Uniswap Labs Blog

A DeFi Playground for Foreign Exchange Markets

October 06, 2023

By Austin Adams, Mary Catherine Lader, Gordon Liao, and Jon Fink Isaksen

Last week on September 28th, the Bank for International Settlements (BIS) released a report in support of DeFi and automated market makers (AMMs) as infrastructure for a new generation of financial markets.

This 100 year old financial institution facilitates cooperation between its member central banks in monetary policy and the foreign exchange (FX) market, which stands at the biggest financial market with $7.5 trillion in daily trading volume. Throughout the past year, the BIS and central banks of France, Singapore, and Switzerland conducted an experiment using AMMs and bridges to trade between the euro, Singapore dollar, and Swiss franc, represented onchain as wrapped Central Bank Digital Currency (CBDCs). Combined, these three currencies account for 2.85 trillion in daily FX OTC trades.

Named after the Mariana Trench, the deepest oceanic trench, Project Mariana is aimed toward providing the deepest amount of foreign exchange liquidity using DeFi and AMMs. This echoes our prior work on how concentrated liquidity can provide more liquidity than traditional limit order book designs. Their concluding report plainly states,

"DeFi elements tested in the project, specifically automated market makers, could form the basis for a new generation of financial market infrastructures."

We applaud BIS Innovation Hub's effort in exploring specific bonding curve designs and encourage the team to utilize the competitive AMM solutions in future iterations of its design choices.

The report also cites Uniswap v3 when explaining the benefits of AMMs such as instant settlement, transparency, and LP tokens as collateral. The BIS believes that a number of AMMs can be tailored to satisfy the requirements proposed in the FX Global Code, something we said ourselves in a recent piece with Uniswap Labs and Circle.

It is genuinely exciting to see TradFi institutions, like the BIS, share our beliefs and convictions that financial primitives, when enforced through code, can lead to fairer, faster, and cheaper financial markets.  We hope that the BIS's research will encourage more public-private partnerships to further explore and validate the real-world use cases of blockchain technology and DeFi.

Uniswap is proud to play its part in this journey towards innovation.

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