Researcher：Larry Shi @Basics Capital

Contributor：Ashley Lin

text

text

The serial liquidations triggered by the liquidity crisis of Celsius and 3AC once again brought the centralization issue of CEFI to the forefront, and the explosion of AEX and HOO also brought the long-forgotten CEX issue to the table again.

DEFI will replace CEFI, at least in the encryption industry, it will be inevitable, sooner or later.

first level title

1. Trend Migration

secondary title

1. Mobility Migration

At the beginning of May 2022, a new research report released by Paradigm showed that compared with the top centralized encrypted trading platforms, Uniswap protocol V3 has deeper liquidity in terms of ETH/USD, ETH/BTC, and other ETH trading pairs .

Based on the data sampling from June 2021 to March 2022, on the ETH/USD trading pair, Uniswap liquidity is twice that of the two centralized trading platforms Binance and Coinbase; /BTC trading pair analysis sampling, for ETH/BTC, Uniswap liquidity is about 3 times higher than Binance, and about 4.5 times higher than Coinbase.

This is a shocking result, but within reason.

But we think these are appearances. The greater charm of Uniswap lies in its respect for asset ownership in its operating model. Its non-custodial trading model will definitely become the mainstream of the trading market, because the asset custody model of centralized exchanges will eventually deviate from the assets Ownership and control belong to the individual blockchain spirit. Mt.GOX was stolen, and Fcoin’s escape has always been a scar in the industry; in addition, under the extreme market of this year’s war, exchanges such as Coinbase have banned accounts in specific countries; the current plunge Under the market conditions, AEX and HOO withdrawal issues, this series of events are accelerating the transfer of trading focus from CEX to DEX.

Migration is silent, but translocation is obvious, silent in the process, obvious in the result, as reported by Paradigm.

secondary title

2. User Migration

The growth of Ethereum wallet addresses is one of the most convincing indicators. The blockchain industry in 2017 talks about the narrative of the protocol layer. Although there are thousands of chains, the so-called blockchain technology has no application except for currency speculation.

At that time, the actual addresses of the Ethereum wallet just exceeded one million, and the ecology of DEFI took place and gradually grew in Ethereum. According to the growth trend chart of the number of ETH addresses, it can be seen that the chain of the entire blockchain industry after 2018 The movement is mighty and mighty, marching forward indomitably.

3. Volume Migration

From the perspective of trading volume, compared with the total turnover of the past 7 days in June, the total turnover of DEX is close to 20% of the total turnover of CEX. It can be seen that DEX has gradually become a force that cannot be ignored, especially for large-scale transactions. In terms of order execution, DEXs such as Curve and UniSwap have shown strong advantages.

first level title

2. DEX war

Under the current market liquidity dilemma, funds in the DEFI market continue to flee, and the TVL of DEX is naturally unavoidable. The consequence of the lack of liquidity is that the user experience of DEX is getting worse and worse, and the competition between different DEXs for stock users is becoming increasingly fierce .

What kind of DEX is needed by users, and what factors are needed by the market?

We disassemble the participants of DEX, which mainly include three parts: Trader, DEX platform and Liquidity Provider. The emergence of AMM has turned DEX from theory into reality. In particular, the combination of AMM+LP has enabled the operation of point-to-pool, especially After UniSwap 2.0, all imitation disks are released. Most of the DEX platforms are the same, and the liquidity on the chain of the market becomes gradually dispersed.

As far as DEX competition is concerned, who can get a better user experience, who can control the flow of users and funds, and what is the basic unit of DEX competition?

First of all, the foundation of the competitiveness of the trading platform is asset security. In this regard, the DEX non-custodial model is no different.

Secondly, from the user's perspective, Trader's demand is always to buy the token you want or sell your own token at the best price, so for Trader, the two basic elements of quotation advantage and liquidity advantage are particularly important. important.

Quotation advantage means that for a specific asset, users will choose which platform can offer a better price based on the rigid selling demand at a specific time.

The liquidity advantage means that users will choose whoever can carry better liquidity at a relatively advantageous price.

We quoted 500,000 USDT trading demands in different DEXs in the market, and found that the amount of USDC convertible on each platform varies greatly.

Obviously, UniSwap V3 performed the best in terms of quotations for this trading pair. 500,000 USDTs can be exchanged for 499,536 USDCs. It performed the best in this specific time period, and the centralized liquidity solution of UniSwap V3 contributed a lot.

The quotations for 50W USDT on several trading platforms on other chains are: 499,486 USDC on Curve, 499,398 USDC on Raydium, 495,852 USDC on Pancake, and 480,067 USDT on Sushi One USDC can be exchanged for 457,074 USDC on QuickSwap. It can be seen that the quotations of various platforms are very different. Because the transaction execution of AMM is different from the order book model of CEX, the advantages of quotation and liquidity directly affect the trading experience of Trader , will eventually form the differentiated advantages of each DEX.

Furthermore, from the perspective of users, from the perspective of market demand, for Liquidity Providers, whoever can provide higher capital efficiency can capture more LPs, and LP+LP capital efficiency is exactly its ability The fundamental support that meets Trader's needs.

The above-mentioned 50W USDT platforms have given different quotations, and the quotations vary greatly. What about the funds of the USDT/USDC LP pool on the platform during the same period?

According to the above figure, we can see that the TVL of USDT/USDC on UniSwap is 128.85m, and the 24-hour trading volume is 55.5m. In this way, the 24-hour fund utilization rate of 128.85m is 42.96%.

Comprehensive comparison, except for Sushi, which has abnormal data due to insufficient USDT/USDC funds, the fund utilization rate of several other platforms is very low. The 24-hour fund utilization rate of Curve is 6.25%, Raydium is 2.07%, and Pancake is 3.41% %, QuickSwap is 1.23%, so it seems that Uniswap is unique in terms of LP capital efficiency.

But there is another terrible data that Curve has reached 1.7b in terms of the ability to capture LPs in USDT transactions. This is an abnormal data that cannot be ignored, mainly because Curve used its algorithm and 0.04 The absolute advantage of the transaction fee has monopolized the trading market of stablecoins and homologous currency pairs (such as ETH/stETH). Of course, Curve’s stablecoin pool exists in three currency pairs: USDT/USDC/DAI. The point optimization experience is better.

It is precisely because Curve’s capital efficiency is not high that Uni V3 was able to get a share of Curve’s mouth. Even so, Curve’s stable currency and homologous currency trading pairs have been deeply bound to other DEFI protocols, and it has become the core of DEFI2.0. The bottom layer of the application type, more than half of the well-known DEFI projects have to go to Curve to deploy liquidity, so even if the capital utilization rate is slightly inferior, it is difficult for UniSwap to shake its super LP capture ability.

Next, we will compare the TVL and capital utilization efficiency of all LP funds on each DEX platform.

As shown in the figure, the three platforms Curve, UniSwap and Pancake performed the best in terms of TVL capture capabilities, 7.5b, 3.77b and 3.78b respectively. According to the capital data of all transaction pairs in one hour, it is found that UniSwap's 24-hour capital utilization rate is still the highest, as high as 40%. Other platforms performed relatively weakly, namely Curve 6.13%, Raydium 6.80%, PancakeSwap 3.57%, Sushi 4%, and QuickSwap 8.60%.

However, since better-performing products such as UniSwap and Curve are not connected to the BNB chain, which DEX has a more competitive advantage on the BNB Chain, which is second only to Ethereum in terms of ecology?

Taking 100,000 USDT to exchange BUSD on the BNB Chain as an example, we found that Pancake’s performance is really poor, with an exchange rate of only 99.626%, which ranks fourth in the statistical range. The exchange rates of DODO and Synapse are comparable, which is worth Note that Izumi’s TVL is only 1.59m, but its quotation for 10W USDT is far better than that of Pancake. If Izumi can capture a TVL of more than 10m, its quotation performance is likely to be better than DODO.

3. Solution comparison

Combining the performance of the previous platforms, let's study and compare the mathematical model schemes they use:

secondary title

• 1. Centralized liquidity of UniSwap V3

• Before UniSwap V3 came out, 90% of DEXs were imitations of V2. Typical representatives such as Sushi, pancake and quickswap spread funds on the curve of X*Y=K with a fee of 0.3%. V3 did Three improvements:

• Divide liquidity into the price range of frequent transactions to improve the capital efficiency of LP;

The NFTization of LP token blocks competitors from sucking blood from their LP;

These improvements meet Trader's needs for quotation and liquidity, and also meet Liquidity Provider's requirements for capital efficiency. Therefore, after the launch of Uni V3, it quickly recovered the market that was divided by imitation disks in the V2 era. Today, Uni's average daily transactions account for The ratio reaches more than 70% of the entire ecological DEX.

secondary title

2. The joint curve of Curve

Curve was once the DEFI protocol with the largest TVL in the entire network. The TVL was once as high as 23b. The joint curve adopted by Curve combines constant product (XYK) and constant price invariance, and the liquidity is concentrated at the convergence point of multiple demands through algorithms. Therefore, its liquidity in a specific price range is very sufficient, even several times higher than that of Uni V3, and its transaction slippage is basically 0.

Curve uses the combination of curves to force its currency pairs to be anchored at a certain liquidity position, creating a specific range of concentrated liquidity and forming a curve with a specific price slope, which can minimize slippage.

For non-stable currency pairs or non-same-origin currency pairs, Curve’s solution is to introduce an internal oracle machine that relies on exponential moving averages, and the effect is not satisfactory.

It's sort of a subset of Uni V3, but slightly different. Curve relies on algorithms to perform liquidity adjustments in its subset range, while the liquidity range of Uni V3 can only be adjusted manually, so Uni V3 has higher requirements for LPs.

secondary title

3. Izumi’s discrete liquidity

Izumi is a rookie project, and it is still in the early stage. The TVL of the iZiSwap platform is only 28m, but on the USDT/BUSD trading pair, it actually achieved a better quotation with a fund pool of 1.59m than Pancake’s 243m fund pool , This utilization efficiency of LP funds is astonishing and worthy of attention.

As shown in the figure, Discretized-Liquidity-AMM (DLAMM) has improved the existing Uniswap V3, cut the concentrated price range into small pieces, precisely positioned them, and created a separated state of concentrated liquidity, making Every price range requires liquidity, which not only satisfies the on-chain operation of limit orders, but also greatly improves the efficiency of the use of LP funds.

So this is the key to iziswap's ability to beat the pancake against the trend. This model will be more viable when the liquidity is exhausted.

secondary title

DODO is an old-fashioned DEX. Its PMM algorithm is also original. The full name is Proactive Market Maker. This algorithm introduces a target price through the oracle. Gather around the target price, thereby effectively reducing the slippage of trading users, and also improving the capital efficiency of LP.

The slope k of the capital pool in this model can be customized to adjust the size of the slippage. Therefore, compared with the DEXs of the V2 series, the configuration of DODO is more flexible and the capital efficiency will be better; compared with V3, this This strategy is slightly inferior, but its free loss is significantly smaller, so the requirements for LP are not high, and it is suitable for foolish LP operators.

first level title

4. Potential problems and avoidance

DEX's competition for market share cannot be stopped, and has never stopped. While extremely improving capital efficiency, while optimizing transaction slippage, it also exposes more risk exposure.

For example, the joint curve of Curve, in the exchange of stable currency pairs and homologous currency pairs, once the price leaves the position of the tangent point of the slash, only a small amount of funds will cause the price to be unanchored, and once this currency pair is unanchored It is easy to cause market panic, resulting in a vicious circle. The unanchoring of UST and the unanchoring of stETH are still vivid.

Another example is Uni V3, which migrates a large amount of funds to the frequent trading range. Once there is a rapid decline or rapid rise in the extreme market, it is easy to get stuck. On June 13, the decline of ETH triggered the liquidation of 650 million US dollars on MakerDAO , leading to the independent pin of Uni V3.

For on-chain transactions, how should we choose DEX and how to avoid pitfalls?

If you are not a practitioner or researcher, I suggest you choose a transaction route like 1inch, which can use algorithms to decompose and allocate transaction execution on each platform, and generally can provide a good price for your transaction needs, it is a fool The pinnacle of operation. But from the perspective of industry research, 1inch is built on top of each DEX, that is, if the DEX itself has no breakthrough progress, you will not get good trading results using 1inch.

The progress of the technical layer is spiraling upward in the improvement of cross-recurrence, and the DEX track is uncertain, and it is difficult to have an end. For users, they can sit back and watch, they can go and stay at will, and there should never be path dependence in the product selection of the DEX track, because the beautiful narratives in the encrypted world are mostly thorny fishhooks. Jia may become the bottom of the next stage. Path dependence is like a frog in warm water. When it is cooked and served on the butcher's table, you will definitely find that there is a plate of leeks next to it.

References:

https://www.paradigm.xyz/2022/05/the-dominance-of-uniswap-v3-liquidity

https://dune.com/rchen8/defi-users-over-time

https://uniswap.org/whitepaper-v3.pdf

https://curve.fi/files/crypto-pools-paper.pdf

https://docs.dodoex.io/chinese/dodo-xue-yuan/pmm-suan-fa-gai-lan/pmm-suan-fa-xi-jie

https://mp.weixin.qq.com/s/8xn8J8SAr8bbTlcS1hNhFg