Meter will work with Chads.vc to build Chadswap, a new decentralized exchange with improved automated market making technology, on the Meter platform.
We are excited to announce that we’ll be working with Chads.vc to build the very first decentralized exchange (DEX) on Meter DeFi Infrastructure!
Chadswap will be an on-chain DEX with our improved automated market maker (AMM) engine that solves many of the problems that liquidity providers (LPs) and traders face with currently-available DEXs.
Problems with currently available AMMs
Most of today’s AMMs, including Uniswap, Balancer, and many others, operate on a constant product market maker (CPMM) model.
This means that for any liquidity pool, a simple equation - x*y=k - determines the price of each asset in that pool. We won’t go deep into the mechanics but if you would like to read more about how the CPMM model works, check out this Medium post.
The CPMM model exposes LPs to two types of potential profit loss.
First, LPs are exposed to loss because of the 50/50 constantly-rebalancing portfolio composition, which may be completely different from their target portfolio. For example, when an LP provides 1 ETH and $340 to a pool, the AMM will automatically sell a portion of ETH to USDT as ETH price appreciates to $380. In this case, the LP is better off holding the original position than providing liquidity to the pool.
Second, LPs are exposed to losses by arbitrage. This problem is especially serious in a big pool. Imagine the price of ETH suddenly increases from $340 to $380 on a centralized exchange. However, the Uniswap ETH/USDT pool is completely blind to this information and still quotes $340 per ETH. In the Uniswap pool, it would take $23M to move the price from $340 to $380, and this would open a big window for arbitrageurs to take profit from the pool’s LPs. This loss is actually a permanent loss instead of “impermanent loss”.
Recently there are many new DEXs like Sushiswap trying to introduce tokens as a transaction fee-sharing mechanism. The ugly truth is that providing liquidity is often a money-losing business without this token subsidy, and there is fundamentally no real profit to be shared with token holders.
How the Meter smart AMM will work
The first improvement in Meter’s Smart AMM mechanism is to introduce oracle data through our partner Chainlink. The oracle data sets a reference price for the AMM, which provides price quotes as guidance and makes adjustments based on the token inventories in the liquidity pool. The AMM no longer tries to maintain a 50/50 value split between the two tokens in the pool. Instead it will try to maintain the same amount of tokens deposited on each side of the pool. This approach essentially eliminates the impermanent loss introduced by forced portfolio composition and dramatically reduces the loss from being taken advantage by the arbitrageurs.
Additionally, this approach allows the liquidity providers to add and remove liquidity with arbitrary token composition, including adding a single asset, without impacting the price. This helps LPs tailor their risk exposure.
There are a few oracle-guided AMMs on the market, such as Bancor v2. However, we believe their implementation of adding and removing liquidity introduces new potential impermanent loss for LPs. Meter’s Smart AMM uses a completely different model that is not subject to such issues. We will have more details as we get closer to launching the AMM.
The Chadswap roadmap
The development of Chadswap will take place in three phases:
- PHASE I: Liquidity mining - Liquidity providers will be able to mine STACY, the governance token for Chadswap, over an approximately 4–6 week period by staking LP tokens.
- PHASE II: Ethereum-based AMM - LPs can migrate their liquidity from Uniswap to Meter’s Smart AMM engine.
- PHASE III: Cross-chain AMM - Chadswap will migrate to Meter and leverage Meter’s cross-chain technology and Ethereum compatibility to interconnect with the Polkadot ecosystem and become a cross-chain AMM. The AMM will also benefit from high performance, low stable cost, and more reliable oracle data feeds on Meter.
In the early stages, the Smart AMM will support trading of the top ERC-20 tokens with Chainlink’s data feed. Other trading pairs will fall back to the Uniswap 50/50 style AMM. More tokens will be supported later as the oracle data feeds expand.
This will increase the usage of eMTRG and bring more value to the Meter network.
We look forward to collaborating with Chads.vc to improve the AMM space and build the first DEX on the Meter network!
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