It’s finally here! With the release of a new DEX on Testnet on two major blockchains, AllianceBlock is moving into the next stage of its development and evolution as a project that supports both DeFi projects as well as financial institutions looking to move into this space. AllianceBlock DEX, along with its other products such as Trustless IDentity Verification (TIDV), Liquidity Mining as a Service (LMaaS) and Bridge, will help create the new face of DeFi 2.0.
In this article, we’ll break down what this new DEX is, how it differs from other DEXes you may have used in the past, and AllianceBlocks’ future development plans. AllianceBlock will be launching their DEX on Testnet soon, so stay tuned on their Telegram group to know when it goes live!
There has been stagnation in the DEX model for some time. With the open-source approach being used by the key players in this space, there are many clones, but little innovation. Thus, there are dozens of DEXs in the space, but all are based on the same models, and suffer from the same limitations.
One of the major limitations is Impermanent Loss (IL). This may not directly affect traders, but it can significantly affect liquidity providers, potentially preventing large institutions and organizations from providing the high volume of liquidity all projects need.
Impermanent Loss in Liquidity Pools Slowing DEX and DeFi Adoption
In short, impermanent loss is a risk of acting as a liquidity provider compared to keeping your assets normally.
For most automated market makers running on a DEX, if the price changes and the liquidity pair you are providing diverges in price between the time when you provide the liquidity and the time of withdrawal, then your assets could end up under-performing compared to simply buying and holding them in your wallet.
Impermanent loss is a real issue that’s affecting DeFi adopters. Recently, a report from Topaz Blue revealed that liquidity providers using some of the most popular models of DEXes are facing increasing losses due to impermanent loss, with 49.5% incurring negative returns due to IL, and 80% claiming that the losses outweighed the fees earned.
That said, it is termed “impermanent” loss as, theoretically, the prices could re-converge together, and reduce your loss. While it is unlikely that a major divergence has happened, it only becomes a loss when you withdraw your funds.
Unlike most DEXes, which focus primarily on the trading side of the solution and accept IL as a necessary evil, AllianceBlock is keen to develop a wider ecosystem than current crypto markets.
We are very proud to announce that the AllianceBlock DEX, launching soon on Testnet, address this key issue with IL. This product, which when live on Mainnet, will launch across multiple top protocols and bridge between them, allowing for considerable reduction in IL and giving large liquidity providers more faith that their funds are less exposed to price movements no matter what happens to the markets.
Our goal is that the DEX becomes the core component of the full AllianceBlock Ecosystem. As part of this, the Mainnet primary token will be $ALBT, used for rewards, fees and governance — with the entire system working as a DAO. Yield farming will also be integrated for users allowing them to create their own strategies and be rewarded accordingly.
Through this model $ALBT will see increased liquidity, functionality and demand — giving benefits both to AllianceBlock and to token holders.
AllianceBlock DEX Open-Source Mathematical Algorithm to Reduce Impermanent Loss (IL)
For a full breakdown of the system and the mathematical models driving it, please see our full whitepaper here.
In short, the service uses the principle of coupling from physics to tether two automated market makers together. These help balance the liquidity pool and prevent as much IL occurring when prices either jump up or decrease rapidly on one of the tokens within the pair.
In turn, this helps protect liquidity providers from IL and potential losses if they need to exit from the pool at a given point in time. This decrease in financial risk means liquidity providers will be more willing to provide deeper liquidity over longer terms. This is essential to draw liquidity from companies within traditional financial markets who might otherwise find liquidity provision does not fit within their risk tolerances.
The DEX is grounded in a new mathematical model designed by an innovation team led by AllianceBlock’s Co-Founder and CEO Rachid Ajaja, Chief Research Officer (CRO) Houman Falakshahi, who holds a PhD in Quantum Mechanics from the University of Paris-Saclay, and Head of Quantitative Analytics, Matthieu Mariapragassam, who holds a PhD in Applied Mathematics from the University of Oxford.
While it would appear this just benefits liquidity providers, it also benefits a number of advantages to other groups of users within DEXes.
The first and most obvious group are crypto traders who use DEXes to swap between various tokens. Liquidity for traders is one of the biggest issues faced when using a DEX, particularly with new projects and tokens.
With increased liquidity from larger providers, traders will be able to have an increased depth of market for purchases. They are also more likely to have a variety of trading pairs available, as pairings which previously would be too high risk for liquidity providers due to IL can be made less risky using the new models in our DEX.
In addition, where previously fees were paid to liquidity providers to balance the risk of IL, they can now become a means of generating revenue for the providers instead, as they incur lower costs.
This also creates possibilities for new crypto and DeFi projects, who previously may have found it harder to attract liquidity providers, and may have previously given away a large volume of their own tokens in rewards. With lower risk they will find it easier to attract liquidity providers and in turn they can offer lower rewards to counterbalance that risk. The improvement over IL will especially benefit larger institutional providers — alongside our upcoming products like Trustless IDentity Verification (TIDV), our DEX will help traditional financial players access opportunities in DeFi. For example, DeFi projects already leveraging our LMaaS will be able to migrate their liquidty in a click of a button. This will of course come along a comprehensive incentive program that will help incentivize liquidity providers to bring liquidity to our DEX.
Testnet Launch on Energy Web Chain (EWC) and Polygon and Mainnet Roadmap
As the first step in the release of the DEX to the public, we will be adding it to our Testnet. The test reward programme will be released with full details in the coming weeks, and the focus will be on rewarding testers for innovation and the level of effect the testing has.
For the Testnet, we will be launching with a number of partners including Energy Web Chain (EWC) and Polygon, with others to follow. These blockchains are a great match for the AllianceBlock DEX as they offer lower fees, faster transaction times, and are ideal for new tokens to list on and build their liquidity pools.
With every improvement, there is a trade-off required. In order to improve IL there are challenges, and the development of this DEX is an ongoing process.
The first of these is an increased slippage in prices. While for lower volume traders this is likely to be less of an issue, higher volume traders may notice an effect. This is a balancing issue that will be improved over time, but for now, the balance between reduced IL and price slippage on trades can be customised whenever a liquidity pool is set up.
The other challenge is, due to having two internal automated market makers balancing to reduce IL, additional calculations are required per trade. On a base chain with already high fees, such as Ethereum, this could create additional costs for traders. In order to prevent this, the focus of the DEX will be on layer 2 solutions which have minimal fees in addition to the other benefits they offer, plus the layer 1 solutions that already have low fee structures.
Why launch on Energy Web Chain?
EWC is the premium layer 1 blockchain for the energy industry and, as such, will give some of the biggest players in the industry access to our suite of products and services. When compared to other layer 1 solutions such as Ethereum it is also much faster and has massively lower transaction fees.
Why launch on Polygon?
We are deploying onto Polygon for very similar reasons. In particular, its high speed of transactions and low transaction costs have seen a rise in total value locked on Polygon’s smart contracts from around $151,000 in the beginning of 2021 to over $6.31 billion just last August.
Both these platforms ensure our users have access to fast, scalable platforms, where their funds won’t be eaten up by large fees.
AllianceBlock’s Integrated DeFi System
After a period of rigorous testing and a bug bounty for developers, we will launch the DEX on Mainnet so it will start to become a hub by which we bridge multiple chains together and, combined with additional AllianceBlock services such as Liquidity Mining as a Service (LMaaS) and Trustless Identity Verification, offer additional services to projects and institutions using it.
This is a major step for AllianceBlock in creating an integrated financial system for DeFi, bringing multiple internal projects together into a holistic package for the DeFi industry. We’re looking forward to you coming along on the journey with us.
It’s clear we have big plans for our cutting-edge take on an Automated Market Maker. Soon, you’ll be able to try out our DEX Testnet when it is officially launched and see exactly how it works, so stay tuned on our Telegram and Twitter to know when it’s live. Share your experience on our Telegram community and e-mail your feedback here. We’ll be releasing a Testnet usage awards programme and a bug bounty for developers in the coming weeks, so keep an eye on our channels!
About AllianceBlock
AllianceBlock is bridging the gap between decentralized finance and traditional finance, by remedying issues that exist in both spheres and linking them more closely together. They see the future of finance as an integrated system in which the best of both worlds can work together to increase capital flows and technological innovation.
Building this future by bridging traditional finance with compliant, data-driven access to new decentralized markets, DeFi projects and ecosystem-scaling tools such as funding and interoperability. As such, they are building a next-generation financial infrastructure that aims to provide regulated financial entities around the world with the tools they need to seamlessly access the DeFi space.
Originally published here
Author
Chris Munch is a professional cryptocurrency and blockchain writer with a background in software businesses, and has been involved in marketing within the cryptocurrency space. With a passion for innovation, Chris brings a unique and insightful perspective to the world of crypto and blockchain. Chris has a deep understanding of the economic, psychological, marketing and financial forces that drive the crypto market, and has made a number of accurate calls of major shifts in market trends. He is constantly researching and studying the latest trends and technologies, ensuring that he is always up-to-date on the latest developments in the industry. Chris’ writing is characterized by his ability to explain complex concepts in a clear and concise manner, making it accessible to a wide audience of readers.
