As the potential of open financial protocols becomes clearer, some applications are gaining adoption faster than others. Maker dominates in terms of value locked and volume transacted. Compound and Uniswap trail, but are well ahead of 0x, Dharma, Augur, and dydx when it comes to liquidity. The rest have yet to show up on the radar. Looking at the three dominant protocols reveals a design advantage with respect to liquidity: none of them require users to find a specific peer to take the opposite side of a trade.

The success of Maker, Compound and Uniswap seems to have little to do with the range of use cases they enable. From a lending standpoint, there’s no type of loan that Maker or Compound can offer that two peers can’t at least approximate by trading with each other on Dharma. Through scalar markets, Augur can offer levered long exposure to ETH similar to what one can get using Maker, but with many more options for users. Uniswap has fewer pairs than many 0x relayers, but significantly more trading volume.

Why are protocols that offer fewer options gaining more adoption? It might be because they constrain the types of trades available to users, allowing an “automatic supply-side” to consistently offer the service.

Take a binary market on Augur: to go long ETH a user needs to purchase a long ETH share—a bespoke ERC20 token—from another user or market maker. Or, they can issue themselves a complete set of one long and one short share and subsequently sell off the short token to another user, keeping the long token to themselves until the market settles. These tokens have no pairs on any DEX, much less any centralized exchange. Liquidity for such long-tail assets is severely limited, making it more expensive and less convenient to trade them.

In Maker, the process is much easier to complete. Users issue themselves dai by locking ETH. To go leveraged long, they simply need to exchange their newly-issued dai for ETH, which is easy to do, with plenty of liquidity on any number of exchanges. In other words, Augur fragments liquidity across a large number of unique ERC20s, while Maker concentrates liquidity in a single asset, dai. Augur is a bespoke and varied process, Maker is automatic and consistent. This greatly improves both cost and usability.

Looking at DeFi protocols from this liquidity angle, three categories are apparent:

One group (Augur, 0x, Dharma) requires users to find peers to trade with, another (Compound, Uniswap) pools maker assets and offers them to takers for a fee, and a final category (Maker) sets parameters through governance, allowing users to trade directly with a smart contract.

Protocols like 0x, Augur, and Dharma are genuinely P2P: For every user that wants to go long, a discrete counterparty must be found to go short. As these are bilateral exchanges negotiated by peers, the types of trades on P2P protocols should form a strict superset of the other categories. There isn’t a universal price, just a series of bilateral trades at different price points (from which we can usually define some notion of implied global price). The types of trades these peers can negotiate with each other has few theoretical limits.

Continuing with a gaming analogy, we can think of Uniswap and Compound as MMORPGs: Instead of discrete bilateral exchanges, all users play on the same map. Users don’t need to find a counterparty, they can just trade with the asset pool. Global prices for those trades are set algorithmically, via a constant product rule in the case of Uniswap and an interest rate model based on utilization in the case of Compound. The set of trades and markets is more constrained.

Maker offers a (quasi) single-player mode, where users issue themselves loans subject to parameters decided through governance (one could argue that users trade with a pool that represents governors of the system). Currently, there is only one type of trade offered and liquidity is concentrated in one asset, dai.