Foresight Ventures: Changes and Development of the DEX Paradigm
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Tips:
AMM and RFQ actually represent the difference between DeFi and TradFi thinking modes
The way AMM improves capital utilization efficiency is through LP leverage
RFQ mode has natural advantages for cross-chain transactions
The introduction of Core Pools will significantly change Balancer's revenue structure
Liquidity incentives about the price range can reshape the shape of Liquidity Position
This article mainly focuses on DEX to talk about its development process and possible development direction. Research on Perpetual Trading DEX has been done in"Perpetual DEX: The Road to LP Productization"first level title
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1) AMM V.S. RFQ
Before entering the text, it is necessary to review the history of AMM VS RFQ. Today, when the various basic frameworks of DeFi are relatively complete, we seem to have become accustomed to AMM DEX. However, the initial form of DEX is not what it is now. The order book system and RFQ are the earliest ways to trade assets on the chain. In the iterative changes of DEX, RFQ was surpassed by AMM in the competition with AMM.The incident of AMM VS RFQ actually reflects the difference between DeFi thinking logic and TradFi thinking logic. From the logic of TradFi, the essence of finance is the process of improving the efficiency of capital utilization. However, compared with the RFQ model, the capital utilization efficiency of the AMM mechanism is extremely low, and it is easy to make assets face price fluctuations when pricing assets, which means that AMM should be inferior to the RFQ model. But the actual result is just the opposite. The AMM model has gone further and further on the road of DeFi, and eventually even affected the model of Perp Trading.
This actually shows that it is biased to think about the development model of DeFi from the logic of TradeFi. As a financial system native to the blockchain, DeFi must have its own underlying logic for finance, which determines the development of DeFi. We can roughly summarize the following points:
LP market making democratization
Transparent pricing power
LP Leverage
In addition to the above three characteristics, except the first two are the characteristics endowed by Web3 ideology to DeFi, LP leverage can actually be combined with the logic of TradFi. In TradFi's logic, improving capital utilization is the essence of finance. Since the TradFi system has developed to a relatively mature state, the composability between different TradFi applications is not so strong. Therefore, for TradFi, improving the capital turnover rate is to improve the efficiency of capital utilization. The RFQ model is a typical transaction model that improves capital utilization through high capital turnover. But for DeFi, there are two ways to increase capital utilization: increasing capital turnover within a single project and improving asset portfolio among multiple projects.This means that DeFi can not only improve the efficiency of capital utilization through the capital turnover rate, but also can superimpose the leverage of assets through composability, and realize the reuse of capital through LP leverage.
Therefore, if you think about the above logic clearly, you can actually easily deduce that the P2P ool in Perp Trading will become a trading mode that keeps pace with the order book—GMX and GNS are just extensions of Uniswap in terms of the development logic of DeFi.
In layman's termsAMM and RFQ realize the efficient use of funds from two perspectives, the former through combination, and the latter through high turnover.Since the entire endogenous DeFi architecture has not yet been established in the early stages of DeFi development, it is more meaningful to increase the capital utilization rate through the DeFi composable model than to simply increase the capital turnover rate. This is why AMMs outperformed RFQs in the early days of DeFi. But the development logic of things is roundabout, and the dominance of AMM in Trading is not absolute.secondary title
2) The supplement of RFQ mode to AMM
The advantages of the RFQ model mentioned above are high capital turnover and lower slippage. The RFQ model can be seen in various trading aggregators, such as 1inch and Paraswap.The RFQ model was introduced to the aggregator as a supplement to AMM transactions, and it also contributed to increasing the complexity of the aggregator's token model.secondary title
3) RFQ supplements for cross-chain transactions
The current common cross-chain transaction mode is still AMM, but the RFQ mode has natural advantages for cross-chain assets. The AMM cross-chain liquidity solution has the problems of liquidity fragmentation and efficiency:Every time a chain is added, a duplicate liquidity pool needs to be added to the chain, and the exchange rate will also be greatly affected by the depth of the pool.However, using the RFQ model with market makers as intermediaries will not have the above-mentioned liquidity fragmentation problem. The specific solution is to introduce Brokers on different chains, and a public ledger manages the accounts of Brokers on different chains. When the user has a need for asset cross-chain or cross-chain Swap, it only needs to connect with the Broker on the corresponding chain.
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2. Changes in the income structure of the veToken model - the introduction of Core Pool
The veToken model is a synonym for a type of DEX, which represents a series of DEXs that determine the release ratio of tokens in different Pools through Gauge Voting, including Curve, Balancer, and various Ve( 3, 3) DEXs.Taking Curve as an example, the revenue closed-loop logic of the veToken model is that holders of veCRV can obtain discounts for veCRV bribery in all future B-side agreements, and the continuous issuance of $CRV is essentially just overdrafting future bribery revenue.However, as DEX, Curve and Balancer themselves do not seem to play the function of DEX transactions. They are more of a liquidity agreement, accumulating liquidity for the market through continuous subsidies of tokens, and tokens are empowered through B-side bribery. This model actually causes a waste of liquidity, and most of the liquidity "lying" in Curve has not circulated in the market.
This issue is actually a controversial point of the veToken model:It has attracted a large number of liquidity through high subsidies, but these liquidity has not exerted its high-speed liquidity function, and cannot generate external benefits.Therefore, for the entire Curve system, apart from a very small number of swap fees, the external benefits that the system can obtain are only the bribery of veCRV by the B-side protocol.
In an economic sense, token subsidy can be understood as the debt issued to users by the system overdrafting future external income, which can only be repaid by the external income obtained by the agreement.In the case of Curve, the debt issued by the system is the additional $CRV reward issued each period, and the external income is the B-side's bribery of veCRV and part of the swap fee. If Curve's external income source is added to Curve's entire economic design, Curve's DEX will significantly improve the debt level of the system.
Therefore, the status quo of DEX in Curve mode can be summarized as follows:
Liquidity within Curve is underutilized
Adding external revenue streams to Curve could significantly improve the system's debt levels
Then the solution is obvious:secondary title。
1) Introduction of Boosted Pools
The first DEX to propose the above solution is Balancer, whose Boosted Pool mechanism aims to increase LP revenue. Boosted Pool is a more advanced form of liquidity that combines Composable Stable Pools, Weighted Pools and Linear Pools. Weighted Pools is a weight-adjusted AMM pool. The common AMM weight is 50/50. Weighted Pools can freely adjust the weight when the pool is established. For example, Radiant Capital's dLP is an RDNT/ETH trading pair set according to the weight of 80/20 ; Linear Pools are liquidity pools specially set up for an asset and its derivatives, such as DAI and aDAI. Usually Weighted Pools will be combined with Linear Pools to form Nested Linear Pools. Still taking DAI and aDAI as examples, the Nested Linear DAI Pool is a DAI-aDAI liquidity pool composed of 20/80 weights, and the LP token issued by it is expressed as bb-a-DAI. Similarly, there are corresponding bb-a-USDC and bb-a-USDT for USDC and USDT. At this time, if bb-a-DAI, bb-a-USDT and bb-a-USDC are combined to form an LP pool, the pool is also called Composable Stable Pool, and the LP token issued by it is also called bb- a-USD.
Although bb-a-USD is an LP token, it is still in the form of the ERC-20 token standard, so it can be used as a pairing asset to pair with various assets in the AMM pool.The more typical one is the bb-a-USD / ETH trading pool. Features of this trading pool include:
This pool can perform pairwise asset swaps of ETH, DAI, USDT, USDC, aDAI, aUSDT, and aUSDC
Due to the existence of aToken, bb-a-USD generates interest all the time
The above-mentioned AMM transaction pool that generates interest all the time is also called Boosted Pools in the definition of Balancer.
The main reason for the high capital utilization efficiency of Boosted Pools is that it realizes the leverage of assets through the issuance of LP tokens.The initial AMM pool needs to maintain sufficient liquidity depth to ensure price stability during asset swaps. This means that most of the assets in the AMM pool perform not the function of asset swaps but the function of stabilizing currency prices.The innovation of Boosted Pools is to split the assets of these two functions. Some of the assets still perform the function of asset swap, while the other part of the assets used to stabilize the currency price are taken to the external agreement for income, and through The external protocol issues LP token to perform the function of stabilizing the currency price of the original AMM pool。
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2) Introduction of Core Pools
The core proposals of BIP-19 include the following points:
Pick some Weighted Pools to form Core Pools
50% of the interest-earning income in Core Pools is allocated to LPs, 17.5% is allocated to BalancerDAO, and 32.5% is used as Bribes to bribe veBAL holders to vote for Core Pools to increase the TVL of Core Pools
25% of Bribe funds allocated directly to Aura Finance's bribery marketplace
The rest of the bribery funds were allocated to Hidden Hands, which is owned by the Redacted Cartel
The introduction of the Core Pools mechanism is actually a guide for the future development trend of Balancer, and guides other capital pools to transform to Boosted Pools as much as possible.Since the amount of $BAL released by Balancer for liquidity incentives is consistent every week, Balancer officials bribe veBAL holders through Bribes to vote for Core Pools, which will shift a large amount of $BAL to Core Pools, leaving it for other flows The $BAL used for liquidity incentives in the liquidity pool will be greatly reduced. Therefore, for these liquidity pools, joining Core Pools as much as possible is the choice to maximize the benefits.
Prior to BIP-19, protocol revenue was distributed among the various stakeholders as follows:
50% of the transaction fee is allocated to LP, 17.5% is allocated to BalancerDAO, and 32.5% is allocated to veBAL holders
100% of Bribe is allocated to veBAL holders
After BIP-19, the protocol revenue distribution is as follows:
50% of the transaction fee is allocated to LP, 17.5% is allocated to BalancerDAO, and 32.5% is allocated to veBAL holders
100% of Bribe is allocated to veBAL holders
50% of the interest-earning income in Core Pools is allocated to LPs, 17.5% is allocated to BalancerDAO, and 32.5% is used as Bribes to bribe veBAL holders to vote for Core Pools
The interest-earning income of Core Pools is diverse, from lending agreements such as AAVE, and from LSD assets such as stETH. From the perspective of asset replacement, the LP of Core Pools exchanged 50% of the interest-earning income for $BAL token incentives bribed with 32.5% of the interest-earning income, as long as the value of this part of $BAL is higher than the original 50% of the interest-earning income , then LP is profitable on the whole. As for veBAL, since the real value of $BAL is equivalent to the discount of veBAL bribes in all future B-side agreements, the introduction of Core Pools will bring additional external real benefits to veBAL holders, theoretically increasing $ Realistic value of BAL.
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3. Uni V3 with Liquidity Incentive Model — Reshaping the Liquidity Position Form
During the Arbitrum airdrop, TraderJoe captured a large amount of $Arb trading volume due to the particularity of its V2 algorithm, making the narrative of Uni V3 a hotspot in short-term DeFi, and at the same time making Timeless Finance with Uni V3’s liquidity incentive attributes also hyped. The cusp. Therefore, there is a voice that "the Uni V3 model with liquidity incentives will lead the next DEX development narrative".At present, there are two forms of liquidity incentives and bribery on the chain, one is incentives about the depth of LP liquidity, and the other is price-related, about liquidity incentives in a specific price range. These two liquidity incentive models are quite different. The former is mainly to increase the depth of LP liquidity, regardless of price; while the latter requires price guidance, which is mainly realized by changing the market-making income in different price ranges.
From the perspective of market size, deep liquidity is a requirement for all protocols, while protocols that require price guidance are limited to certain anchor assets, such as ETHLSD and stablecoin. thereforeFrom the perspective of demand breadth, the demand for deep liquidity is wider, while the demand for price guidance is more limited. According to the classification of the above models, the liquidity incentive model of Curve and Timeless Finance for Uni V3 can be summarized as the former, which focuses on providing deeper liquidity; while Maverick Protocol should be classified as the latter, providing more efficient and accurate flows sex.
At present, there are two demand pain points for the liquidity incentive of the AMM model:
For the AMM model of Uni V3, only the liquidity near the price range is active, and the liquidity outside the price range is hardly used. However, in the incentive of liquidity depth, these two kinds of liquidity with different degrees sex gets the same rewards
For the Curve model, incentives for the anchored assets regarding the depth of liquidity may exacerbate the unanchored state of the anchored assets
The second point may be difficult to understand. Taking stETH as an example, before the Shanghai upgrade, because the ETH deposited in the beacon chain could not be withdrawn, stETH had a liquidity discount, and the price was about 0.98 ETH. At this time, if you want to get stETH - ETH Curve LP rewards, you must add liquidity to the Curve pool at the exchange rate of 0.98 ETH = stETH. The added liquidity did not improve the unanchored status of stETH, but added deeper liquidity to the original price. This will instead prevent the price of stETH from returning to the anchored state.
Maverick Protocol has given its own solution to the above two demand pain points, which is called Boosted Position. The official uses "surgical" to vividly describe the role of Boosted Position in guiding mobility. Still taking the above stETH as an example, the “surgical” function of Boosted Position on stETH is mainly reflected in two aspects:
Give additional incentives to LPs who automatically adjust positions to the right following the price of stETH
Give additional incentives to LPs who make markets in the range of 0.98 - 1
Therefore it can be seenMaverick's liquidity guidance is mainly reflected in two aspects: price change direction guidance and liquidity market-making interval guidance.Through additional income incentives, the shape of Liquidity Position is reshaped, and at the same time, liquidity incentives are all around the spot price, which improves the efficiency of capital utilization for incentives.
The next DEX that may introduce liquidity incentives in specific price ranges is Traderjoe, mainly because of its special V2 mechanism that can seamlessly integrate range-based liquidity incentives. Traderjoe's special mechanics include the following:
The scale of the price range is planned in advance, and LP can only add LP within the planned scale range
The interval formed between two adjacent scales is called 1 bin, each bin can correspond to a single point of liquidity, and the transaction price will not change until the liquidity in the bin is consumed
Due to TraderJoe's clear division of price ranges and the vertical integration of LP liquidity in a single bin range, the distribution of liquidity incentives among LPs will be greatly simplifiedfirst level title
Overview
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Reference
https://docs.balancer.fi/concepts/governance/protocol-fees.html#trade-fees
https://medium.com/maverick-protocol/maverick-phase-ii-liquidity-shaping-with-boosted-positions-a 92 2c 67 d d5 57
https://docs.traderjoexyz.com/
Foresight Ventures bets on the innovation of cryptocurrency in the next few decades. It manages multiple funds: VC fund, secondary active management fund, multi-strategy FOF, special purpose S fund "Foresight Secondary Fund l", with a total asset management scale of more than 4 One hundred million U.S. dollars. Foresight Ventures adheres to the concept of "Unique, Independent, Aggressive, Long-term" and provides extensive support for projects through strong ecological forces. Its team comes from senior personnel from top financial and technology companies including Sequoia China, CICC, Google, Bitmain, etc.
Foresight Ventures bets on the innovation of cryptocurrency in the next few decades. It manages multiple funds: VC fund, secondary active management fund, multi-strategy FOF, special purpose S fund "Foresight Secondary Fund l", with a total asset management scale of more than 4 One hundred million U.S. dollars. Foresight Ventures adheres to the concept of "Unique, Independent, Aggressive, Long-term" and provides extensive support for projects through strong ecological forces. Its team comes from senior personnel from top financial and technology companies including Sequoia China, CICC, Google, Bitmain, etc.
Website: https://www.foresightventures.com
Disclaimer: All Foresight Ventures articles are not intended as investment advice. Investment is risky, please assess your personal risk tolerance and make investment decisions prudently.
