Permissionless Market Creation
Permissionless market creation is a system in which anyone can set up a financial market without needing approval.
What Is Permissionless Market Creation?
Permissionless market creation refers to a system in which anyone can set up a financial market that facilitates the exchange of funds or assets between two or more parties without needing approval.
Markets can be created for a variety of financial instruments such as stocks, bonds, cryptocurrencies, and loans. At its core,
permissionless market creation enables users to participate in financial activities in an open, fair, and decentralized manner by giving users full control to create an unlimited number of new use cases.
How Does it Work?
To demonstrate, we can examine the creation of a swap market and a lending market in DeFi.
Swap Market
Uniswap is one
decentralized exchange (
DEX) where anyone can create a crypto swap market.
Creating a market pair: Anyone can create a new trading pair on Uniswap by choosing two tokens, for example, ETH and DAI, a fee tier (the amount paid by swappers), and then providing
liquidity.
Trading: Once the market pair is created, other users can trade ETH and USDC freely within this market. There is no one entity deciding which pairs can exist. Instead, anyone can create any pair they choose.
Lending Market
Lending protocols with permissionless market creation allow anyone to create a lending market
Creating a market: A protocol that allows for permissionless market creation, users can create isolated lending markets by defining parameters such as the assets involved, collateral requirements, interest rate models, and liquidation terms.
Lending & Borrowing: Once established, other users can participate in these markets by lending assets to earn interest or providing collateral and borrowing assets.
Permissioned vs Permissionless Market Creation
Permissionless markets are a solution to the restrictive approach imposed by protocols with permissioned market creation or asset listings. This permissioned approach only allows specific whitelisted addresses to create markets. For example, on certain lending platforms, users must get approval from the
DAO to create markets. In this scenario, the DAO acts as a gatekeeper of markets which provides additional oversight but also restricts potential innovation through users experimenting.
The DAO acts as a gatekeeper of markets which provides additional oversight but also restricts potential innovation.
In contrast, permissionless market creation focuses on maximizing scalability by leaving these decisions to a free market. The high degree of freedom allows users to innovate by creating marketing for any type of use case, risk profile, or regulatory constraint, ultimately serving a much wider set of financial participants.
Benefits of Permissionless Market Creation
Benefit | Explanation |
Flexibility | There is the ability to address a wide range of use cases and express different levels of risk. |
Accessibility | Anyone can create markets, lowering the barrier to entry and promoting inclusivity.
|
Decentralization | Less reliance on central authorities or gatekeepers. |
Healthy competition | An open market for risk management is created whereby multiple parties compete to offer lower fees, and better returns.
|
Scalability | Without the need for permission, markets can grow and adapt more rapidly. |
Limitations of Permissionless Market Creation
Limitation | Explanation |
Increased Risk | Without an approval process, markets may be created using low-quality or scam coins and may mislead users. |
Quality Control | Markets may be created incorrectly or with poorly set parameters. For example, markets using an inappropriate oracle could result in wrongful liquidations or the incurrence of bad debt. |
Fragmentation | Multiple markets with similar use cases can arise, such as on Uniswap, where a WETH/USDC pair might have both 0.05% and 0.30% swap fees, fragmenting liquidity. A permissioned system would likely allow only one market to prevent this fragmentation |
Author:
Paul Frambot is the Co-Founder and CEO of Morpho Labs, a research and development company responsible for building and growing the Morpho protocol. Paul co-founded Morpho Labs whilst studying towards his, now-completed, Master's in Parallel & Distributed Systems from the Institut Polytechnique de Paris in 2021. During his studies, Paul raised $18M from top investors, including Andreessen Horowitz (a16z) and Variant for Morpho, which has since grown into a multi-billion-dollar lending protocol. The latest version, Morpho Blue, is a completely independent but remarkably simple protocol that serves as a secure, efficient, and flexible base layer for users and applications.