PropAMMs Cut SOL/USDC Trade Costs but Public Pool Returns Crash, Research Finds

The Quick Take

• A September research preprint found that PropAMMs lower Solana trading costs for SOL/USDC pairs during low-volatility periods, improving execution for retail traders.
• Public liquidity pool returns for passive depositors fell sharply, suggesting sophisticated market makers are capturing a disproportionate share of fee revenue.
• The findings highlight a structural tension in DeFi: lower trading costs improve user experience but may reduce the economics that sustain liquidity provision.

Automated market makers are the foundational liquidity infrastructure of decentralized finance, and Solana has emerged as one of the highest-throughput chains for DEX activity. PropAMMs — professional or proactive automated market makers that adjust pricing dynamically — represent a maturing iteration of the original constant-product formula, designed to reduce slippage for retail traders by narrowing spreads in quiet market conditions. The finding that execution quality improves for traders while passive pool returns deteriorate reflects the classic two-sided marketplace dynamic inherent in DeFi liquidity market microstructure.

If PropAMMs structurally compress passive depositor yields, the long-run consequence is a reduced supply of public pool liquidity as retail yield-seekers migrate to higher-return alternatives — staking, lending protocols, or non-AMM yield vaults. This would paradoxically reverse the intended consumer benefit of lower trading costs by reducing depth in public pools during volatile markets, exactly when liquidity depth matters most. Professional market makers on Solana — Wintermute, Jump Crypto, and specialized prop desks — stand to benefit from PropAMM dynamics as they retain execution advantages unavailable to retail liquidity providers.

The key watch point is whether Solana's expanding DEX volume sustains total fee revenue at levels sufficient to attract passive liquidity despite compressed per-unit returns. Track Solana DEX total value locked and liquidity provider deposit flows quarterly — a sustained TVL decline would validate the return-compression thesis. The macro variable for the entire Solana DeFi ecosystem is broader risk appetite for crypto assets: a risk-off environment compresses both trading volumes and liquidity mining participation simultaneously, amplifying the return impact described in the research preprint.

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