We are excited to unveil Dfyn Exchange’s V2, developed after careful considerations that include the limitations of the Uniswap V2 model on which Dfyn was originally based. Dfyn launched almost two years ago and was the first AMM on the Polygon network. Dfyn V2 is an earnest attempt by us to prepare Dfyn not just for the present but for the future.
AMMs — A walk down memory lane.
As thousands of tokens have been created and continue to be created, there is a growing need to swap between them. Traditional exchanges require there to be a willing buyer and seller for each token pair to trade, also called liquidity. However, insufficient liquidity for many long-tail crypto assets prevented centralized exchanges from listing them.
Bancor is one of the founding fathers of DeFi. It was the first DEX to innovate the AMM model to facilitate swaps between Ethereum-based tokens. Instead of a central order book that matched buyers and sellers according to their bid and ask prices, the AMM fulfilled orders with on-chain liquidity pools. Bancor introduced the constant product AMM in 2017, its platform saw only modest adoption because each token was paired with Bancor’s native token.
Uniswap emerged as the clear winner of the AMM wars; let’s look at the history of Uniswap and how it has evolved.
Uniswap V1: It started with having each ERC-20 tokens need to create a pool with ETH. So, If one wants to do a transaction from USDC to Matic. First, it will hit USDC to ETH pool and then ETH to MATIC pool.
Uniswap V2: In this, one can create Pools between any two ERC-20 tokens. Like a pool between USDC and MATIC, the transaction between USDC and Matic can be done in a single transaction, provided there is a liquidity pool for USDC/MATIC.
Uniswap V3: It follows concentrated liquidity, and as the name suggests, the liquidity is not distributed but concentrated at different ranges. We know that AMM follows the x*y=k price curve. In Uniswap V2, Liquidity is distributed equally along the price curve.
But in Uniswap V3, the liquidity is deposited at a particular price range. In doing so, LPs construct individualized price curves that reflect their preferences. The purpose of innovation in AMMs has been capital efficiency so that we can fulfill maximum orders with less liquidity.
Uniswap V3 is not the final iteration of the DEXes — there is more that needs to be done, and we will be elaborating on it in the following sections.
Dfyn has come a long way
From being the first AMM on Polygon to one of the largest DEXes by volume soon after. The exchange has since hit multiple milestones.
- Reached a peak TVL of $300 million
- Introduced vDFYN vaults for the community to get fee-sharing from the protocol
- Processed over $3 billion in trades
- Launched on multiple chains, including Polygon, Fantom, and Arbitrum
- Burnt 20% of the total supply to support tokenomics and prolonged the vesting schedules of team and investor
- Integrated Router Protocol’s widget to offer cross-chain swaps within Dfyn
The Problem: Challenges with Uni V2
There are a few of challenges with the current (Uniswap V2) model that Dfyn adopted.
- Impermanent Loss: Impermanent loss happens when the price ratio of deposited tokens changes after you deposit them in the pool. The larger the change is, the more significant the impermanent loss. To compensate for the loss to the users who have deposited the liquidity, we have to give out more rewards as an exchange.
- Liquidity Mining: Liquidity is the most critical factor for an exchange in how AMM was designed. The more liquidity in the pool, the less slippage large orders may incur. That, in turn, may attract more volume to the platform. Users will park their liquidity where they will get more rewards. So to attract liquidity, we need to shill out more rewards.
- Market: Many Uniswap V2 clones were coming, and everyone was fighting for liquidity, shilling out more rewards. Also, with the launch of the Uniswap V3 concentrated liquidity model, it became even more challenging to compete with the current Dfyn model.
To summarise, it would be fair to say that the Uniswap V2 model failed to scale because liquidity costs were high enough not to sustain organically and required token rewards.
To overcome these challenges, we are launching Dfyn V 2.0
In Dfyn V 2.0, we work hard to give our users a one-stop solution for all financial needs in a decentralized world. We will be multi-chain and offer a variety of financial products.
We will achieve this in multiple steps, first by bringing the RFQ model to Dfyn. This will allow us to achieve the following things:
Better Prices: We have integrated with multiple market makers that will give users the quotation for their requests. The user gets the tightest spreads and best prices for highly traded tokens.
Zero Slippage — Users can execute very large quantities without slippage, as this is similar to an OTC trade.
Capital Efficient — Traditional AMMs require LPs who need to provide a lot of idle capital as liquidity. This lack of capital efficiency leads to the higher fee required to incentivize the LPs, which ultimately leads to worse prices for swaps. RFQ requires no idle capital from market makers hence they can provide better prices in a lower fee environment.
No risk of MEV — No third party can sandwich the trade between the market maker and the user.
Security — The execution of orders happens on the chain, which ensures the decentralized aspects of security and anonymity of a DEX are also maintained while getting closer to the better prices provided on centralized exchanges.
We will be launching with the RFQ model on Polygon, but within one month, we will be coming on AVAX and BSC as well.
You can check the new UI and the RFQ orers on our testnet here: https://exchange.defyn.network/#/swap (Please note that the funds used here are real).
RFQ Styled Orders
Dfyn will provide RFQ-styled orders where the user for every swap performs an RFQ quotation request, and a market maker will immediately offer a quotation for the swap — the user will then get the option to accept or reject the offer. The whole process will be automated, quick, and secure. The best part is that it will be highly capital efficient and incentivize market makers to compete and provide the best prices to the user requesting quotes.
Isolated liquidity pools for market makers and concentrated liquidity with unified pools will further enhance the Dfyn order system. More on them below.
Isolated Liquidity Pools for Market Makers
Later, we will also provide the users to create isolated pools where funds can be stored in custody and assign delegated signers from one of our Market makers. This will enable Market makers to trade with these user funds for a fee.
This will enable users with additional capital an opportunity to get a return and an opportunity for market makers to earn a part of the profits without deploying their capital. This creates an actual win-win situation for everyone involved. Users get the best prices, liquidity providers earn some yields on their capital, and market makers can provide quotes using their limited capital.
Concentrated Liquidity with Unified Pools
Dfyn is also coming with AMM based on concentrated liquidity. Our thesis is that Dfyn, by leveraging the power of concentrated liquidity pools and RFQ orders, will be able to give users a superior trading experience.
Most AMMs followed the XYK model, based on the x*y=k price curve. In which liquidity was distributed evenly, one could trade their assets within the infinite interval (0∞).
While with the concentrated liquidity mechanics, liquidity providers (LPs) can accumulate their capital to smaller price intervals than (0, ∞), which enables individualized price curves, higher capital efficiency, and deeper liquidity for traders.
In a stablecoin/stablecoin pair, for example, a liquidity provider may allocate capital solely to the 0.99–1.01 range. As a result, traders are offered deeper liquidity around the mid-price, and LPs earn more trading fees with their capital.
There are different models of concentrated liquidity. One is creating different pools for different tiers, and the other is having one pool but a dynamic fee based on market conditions. In Dfyn, we are going with one pool model with a variable fee structure instead of a separate pool because of the following reasons:
- Avoid Liquidity Fragmentation: — Multiple pools for the same pairs will lead to liquidity fragmentation, and that is not ideal as higher liquidity in a concentrated range provides lower slippage, which is good for users.
- Overcome Impermanent Loss: Volatile market conditions or volatile pairs lead to more Impermanent Loss for the users, so it makes sense to have higher fees for those LPs to compensate them for the IL. For stable market conditions. LPs can earn a good yield with a low risk of impermanent loss even with low fees. We have developed a proprietary model which adjusts fees based on pair and market conditions instead of having it constant. This enables us to keep the fee low in stable conditions and higher in volatile conditions.
Dfyn will be launching concentrated liquidity this quarter.
Delegation Vaults — a win-win for everyone
We will also launch Delegating vaults to enhance our LPs’ yield. If given permission, a part of LP’s tokens will be deposited into a blue chip lending borrowing protocol like Aave to provide an extra yield to the liquidity providers so they can collect AMM fees and earn an additional yield on top of it.
On-chain limit orders
Dfyn is introducing on-chain decentralized limit orders. Currently, DEXes have centralized limit orders if they exist. This leads to a few risks -
Centralization risk — f the central entity storing limit orders goes down, the price may touch the trigger point, but the limit order might not get executed. Also, this is more prone to hacks.
Manipulation — Bad faith actors might pay to get order flow from these centralized entities. They can manipulate the order book and front-run the trades. A lot of exchanges have their internal market-making arm or are engaged in selling the order-book flow to HFTs.
On-chain limit orders can solve these issues.
To achieve an on-chain limit order, Dfyn users can deposit a single token in a pool in a custom range, for example, depositing USDC in ETH/USDC pool in the $1999-$2000 range. Once the range is crossed, the deposited asset gets converted into another token( ETH in this case). The liquidity is immediately removed to give the user the desired token once the price is breached. This may sound like multiple steps in explanation, but our goal is to abstract all of this and give users a one-click on-chain limit-order system.
The Road Ahead
Dfyn aims to be a one-stop solution for all trading needs in a decentralized world. We will be multi-chain and offer a variety of financial products. We are now working towards building a state-of-the-art decentralized derivatives platform — this will allow users to access leverage products.
Initially, we plan to launch with RFQ-based orders, and then quickly, we will introduce all other features mentioned above over the next few months. Please find the short-term roadmap below.
We are excited to build Dfyn V2 and plan an AMA soon, along with α surprise announcement.
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.
Discord : https://discord.gg/yjM2fUUHvN
Telegram Announcements: https://t.me/dfynofficial