Automated Market Makers are evolving to address specific functional issues such as the problem of capital inefficiency. Uniswap 3.0 allows users to set price ranges where they want their funds to be allocated. This is creating a far more competitive market for liquidity provision and will likely lead to greater segmentation of DEXs.
The options will likely range from the simple lazy LP approach where funds sit in a pool without any price matching criteria, and those that are geared towards strategic capital allocation, essentially mirroring an Order Book-style approach, which will appeal to experienced DEFI users.
At the same time as AMM functionality improves and innovates the user experience of decentralised exchanges that sit on top, which is a clunky and confusing experience, will rapidly evolve to reduce the friction that limits adoption.
More broadly innovation in the DEFI sector is addressing concerns around loss of funds through the emergence of insurance services, trying to reduce the incidence of code exploits through better auditing and finding ways to flag price manipulation faster and minimise any potential loss.
The issue of fees and scalability within AMMs and decentralised exchanges is a function of the wider battle among Smart Contract compatible chains. Ethereum’s imminent merge is being closely watched given the impact it might have along with the development of Layer 2 rollups which potentially reduce fees to pennies.
At the same time, proponents of alternative layer 1 blockchains like Solana, Cardano and Avalanche make the case for faster transactions and lower fees attracting users and creating diverse applications which naturally include AMM powered decentralised exchanges. More competition gives users more choice which can only be a good thing.
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