Comparing Decentralized Exchanges (DEXes): Concentrated Liquidity Adoption as a Gauge
To appreciate what concentrated liquidity brings to the table, one must herald back to 2018. Before Uniswap entered the scene in late 2018, centralized exchanges like Binance and Coinbase had no meaningful alternatives.
Centralized exchanges allow fast, hassle-free, yet custodial swapping of coins for a fee. These giants are still powerful — and central to the success of crypto — , running parallel with decentralized exchanges launched on various chains.
They actively offer an easy-to-use ramp for new users to experience the benefits of cryptocurrency and blockchain solutions first-hand.
How DEXes Evolved
Uniswap released V1 of its Automated Market Maker (AMM) model to test the waters in November 2018. It was a concept existing in beta for a decentralized marketplace allowing the swapping of ERC-20 tokens.
The stability upgrade of V2 introduced many other features like flash swaps, oracles, and swapping between ETH and ERC-20 tokens. Security paddings on V2 included a more robust system resistant against manipulation by incorporating a decentralized oracle system. However, the launch of V3 promised even more, especially with the idea of Concentrated Liquidity.
Concentrated liquidity is a core feature in Uniswap V3, released strategically to adapt the swapping platform to the “heavy” Ethereum, struggling with high demand for block space. This version was released on the mainnet and as a beta on Optimism — a layer-2 on Ethereum. While operational in Ethereum, Concentrated Liquidity is a feature that’s also finding use in other swapping platforms on Cardano and Binance Smart Chain (BSC).
In Cardano especially, Genius Yield is tapping on the benefits of Concentrated Liquidity in their bid to democratize DeFi while concurrently riding on Cardano’s bespoke design, which offers transformative capabilities unmatched by any other smart contracting platform.
A Case For Concentrated Liquidity
Concentrated Concentrated liquidity is an innovative model meant to boost capital efficiency for liquidity providers. A model first introduced by Uniswap V3, this style has been adopted in other non-AMM DEXes using order book architecture on platforms such as Cardano.
Concentrating liquidity means a liquidity provider (LP) isn’t inefficiently spreading liquidity uniformly at all prices. Instead, assets are allocated at specific, custom price ranges where price action is active. Like other models, all trading fees collected within a given custom trade range, captured as non-fungible LP tokens, are split to all suppliers proportional to the number of assets provided.
Since there is flexibility, an LP can supply assets to a pool at different ranges to suit their market-making strategies just like they would in traditional exchanges. It is also possible to implement reward maximizing plans through algorithmic yield optimization trading strategies.
The result translates to much higher capital efficiency and deeper liquidity for traders since LPs require fewer assets to maintain low slippage. Most importantly, liquidity providers receive much more rewards because of turbo-boosted efficiency while concurrently dampening the effects of impermanent loss.
Statistics show that the tighter an LP concentrates assets in a price range, the higher the rewards. It has been further demonstrated that liquidity provision in a tight 0.10 percent range can amplify ROI by a whopping 4000X.
The State of DEXes in DeFi: Which Protocols are Innovating?
A quick scan of the Cardano ecosystem reveals that most upcoming exchanges have big ambitions.
Unfortunately, there has been no ground-breaking innovation on their end to squeeze maximum benefits from Cardano’s eUTXO architecture, which is designed to provide a grand opportunity for exchanges to quickly pool liquidity.
ADAX, for example, is distinguished by its ERC-20 to Cardano converter and the sentiment analysis tool. They also promise to build deep liquidity pools and release a model to protect users against impermanent loss. Meanwhile, SundaeSwap offers what’s found in other DEXes launching on Ethereum or the Binance Smart Chain (BSC). They provide quick swapping of native assets without details on how they will guarantee efficient liquidity.
Perhaps the only DEX that’s impressive thus far, drawing inspiration from Uniswap V3, is SheepDex on the account-based BSC blockchain. It launched in mid-October and is the first to offer concentrated liquidity in the space, even allowing for range orders and multi-tiered fees using an AMM mechanism. Its users can also provide liquidity for a single token.
Genius Yield Goes the Extra Mile
Genius Yield will be the first in Cardano and the industry to combine concentrated liquidity and an AI-powered smart liquidity management system. While concentrated liquidity is a massive introduction to DEXes and DeFi, few projects are willing to commit and actualize its benefits. The automation in Genius Yield is distinguishing, placing the all-in-one DeFi solution miles ahead of competitors.
Besides, Genius Yield leverage the benefits of Cardano’s eUTXO architecture, low fees, high throughput, and the flexibility of ADA delegation for even higher capital efficiency for liquidity providers. The AI-powered smart liquidity management solution is easy-to-use, minimizing risks and amplifying profits for liquidity providers using any of the optimized yield strategies.