreciate the significance of AMM trading and its implications for decentralized finance, current AMM implementations are not as capital efficient as CLOBs.
Enter composability. An AMM that composes with Serum’s CLOB, for example, can create a hybrid AMM model with distinct advantages for the ecosystem: AMM-style liquidity provision with reduced slippage, for example.
The possibilities expand into all domains of trading. A custom Serum DEX GUI can focus on a specific segment of traders and provide value-added features like automated strategies. A borrow-lending protocol that matches borrowers and lenders via an order book as opposed to a market model can establish a fairer clearing price for participants. Perhaps real-world applications can connect to that borrow-lending protocol to generate yield for tradfi users.
Whichever way the ecosystem is expanded, it all bottoms-out to the DEX and order book.
Serum DEX is the matching engine powering Solana-based financial projects — protocols which feature some form of trading and which benefit from Serum’s liquidity and DEX prices (whether for order execution, pricing, market data, or risk management). And as $SRM holders know, Serum collects DEX fees from all platforms, with 80% going to SRM buy and burn and 20% going to DEX hosting.
We look forward to even greater innovations from our ecosystem participants. The developer resources and community are always available for the next generation of builders seeking to compose exciting DeFi concepts with Serum’s core infrastructure and unlock the potential of decentralization and capital efficiency without tradeoffs in trust, convenience, or security.
Serum Swap and Raydium
The plan for Serum DEX is clear. What, then, was the purpose of deprecating Serum Swap, the proof-of-concept AMM? What does a participant like Raydium do for the Serum ecosystem and the future of $SRM?
Let us be clear: Serum Swap’s deprecation is not a step backwards. In fact, Serum Swap never sent orders to Serum DEX’s CLOB.
Compare this set up with Raydium, which does send orders to the CLOB, resulting in fees generated that go towards buy and burn.
The choice to remove Serum Swap reflects a long-term interest in Serum ecosystem’s development and encouragement for proven AMM players to grow and, in return, bring greater liquidity and volume to Serum. This is the short answer; an in-depth explanation is also in order.
Synergy with Raydium
Raydium is an incredible AMM building on the Serum and Solana ecosystems and the first to source its liquidity from an order book.
One of its distinguishing features is its incorporation of the Serum order book according to its constant product invariant. As we know, the traditional decentralized AMM model relies on a deterministic algorithm (usually following a product curve equation) to make markets for the pooled assets users supply and transact against.
“Raydium takes all the tokens accrued in its liquidity pools to place orders on the orderbook according to the constant product invariant.”
The traditional drawbacks of AMM’s are also well known: gas fees, network congestion, slippage on large orders, and fragmented (overlapping) liquidity, to name a few.
Raydium combats the fee and speed problems through its choice of Solana. This particular advantage is clear.
As for resolving issues of slippage and liquidity, Raydium brings an innovative market making structure by leveraging Serum DEX’s order flow alongside providing liquidity with its own pools. Approximately 50% of Raydium’s swaps end up on the order book.
Unlike other AMMs, Raydium provides on-chain liquidity to a central limit order book, meaning that Raydium liquidity providers get access to the entire order flow and liquidity of Serum and traders reap the benefits of greater liquidity and less slippage.
In fact, access is bi-lateral and benefits the entire Serum ecosystem: orders submitted to the order book by Raydium can be transacted against by anyone on Serum and vice versa. The relationship between Serum ($SRM) and Raydium ($RAY) is therefore not one of competitive hostility, but of ambitious synergy.