Permissionless market creation is a system in which anyone can set up a financial market without needing approval.
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.
To demonstrate, we can examine the creation of a swap market and a lending market in DeFi.
Lending protocols with permissionless market creation allow anyone to create a lending market
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.
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. |
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.
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