【Dapp Pocket】Uniswap's two major competitors, the rise of a new type of DEX!

2020/10/28

Dear DeFi decentralized finance enthusiasts,

This week, PayPal made a major announcement, supporting the purchase and payment of four major cryptocurrencies including Ethereum. Let's discuss the challenges that DEX like Uniswap using automated market maker AMM are currently facing, and how new competitors are innovating to overcome these challenges.

Headline news this week also includes PoolTogether upgrading to V3, adding yVault prize pools and a new credit scoring system; the hotly debated proposal for a retroactive airdrop on Uniswap by Dharma; and Aave's ecosystem NFT platform Aavegotchi launching token staking activities, and more. The senior perspectives this week include Hayden from Uniswap declaring that AMM is still in its early stages; Anthony from TokenSet praising the "gas fee distribution chart"; and Ethereum's V God telling those who still refer to Ethereum as an Altcoin how outdated they are!

Advertisement - Please scroll down for more content

Table of Contents

1. Our Perspective

The Rise of Two Competitors of Uniswap, a New Type of DEX Emerging!

Automatic Market Maker AMM

During the rise of DeFi, Uniswap established the reputation of an Automatic Market Maker with a simple and clear mathematical formula X * Y = K, which straightforwardly determines the price of any trading pair in the liquidity pool. Uniswap has made significant contributions to market liquidity in the early stages of DeFi, with daily trading volumes exceeding $400 million since September, surpassing centralized exchanges like Coinbase, solidifying the AMM model's position in decentralized exchanges (DEX). This has inspired the emergence of optimized versions of AMM such as Balancer and Curve. However, this model also faces many significant issues.

Pain Points of AMM

The core model of Uniswap is too simple, leading to inevitable issues like Impermanent Loss and significant trading slippage.

Impermanent Loss

Impermanent Loss occurs when there is a price disparity between the two assets X and Y in the external market. As AMM itself doesn't detect market prices, arbitrageurs enter to change the pool ratio to match external market prices. However, arbitrageurs' "profits" within AMM directly translate to "losses" for liquidity providers.

High Trading Slippage

Another hidden issue of the X * Y = K formula is the insufficient liquidity for assets in the mid-price range. In simple terms, when an AMM market with low liquidity faces a large buy or sell order, the asset price within the AMM experiences exaggerated slippage, resulting in losses for large traders.

Oracle x Automatic Market Maker? "Intelligent DEX" CoFiX

CoFiX is a new decentralized exchange that, unlike AMM, incorporates external oracle data as the market price source. Observing Uniswap's bid-ask prices, CoFiX realized that relying solely on its mathematical model without linking to external market data would detach its order book from naturally occurring order books.

Synthetic "order book" of Uniswap VS. Real order book.

Furthermore, the capital efficiency of Uniswap is also a major issue. Uniswap's daily trading volume compared to its Total Value Locked (TVL) is only about 30%, indicating that 70% of the funds are essentially idle, which is very low for cryptocurrency liquidity providers. Combined with the mentioned AMM pain points, CoFiX decided to connect to an external oracle Nest to provide data. CoFiX is expected to become a "Computable DEX" with more superior pricing functionality.

Oracle x Advanced Market Making Model? "Proactive Market Maker" DoDo

Is it possible to provide a better market pricing environment by incorporating an intelligent contract's mathematical model on top of oracle-fed pricing? DoDo.Exchange confidently states that it is achievable with a simpler formula Pricing = iR. In reality, hidden within this seemingly simple formula, i is the real-time market price provided by leading oracle Chainlink, establishing a price benchmark, allowing DoDo's pricing to avoid the significant slippage seen in Uniswap. Additionally, DoDo has designed a variable risk coefficient R to fine-tune prices towards maximizing capital utilization.

In the DoDo model, as long as asset liquidity is sufficient, users can provide one-sided liquidity—for example, only providing ETH liquidity in the USDC/ETH market—and significantly avoid the impermanent losses faced by traditional AMM liquidity providers. Moreover, traders do not need to worry about slippage losses from large trades. With DoDo's model adjusting R autonomously based on market conditions and liquidity, it offers more ideal pricing in the market, termed as "Proactive Market Maker."

How Will Uniswap Counterattack? Uniswap V3

The hope for Uniswap to continue competing with these emerging competitors in the medium to long term lies in the reforms of V3. Various sources have hinted that Uniswap V3 will be launched in 2021, and while the details are still unclear, founder Hayden previously tweeted, "Uniswap V3 will prove that AMM can outperform traditional exchanges in both slippage and capital efficiency."

These happen to be the biggest pain points of AMM... Let's wait and see!

Conclusion: The Battle Between Mathematical Models and External Data

If we view it as a spectrum, one end is the completely trustless "mathematical model" approach, and the other end is accepting market information and forging a new battlefield of liquidity through "oracle pricing." Both approaches have clear advantages and disadvantages. For instance, oracles may be susceptible to malicious attacks. Therefore, new competitors are seeking a balance between these two extremes, such as DoDo's oracle combined with a risk coefficient model. It's challenging to assert the superiority of these new products over traditional AMM before they undergo stress testing, and there's no guarantee that the former leader will always remain at the top. However, optimistically, the innovation spurred by this competition will continue to evolve decentralized exchanges (DEX) and the overall DeFi ecosystem every day.

2. Highlights of the Week

✨ Headlines of the Week

PayPal Allows Buying ETH, BTC, and Other Cryptocurrencies

Payment giant PayPal announced a new service that allows users to directly buy, sell, and hold cryptocurrencies from their PayPal accounts. It will also enable cryptocurrency payments for the platform's 26 million merchants. This service is provided through a collaboration with compliant virtual currency products and services provider Paxos Trust Company. PayPal stated that the service will be available to U.S. PayPal account holders in the coming weeks, initially supporting four cryptocurrencies: Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH), and Litecoin (LTC).

PoolTogether Upgrades to V3, Introduces yVault Prize Pool, and Credit Score System

No-loss lottery PoolTogether's core concept revolves around players purchasing lottery tickets with funds that are pooled to earn interest on the DeFi lending platform Compound. Each week, interest earned by the pooled funds is given to the winners. V3's key changes include introducing yVault prize pools, allowing developers to adjust prize strategies similar to liquidity mining, and a fairer credit score system for regular players.

Kyber Launches Professional On-Chain Market Making Module KyberPRO

Decentralized trading protocol Kyber Network announced the launch of the professional on-chain market-making module KyberPRO. KyberPRO is a tool designed for market makers, providing liquidity systems, tools, documentation, and technical support. It is an end-to-end module that allows professionals to engage in profitable market-making operations on-chain with minimal smart contract knowledge.

Controversial Discussion on Dharma's Proposal for Retroactive Airdrop on Uniswap

Fund aggregators like Dharma, MEW, Monolith, etc., offer services where users pool their funds before trading to mitigate individual users' Gas Fee issues. As they use a Proxy to aggregate user funds, individual users, while being Uniswap users in reality, were not considered for the 400 UNI airdrop. To address this, Dharma initiated a UNI governance proposal requesting a retroactive airdrop for those Uniswap users via Proxy. The discussion between the two sides is still ongoing.

Aave Ecosystem NFT Platform Aavegotchi Launches Token Staking Activity

Decentralized protocol Aave's NFT platform Aavegotchi initiated a token staking activity. Users can earn "game tokens" FRENS by staking GHST or GHST-ETH LP tokens. 1 GHST can earn 1 FRENS per day, while 1 GHST-ETH LP token can earn 100 FRENS per day. FRENS can be used to purchase lottery tickets or other items in the game's marketplace.

Celo stablecoin payment network hosts Celo Camp incubating startups, Taiwan team Cappuu selected

💰 Financing

Public chain CasperLabs raises $14 million through token private sale, mainnet scheduled to launch in the first quarter of next year

Decentralized media platform Audius officially launches its mainnet, secures $9.8 million in the latest funding round

3. Insights from Industry Leaders

Uniswap Founder Hayden Adams: "The simplest fact about AMM is—it's the future trend, and we are still in the early stages."

TokenSet Marketing Anthony Sassano: "Take a look at this gas fee distribution chart!"

Ethereum Founder Vitalik Buterin: "Saying ETH is a shitcoin in 2020 is like saying Lamborghini is a carriage replacement."

4. Data Indicators

The data for this week is from 2020/10

DEFI MARKET DEVELOPMENT