Where does AMM stand in RWA?

Author: Sanqing Source: X, @sanqing_rx

Introduction

Real-world assets (RWAs) are becoming a key narrative for Web3's mainstream adoption. However, bringing trillions of dollars of real-world assets onto a blockchain requires more than just tokenization; building efficient and robust secondary market liquidity for them is the true challenge that will determine success or failure. Automated market makers (AMMs), as the cornerstone of DeFi, are naturally highly anticipated, but can they be directly adapted to the world of RWAs?

Summary (Three-sentence Overview)

Conclusion: Current mainstream AMMs (centralized liquidity, stablecoin curves, etc.) are unsuitable to serve as the "primary market" for RWAs. The biggest obstacle isn't the curve model, but rather the unsustainable economic model of LPs (liquidity providers) in the low-turnover, strict-compliance, and slow-pricing RWA environment. Positioning: Issuance/redemption, KYC order books/RFQs, and periodic auctions should be the "mainstay" of RWA liquidity; AMMs should be relegated to the "convenience layer," catering only to small, daily, and convenient secondary turnover needs. Approach: Through a combination of "narrowband market making + oracle slipstreams/hooks + yield bridging," RWA's native returns (such as coupons and rents) can be truly passed on to LPs, supported by comprehensive risk management and information disclosure. 1. AMMs should not be the "main market" for RWAs. RWAs pursue a predictable, measurable, and settleable financial framework. While the continuous quote AMM mechanism is highly innovative, it faces three inherent challenges in most RWA scenarios: weak organic trading volume, slow information flow, and a lengthy compliance process. This makes returns for LPs based solely on transaction fees extremely meager, while also exposing them to the risk of impermanent loss. Therefore, our core argument is that AMMs should not serve as the "main market" for RWAs, but rather as the "last mile" of liquidity. Their role is to enable users to conveniently exchange small amounts of assets anytime, anywhere, enhancing the user experience. However, the core functions of large-scale transactions and price discovery must be delegated to other more suitable mechanisms. Second, why are AMMs so successful in the crypto-native world? To understand the limitations of AMMs in RWA scenarios, we must first understand the cornerstones of their success in the crypto-native world: Constant trading: A 24/7 global market, coupled with permissionless cross-market arbitrageurs, instantly eliminates any price discrepancies, creating continuous trading activity. Highly composable: Almost anyone and any protocol can become an LP or participate in arbitrage with no barriers to entry, creating powerful network effects and self-reinforcing traffic. Volatility is business: High volatility drives a large amount of trading demand and arbitrage opportunities, generating transaction fees that give LPs the opportunity to outperform impermanent loss. When we attempt to replicate these three points in the RWA space, we discover that the entire foundation has shifted: transaction frequency has significantly decreased, pricing heartbeats are extremely slow, and compliance thresholds have been significantly increased. [In-Place Explanation | Pricing Heartbeat] "Pricing heartbeat" refers to the frequency of trusted price updates and is key to understanding the difference between RWAs and crypto-native assets. For crypto-native assets: Heartbeats are typically measured in seconds (exchange quotes, oracle feeds). For most RWAs: Heartbeats are often measured in daily or even weekly intervals (fund net asset value updates, real estate valuations, auction results). Assets with slower heartbeats are less suitable for long-term exposure to deep, continuous quote pools.

Third, the economics for LPs in the RWA scenario are not balanced

The annualized return on LP investment depends primarily on three factors: transaction fees, turnover within the efficient price range, and the annual recurrence of the trading rhythm.

For RWAs, this balance is difficult to achieve because:

• Turnover rates are generally low: "Funds in the pool" are rarely "activated" by high-frequency trading, resulting in minimal fee income.

• The opportunity cost is too high: External markets offer substantial coupons or risk-free rates. For the same principal, LPs often find it more cost-effective to directly hold the RWA assets themselves (if possible) rather than providing liquidity. Risk-Return Imbalance: Against the backdrop of low fee income, LPs also bear the risk of impermanent loss (relative to the loss from holding assets unilaterally) and the risk of being "preyed upon" by arbitrageurs due to lagging price feeds. Overall, the LP economic model is inherently disadvantaged in RWA AMMs. Fourth, Two Major Structural Frictions: Pricing and Compliance Beyond the economic model, two other structural issues hinder the adoption of AMMs. Pricing Misalignment: RWA's net asset value, valuation, and auctions are slow, while AMMs provide instant, tradable quotes. This time difference creates a massive arbitrage window for those with the latest information, allowing them to easily exploit the price differences of uninformed LPs on AMMs. Compliance disrupts composability: KYC, whitelisting, and transfer restrictions, among other compliance requirements, lengthen the capital inflow and outflow pathways, disrupting DeFi's "Lego-like" model of "everyone can participate." This directly leads to fragmented liquidity and a lack of depth. Cash flow "plumbing": RWA cash flows, such as coupons or rent, must either be reflected through net asset value increases or distributed directly. If the AMM/LP mechanism isn't well designed for revenue capture and distribution, LPs may not receive their fair share of these cash flows or face dilution during arbitrage. V. Boundaries of Applicability and Practical Examples: Not all RWAs are incompatible with AMMs; we need to discuss them in a categorized manner. More user-friendly: Assets with short duration, daily updated net asset values, and high price transparency (such as money market fund shares, short-term government bond tokens, and interest-bearing certificates). These assets have a clear central price and are well-suited for narrowband AMMs that provide convenient exchange services. Less user-friendly: Assets that rely on offline valuations or infrequent auctions (such as commercial real estate and private equity). These assets have slow activity and significant information asymmetry and are better suited for order books/RFQs and periodic auctions. Case Study: Plume Chain Nest Arbitrage Window Background: Nest's nALPHA and nBASIS tokens have AMM pools on Curve and the native Rooster DEX. Initially, their redemption process was fast (approximately 10 minutes), but token prices updated approximately once a day, sometimes even slower.

  Phenomenon: Because the net asset value is updated daily while the AMM reports it instantly, the AMM price fails to keep up after the new net asset value is announced. This creates an arbitrage opportunity: "Buy at a low price on the DEX → immediately apply for redemption from the project → settle at the updated higher net asset value."

  Impact: Arbitrageurs profit, while AMM LPs bear the full impermanent loss, especially those LPs who provide liquidity in more deviated price ranges, who suffer even greater losses.

  Review and Fix Suggestions:

  Review: The root cause of the problem lies in the mismatch in pricing heartbeats, and the protocol lacks necessary risk control guardrails and order diversion mechanisms.

  Remediation Suggestions:

  • Order Diversion: AMM only processes small transactions (see explanation below), and large orders are forcibly directed to RFQ or issuance and redemption channels.

  • Active Price Following: Employ an "Oracle Sliding Band + Hook" mechanism to provide liquidity only within a narrow range of ± the latest net asset value. Automatically migrate the price band or temporarily increase the fee rate when the net asset value is updated.

  • Risk Control Guardrails: Set oracle freshness thresholds, price discount and premium circuit breakers, and switch to auction or redemption-only mode on days with significant valuation adjustments.

  • Information Disclosure: Establish a public dashboard that displays information such as discount and premium distribution, oracle status, and redemption queues to enable LPs to make independent decisions.

  Six. Four-way parallel "liquidity skeleton"

  For a mature RWA market, the liquidity architecture should be multi-layered.

  

  

  Seventh, refined operation: three axes to make good use of RWA AMM

  To make AMM play a good role in its "convenience layer" positioning, three things need to be done well: