A new trading technology called Prop AMMs is making the Solana ecosystem one of the most efficient places to trade, attracting significant volume and institutional players. This trend directly benefits Jupiter (JUP), the dominant trading aggregator on Solana, by solidifying its control over user order flow. As the essential infrastructure enabling this innovation, oracle providers like Pyth Network (PYTH) represent a key "picks and shovels" investment opportunity. Conversely, traditional AMMs such as Orca (ORCA) and Radium (RAY) face an existential threat as they are being squeezed out of high-volume trading pairs. Investors should monitor Solana's on-chain trading volume, as its continued growth is critical for this entire investment thesis to thrive.

Thematic: Prop AMMs / Oracle AMMs

• A major innovation in Solana DeFi that is changing the market structure for trading. The guest, Chris Hermida, prefers the term Oracle AMM.
• Unlike traditional AMMs (Uniswap, Orca, Radium) that price assets based on the ratio of tokens in a liquidity pool, Prop AMMs use oracles (like Switchboard or Pyth) to pull real-time prices from off-chain sources, such as large centralized exchanges like Binance.
• This structure allows market makers to provide much tighter spreads (better prices) for users and reduces their risk of losses from impermanent loss or being "picked off" by informed traders (toxic flow).
• These Prop AMMs are not user-facing. Instead, they plug into the backend of DEX aggregators like Jupiter. A retail user swapping SOL for USDC on Jupiter would be routed through a Prop AMM without even knowing it, simply receiving a better price.
• The rise of Prop AMMs began in late 2023 / early 2024 and they have since captured a majority of the trading volume for large-cap pairs on Solana.
• The teams behind them are often secretive, similar to high-frequency trading (HFT) firms in traditional finance.
  • SolFi, one of the largest, is known to be built by Ellipsis Labs.
  • Other major players include Humidify, Zerophi, and Goonfi, whose operators are not publicly confirmed.
• The trend is expected to continue, with more trading firms launching their own Prop AMMs to compete for Solana's significant on-chain order flow.

Takeaways

• Investment Theme: The rise of Prop AMMs signifies the maturation of DeFi, with sophisticated, capital-efficient trading infrastructure moving on-chain. This makes the ecosystem more attractive for both retail and institutional participants.
• Competitive Landscape: This trend is an existential threat to traditional AMMs for high-volume, liquid pairs like SOL-USDC. Investors in AMM protocols should monitor how they adapt to this new environment.
• Future Growth: The next evolution could be pool-based oracles, which would lower the cost of running a Prop AMM and allow them to support a much wider range of assets beyond just the largest cryptocurrencies, potentially including mid-cap tokens and RWAs (Real World Assets).

Solana (SOL)

• The podcast identifies Solana as the primary ecosystem where the Prop AMM innovation has taken hold and flourished.
• A key reason for this is the dominance of DEX aggregators, primarily Jupiter, which centralizes order flow and makes it easy for Prop AMMs to plug in and compete for volume.
• As a result of this innovation, on-chain trading spreads for major pairs on Solana are now often tighter than on centralized exchanges, making it a highly efficient place to trade.
• The ecosystem has seen a "massive amount of trading volume" in 2024, which is what attracts the sophisticated market makers who build Prop AMMs.
• A key risk for Solana is whether it can maintain this high volume. The guest notes that market makers will "follow wherever the opportunity is," meaning volume could shift to other high-performance chains like Base, Monad, or others if they become more attractive.

Takeaways

• Bullish Sentiment: The development of Prop AMMs is a strong positive for the Solana ecosystem, demonstrating its capacity for innovation and its ability to attract sophisticated financial players. This enhances its "internet capital markets" thesis.
• Key Metric to Watch: Investors should monitor Solana's on-chain trading volume relative to other competing blockchains. Sustained or growing volume is crucial for this efficient market structure to thrive. A significant drop-off in volume is considered the biggest threat.

Jupiter (JUP)

• Jupiter is identified as the dominant DEX aggregator on Solana, controlling 90%+ of the retail order flow.
• Its dominance is a critical enabler of the Prop AMM trend. By providing a single, massive source of order flow, Jupiter makes it straightforward for market makers to deploy capital and compete for trades.
• While competitors like OKX Wallet, Titan, and Camino exist, they are described as "distant seconds" to Jupiter.
• The guest notes that building an aggregator is a very different business than market making, suggesting that while Prop AMM teams could build their own front-ends, it's a difficult "game" to win.

Takeaways

• Strategic Position: Jupiter is in a powerful position as the main gateway to Solana's on-chain liquidity. It benefits directly from the increased competition and efficiency brought by Prop AMMs, as it can offer better prices to its users.
• Moat: Jupiter's primary value and competitive advantage is its control over order flow. As long as it remains the default trading venue for Solana users, it will be a central and valuable piece of the ecosystem's infrastructure.

Traditional AMMs: Orca (ORCA), Radium (RAY), etc.

• These protocols are being "squeezed out" and are losing significant market share for large-cap trading pairs (e.g., SOL-USDC, USDT-USDC) to the more efficient Prop AMMs.
• Their primary use case is shifting towards long-tail assets, especially meme coins, where price discovery is happening for the first time on-chain and there is no external price feed for a Prop AMM to use.
• In response to this pressure, some AMMs are adapting. Orca, for example, recently launched its own meme coin launchpad to secure a source of these long-tail assets and remain competitive.

Takeaways

• Bearish Sentiment: The business model for traditional AMMs is being fundamentally challenged. They are no longer the most efficient venue for trading major assets on Solana.
• Adapt or Die: Investors in these protocols should evaluate their strategy for adapting to this new market structure. Success will likely depend on their ability to dominate the niche of new, long-tail asset launches, which is a different and potentially riskier market.

Oracles: Switchboard & Pyth Network (PYTH)

• These oracle protocols are the core infrastructure that enables Prop AMMs to function by providing the necessary off-chain price data.
• The guest, a co-founder of Switchboard, highlights that the next big unlock could be a shift to pool-based oracle updates. This would make it more cost-effective to provide price feeds for a much larger number of assets, expanding the reach of Prop AMMs beyond just the top few coins.

Takeaways

• "Picks and Shovels" Play: Oracles like Switchboard and Pyth are essential underlying technologies for this major DeFi trend. As the Prop AMM model grows on Solana and potentially expands to other chains, the demand for their services is likely to increase. They represent a "picks and shovels" investment in the growth of advanced DeFi.