Comparing Uniswap V3, Kyber DMM and Trident – How will the “liquidity optimization” problem be solved?

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2021-09-15 15:34:52

Today (September 15), the Sushi project announced the source code for the Trident exchange (an AMM platform born to help “optimize liquidity”). So why do many AMMs need to optimize their liquidity sources and how are the projects choosing this solution like Uniswap V3, Kyber DMM or Trident similar and different? Let’s find out in the article below!!!

Comparing Uniswap V3, Kyber DMM and Trident – ​​How will the “liquidity optimization” problem be solved?

An overview of the traditional AMM pool model

For those of you who have come into contact with the concept of AMM for the first time, it can be roughly understood that This is a decentralized exchange. Liquidity in the platform will be provided by the user himself and if anyone If you want to buy X token, you can drop Y token into the pool and take out X token.

The general formula for this traditional AMM model is x*y=k And those who are interested can learn more details in the article below.

>> See more: An example of volatility when participating in liquidity and farming

Reasons to “Optimize Liquidity”

The model x*y=k has a weakness, That is price slippage. That is, when users trade with a large order, they may suffer exchange rate loss. For example swap (convert) 100,000 USDC to USDT, only 99800 USDT will be obtained.

It is possible that with stablecoin-stablecoin trading pairs, this volatility is negligible, however, with illiquid trading pairs (ie the amount of tokens in the pool is not thick enough), the problem of slippage will become extremely serious for users.

That’s why liquidity solutions for AMM were born. In a nutshell, the transaction rate of AMM pools will be flexibly adjusted depending on the situation that the user needs, in order to minimize slippage to the lowest possible level.

Projects are following this model

Uniswap V3 – Centralized Liquidity

Uniswap V3 whitepaper was published in March 2021, introducing the mechanism of “Centralized Liquidity”.

Detailed information of Uniswap V3 products, we have mentioned in the explanation below:

> See more: Uniswap v3 – Good horse in the long run?

Note: It is recommended that you read the article below to understand the overview of the “Centralized Liquidity” model above before continuing to read the rest of this article.

Source: Uniswap V3 Whitepaper
Source: Uniswap V3 Whitepaper

The general idea is that the green curve – virtual reserves is closer to the original axis (ie the orange line – real reserves). This helps to reduce exchange rate fluctuations when there is a change in the amount of X,Y tokens in the pool. Needless to say, Uni v3 still has a few weakness as follows:

  • Non-self-reinvesting transaction fees: With versions V1, V2, collected transaction fees will continue to be deposited back into the liquidity pool, helping to thicken liquidity in the pool, and at the same time helping liquidity providers (LP – Liquidity Provider) earns compound interest. However, due to the peculiarity of V3 the price range (price bracket that LP provides liquidity), the transaction fee collected will not be able to continue to be deposited back into the pool for LP.
  • If the market price leaves the price range for which the LP has provided liquidity, the LP will not be entitled to a share of the profits from the transaction fees collected by the pool. Therefore, there are many solutions like Gelato that “must” be born to fill this gap of Uni V3.

Kyber DMM – Amplitude coefficient of variation

Kyber DMM (or Dynamic Market Making) is a new product of KyberSwap. For those of you who have been familiar with KyberSwap since the early years of DeFi, now this platform has migrated the product to Krystal (with positioning as a DeFi Hub – where all the operations a user needs in the DeFi field). I have also tried Krystal’s products and have a few personal comments in the clip below, if you are interested, you can check it out:

>> See more: DeFi Use: Review Krystal – All-in-one DeFi Solution

Now we will return to Kyber DMM’s “Amplitude Factor” solution. This idea is okay Kyber team announced in February 2021 – even before Uniswap V3 provided its whitepaper. Basically, Kyber also aims to concentrate liquidity in a certain area. Kyber also has an approach that brings the exchange rate curve closer to the original axis (ie the dashed blue line in the image below).

Red: Uniswap, Green: Curve, Blue: Kyber DMM
Red: Uniswap, Green: Curve, Blue: Kyber DMM

Differences with Uniswap V3:

  • Dynamic fee: When providing liquidity on Uniswap’s V3, users can only binding in 3 options trading fees are 0.05, 0.3 and 1%. However, Kyber DMM’s pool will give transaction fees that fluctuate depending on market fluctuations. For example, when the market is heavily traded, transaction fees are adjusted higher, thereby helping to reduce the Impermanent Loss (estimated loss) for LPs.
  • Amplitude Index: Instead of asking users to choose Price Range like V3, Kyber will streamline the initial selection process for users, with the application of Amplitude index for each pool. The lower the index, the lower the exchange rate volatility in the pool, thereby helping the amount of capital in the pool be used more optimally. This approach helps LP still enjoy the share of transaction fees even though the exchange rate fluctuates out of a certain Price Range like Uni V3.

Trident (product branch of Sushi)

At the time of writing, Sushi has also introduced the source code for the Trident product.

There are not many documents yet describing how this new product works. However, according to previous introductions, Trident’s approach will be to synthesize the most popular pool types today, which are Curve, Balancer, and Uniswap.

Information about Trident, those who are interested can read in the article below:

> See more: SushiSwap Launches New AMM: Trident

Point of difference of Trident that is built on the liquidity platform of BentoBox, instead of having to attract liquidity in the traditional way of the two names mentioned above. This is expected to be one of the pieces to help the Sushi ecosystem become closed to keep cash flow.

Thus, we have reviewed the solutions to help use capital effectively of today’s popular AMMs. I hope this article is of great value to you.

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