Kyle Samani is back: this time, we're going to eliminate CEX through efficiency!

This article is from Kyle Samani

Compiled by Odaily Planet Daily (@OdailyChina); Translator: Azuma (@azuma_eth)

Editor’s note: The man known for shouting out Solana, and the former co-founder of Multicoin Capital who recently stepped back from the spotlight, Kyle Samani, is making a comeback!

Last night, Kyle Samani posted a lengthy thread on his personal X account. In the post, Kyle revisits his characteristic “call-out” style (not a negative term here), using the efficiency dimension—an aspect of the decentralized narrative—as a breakthrough point to explain how the PropAMM currently promoted within the Solana ecosystem will match or even surpass traditional centralized models in efficiency, demonstrating that PropAMM is one of the most important innovations in market microstructure in recent years or even decades.

Related articles include: “The Man Who Calls Out SOL the Most, Exits the Crypto World” and “Kyle Samani’s Exit, Is There More to the Story?”

Below is Kyle Samani’s original content, translated by Odaily Planet Daily.

PropAMM is one of the most significant innovations in market microstructure in recent years, and perhaps one of the most important in decades.

To help everyone understand this conclusion, let’s first look at how market makers (MM) quote prices on traditional centralized exchanges (CEX).

Market makers typically co-locate physically with the exchange. Each market maker runs their algorithm on a server connected via a uniform cable (e.g., 50 meters) to another server hosting the exchange’s system.

A large volume of data streams back and forth between the market maker and the exchange. Whenever a market maker sends an order—be it a limit order, cancel, or market order—the exchange broadcasts this information to all other market makers; then they update their orders based on the new data; this cycle repeats endlessly.

Here’s a simple diagram to illustrate.

Now, let’s see how PropAMM on Solana’s mainnet works.

The beauty of PropAMM on Solana is that the blockchain itself directly “hosts” the market maker algorithms. This means the system no longer needs to send billions of messages back and forth between market makers and the exchange; instead, the market-making algorithms run directly on the same physical machine as the exchange.

The new diagram looks like this. (Yes, just the Solana blockchain is enough!)

In the crypto industry, there’s a common saying: because decentralized systems need to communicate across global nodes, they are inevitably slower (with higher latency) than centralized systems.

But if you look at this from a different perspective, on-chain hosted algorithms could actually have lower latency than traditional centralized financial exchanges.

Why is that? The reason lies in the fact that updating prices in PropAMM involves only electronic signals moving within the same silicon chip. For example, if a recent market order causes the SOL-USD price to change, this information is immediately visible to all PropAMMs and used for the next market order’s pricing. Everything happens within the same silicon chip, eliminating the need for bidirectional communication between servers.

It’s important to note that PropAMM does require frequent oracle updates, but this isn’t a problem and doesn’t change the overall picture I described above.

The key point remains: when the exchange—in this case, the Solana blockchain—directly hosts the PropAMM algorithms, the pricing updates by market makers occur in real-time within the same physical silicon.

PropAMM has already become the dominant mechanism for SOL-USDC spot quotes on Solana, with narrower spreads than all major CEXs. I expect this market structure to become the dominant on-chain trading model this year, including spot, perpetuals, and even prediction markets.

The biggest challenge for PropAMM is that currently, there’s no guarantee that takers will always get the best execution, because:

• All PropAMM algorithms are private (which is reasonable, as traditional market-making algorithms are also proprietary);
• Routing trades across multiple PropAMMs results in non-deterministic outcomes.

However, this problem can be solved. I expect all related aggregator teams this year to release solutions, such as Jupiter and dFlow for spot trading, and Phoenix for derivatives.

Currently, PropAMM is still not fully optimized and is limited by various constraints of the Solana blockchain itself. This year, Solana will roll out a series of major upgrades that will significantly enhance PropAMM’s performance, including:

• Higher CU (compute unit) limits per transaction and larger trade sizes;
• Increased CU limits per block;
• Alpenglow: reducing slot time from 400ms to 100–150ms;
• DoubleZero: lowering global network latency;
• Application-controlled execution;
• Multiple concurrent leaders.

If, without these upgrades, PropAMM on Solana’s mainnet can already offer narrower quotes than all CEXs, then imagine how powerful it will become as these upgrades are gradually implemented.