Don't miss out on this up-and-coming player, Smoothy, that you, who follows mStable and Curve, should pay attention to as it prepares to go live.

Trading between stablecoins has always been a market necessity, but the persistent problem of slippage has long troubled market participants. The decentralized exchange platform Smoothy.finance, which is set to launch soon and initiate liquidity mining, claims to achieve low-cost and zero-slippage trading while maximizing profits for liquidity providers. How exactly does it manage to do this?

Same Anchored Assets but Different Prices

This year can be said to be a dedicated track for Decentralized Finance (DeFi). According to data from DeFi Pulse, the total value of locked assets on DeFi platforms has grown by about 13 times compared to the beginning of the year, showing a remarkable growth rate in the ecosystem. Many tokens pegged to specific assets have been introduced into the Ethereum ecosystem, such as WBTC and renBTC pegged to Bitcoin, and various stablecoins pegged to the U.S. dollar. In the future, more and more physical assets or cross-chain assets will be tokenized and introduced into the Ethereum ecosystem.

However, despite these anchored tokens (such as USD stablecoins) being pegged to the same asset, they still have price differences due to market supply and demand. Especially during the recent liquidity mining frenzy, stablecoins pegged to the U.S. dollar, such as Dai and USDT, had a price difference of 2% (even exceeding 4% at one point), which became more severe with large trading volumes due to slippage issues.

In order to provide a perfect solution to the slippage issue, an anonymous team has developed a decentralized trading protocol called Smoothy.finance, which claims to achieve low-cost, zero-slippage trades while maximizing profits for liquidity providers.

Current Solutions Are Not Perfect

Decentralized stablecoin protocols like mStable and decentralized stablecoin trading platforms like Curve have attempted to solve this problem, but each has its limitations and issues.

mStable

mStable allows liquidity providers to collateralize USDT, USDC, DAI, and TUSD on the platform to mint the stablecoin mUSD backed by a basket of assets. The stablecoins collateralized by liquidity providers are directly transferred to lending platforms like Compound and Aave to earn interest, which is then distributed to liquidity providers who collateralize mUSD. However, those who have used mStable know that executing the swap function requires high gas fees because "the stablecoins collateralized by liquidity providers are directly transferred to lending platforms like Compound and Aave to earn interest," resulting in additional gas costs for each swap transaction, which is not cost-effective for retail investors exchanging small amounts.

In short, while mStable's mechanism provides stable and substantial interest income for liquidity providers, the high gas fees pose a significant economic burden for token swappers.

Furthermore, mStable's liquidity pool has a rigid "asset weight upper limit." For example, as shown in the figure below, the USDT in the pool is close to the weight upper limit. At this point, users cannot exchange other stablecoins for USDT on the platform because it would cause the weight of USDT in the pool to exceed the protocol's predefined limit. While this design provides security for mUSD's value, it also renders the swap function unusable in many situations.

Curve

Unlike mStable's single pool design, Curve adopts a multi-pool design to provide pools with different characteristics based on different fund preferences and purposes.

For example, the "Y Pool" in the figure above is similar to mStable's mechanism, where liquidity providers can earn stable interest income, but the efficiency of token swapping for users is lower. The funds in the "sUSD Pool" are not held in third-party lending platforms, and liquidity providers can only earn transaction fee revenue, but the gas fees required for token swapping are relatively cheaper. Although the multi-pool approach can meet the needs of a wider range of users and liquidity providers, it also disperses the depth of the pools.

On the other hand, while Curve's trading algorithm has been optimized and alleviates slippage issues compared to Uniswap's "x * y = k" algorithm, it still cannot guarantee a 1:1 exchange ratio between stablecoins.

Smoothy.finance: Crossing Limits

From the solutions of mStable and Curve mentioned above, it is evident that current solutions must balance between "high gas fees" and "passive income for liquidity providers," and so far, there hasn't been a platform that can perfectly achieve zero-slippage trades. However, Smoothy.finance claims to offer features like "zero slippage, no trading limits, low costs, and maximized profits for liquidity providers." How does it achieve this?

Firstly, in the choice between "high gas fees" and "passive income for liquidity providers," Smoothy adopts a more flexible mechanism design, similar to the traditional financial "reserve requirement" system. Liquidity providers' funds are pooled into a single pool, where 80-90% of the assets are deposited in aggregation protocols like Yearn or third-party lending platforms to earn stable interest, while the remaining 10-20% serves as a reserve for daily transactions. If the reserve is insufficient, a balancing mechanism is triggered to readjust the reserve to a reasonable range.

Smoothy claims that, compared to Curve's Y Pool and mStable, the reserve mechanism can save users about 80% of gas fee consumption and maximize the profit capabilities of liquidity providers.

Regarding slippage issues, Smoothy employs a mechanism similar to mStable. Smoothy sets a "soft weight" for each stablecoin in the trading pool, as shown by the blue line in the figure below. If the proportion of BUSD exceeds the default weight, a penalty fee is charged if a user insists on exchanging other stablecoins for BUSD. However, users exchanging USDT, USDC, DAI, TUSD, or sUSD for BUSD do not incur a penalty fee, and there are no penalty fees for exchanges between USDT, USDC, DAI, TUSD, and sUSD.

The comparison between Smoothy and other protocols provided in the figure below shows that the gas fees for executing trades on Smoothy are quite low, and apart from a 0.04% transaction fee, there are virtually no slippage issues.

Value Capture of Governance Token SMTY

Investors are most concerned about Smoothy's governance token SMTY. Unlike Curve, which is controversial, and mStable, where institutions hold most of the chips, the token issuance mechanism for SMTY is quite different. There is no pre-sale for SMTY, and the team has not reserved any allocation. All SMTY can only be obtained by "contributing to the project during the testing phase" or "providing liquidity after the platform goes live."

However, it is important to note that the token itself does not have profit-sharing functionality; its value capture comes from a deflationary model where tokens are burned. According to the official statement, each transaction incurs a 0.04% fee, of which 0.03% is allocated to liquidity providers, and the remaining 0.01% is converted to SMTY and burned. In addition, 95% of the pool interest earnings are distributed to liquidity providers, with the remaining 5% converted to SMTY and burned. Details such as total supply and inflation rate are currently not disclosed, and the official detailed token issuance information will be released before the product launch.

Although the DeFi concept sector is gradually cooling off, stablecoin trading remains a market necessity. On the other hand, most liquidity mining yields are currently decreasing. If Smoothy's liquidity mining can maintain high returns after its launch, it may have the opportunity to attract liquidity from other platforms, thereby strengthening the depth of its own pool and becoming a mainstream stablecoin trading platform.