Deep Dive into Liquidity Pools: Earn Passive Income on Our Arbitrum DEX
If you’ve been following this space, then you’d be aware that Dfyn V2 is now live on the Arbitrum network. In the past few days, we’ve been releasing informational blogs to help traders understand the diverse functionalities of our DEX that they can leverage on Arbitrum to make profitable trades.
However, our Arbitrum DEX also provides multiple ways for liquidity providers to earn substantial passive income by providing liquidity to the ecosystem. In this blog, we will reveal the three major ways you can contribute to the ecosystem and earn great yields.
Become a Liquidity Provider
In a decentralized exchange (DEX), liquidity refers to the availability of buy and sell orders for a particular asset.
Now, Dfyn V 1.0 operated on the Uniswap V2 model. This meant that liquidity was distributed evenly along the x*y=k price curve, with assets reserved for all prices between 0 and infinity. Consequentially, in this structure, the majority of the liquidity was never put to use. Since, as an LP, you only earn fees when a trade happens, for you to accrue returns, you had to pick a price range that would expect to see the most volume.
This meant that, in all likelihood, you would earn fees on a relatively smaller portion of your overall investment. When you add the factor of impermanent loss, you could make a case for categorizing the prospect of becoming an LP as a risky one.
With Dfyn V 2.0, we’re removing this probabilistic nature of acquiring returns and ensuring that regardless of your price range and capital, you get significant returns.
We’re achieving this by leveraging concentrated liquidity mechanics. In this paradigm, liquidity providers (LPs) can accumulate their capital to smaller price intervals than (0, ∞), which enables individualized price curves and higher capital efficiency.
And more importantly, this structure will also mean that, as an LP, you’ll get the same liquidity depth as earlier within specified price ranges while putting far less capital at risk.
Moreover, in order to avoid liquidity fragmentation and overcome the possibility of impermanent loss, we’re providing one pool with a variable fee structure.
Become a Market Maker for RFQ Trades
As a market maker in Dfyn, you earn rewards when our Arbitrum DEX successfully executes trades. Simply put, the higher the number of successful transactions, the more opportunities you have as a market maker to earn alluring rewards.
In our attempt to increase trading volume, improve pricing, reduce volatility, and increase liquidity while increasing transparency, a few weeks ago we introduced the RFQ (Request for Quote) model for executing trades.
In this model, the user for every swap performs an RFQ quotation request, and a market maker immediately offers a quotation for the swap; the user then gets the option to accept or reject the offer. The whole process is automated, quick, and secure.
This process will increase the number of successful transactions by providing a seamless user experience. In fact, here are a few peerless benefits that the end user will receive with the RFQ model:
- Increased trading volume: RFQ orders can help increase trading volume by allowing traders to negotiate large trades that would otherwise be difficult to execute on the DEX because of the lack of liquidity. This can lead to more trades being executed, which can increase revenue for market makers.
- Improved pricing: RFQ orders enable market makers to negotiate prices directly with traders, allowing them to achieve better prices for their trades. This can increase revenue and improve the profitability of their trades.
- Reduced volatility: RFQ orders can help to reduce volatility by allowing traders to negotiate large trades without moving the market price. This can benefit market makers by reducing the risk of large price fluctuations that can negatively impact their positions.
- Increased liquidity: RFQs can increase liquidity by allowing traders to negotiate large trades that otherwise would not have been possible due to a lack of liquidity. This can also benefit market makers by increasing the trading volume and, therefore, the liquidity of the market.
- Increased transparency: RFQ orders can increase transparency by enabling market makers to negotiate prices directly with traders, rather than relying on the order book. This can help market makers to better understand the market and make more informed decisions about their positions.
Become a Limit Order Maker
Traditionally, Limit order makers play an important role in a DEX. They provide liquidity to the market and help other traders execute their trades by providing the buy or sell orders that they need. They also help to increase the depth and liquidity of the order book, which can make the market more efficient and increase transparency.
When the trader successfully completes a limit order using the liquidity provided by the limit order maker, they have to pay a fee called the Basis point, or BPs. This fee will be provided to the limit order maker for allowing the trader to use their liquidity to complete the transaction.
So it is in the best interest of a limit order maker that more end users place limit orders on a DEX.
In order to attract more users to place limit orders on Dfyn V 2.0, we’ve worked tirelessly to decrease all points of friction. In a measure to achieve just that, we have introduced On Chain Limit orders on Dfyn V 2.0.
Here are some key benefits of adopting this approach:
- Increased transparency: On-chain limit orders are stored on the blockchain and are visible to all participants. This increased transparency can help CLMMs to better understand the market and make more informed decisions about their positions, which can increase the effectiveness of their liquidity provision.
- Reduced counterparty risk: On-chain limit orders are stored on the blockchain, which means that they are executed automatically by smart contracts. This eliminates the need for trust in a counterparty and reduces the risk of fraud or default. This can increase the security of the CLMMs assets and increase the trust in their liquidity provision.
- Improved execution: On-chain limit orders are executed automatically by smart contracts, which can improve the speed and efficiency of trade execution. This can benefit CLMMs by allowing them to take advantage of market opportunities more quickly and increase their profitability.
- Reduced costs: On-chain limit orders can reduce costs by eliminating the need for a centralized intermediary to match orders. This can lead to lower trading fees and improved profitability for CLMMs.
- Immutable records: On-chain limit orders are stored on the blockchain, which makes them immutable. This means that once they are recorded they can’t be altered or deleted, this can benefit CLMMs as they can rely on the integrity of the order books and trades.
Collectively, these factors compound together to incentivize end users to place limit orders on Dfyn V 2.0
As we mentioned earlier, this directly helps you, the limit order maker generate more profits because when it comes to execution of limit orders on our CLMM DEX, the question becomes not of ‘IF’ but of ‘WHEN’.
We hope that this blog serves as a valuable resource to understand the various ways you can leverage Dfyn V 2.0’s improved capabilities on Arbitrum node to park your liquidity and earn disproportionate rewards.
Dfyn’s vision is to become a one-stop solution for all trading-related activities. Dfyn is a fully decentralized multi-chain trading exchange that offers cross-chain swaps powered by Router Protocol and has now launched RFQ-based orders for better capital efficiency.