Decentralized exchanges (DEX) are the cornerstone of the multi-billion dollar DeFi ecosystem. Veax provides a robust DEX implementation that is capital efficient and minimizes impermanent loss. To do this, Veax combines these two features:
Concentrated liquidity is an AMM (automated market maker) model that was popularized by Uniswap v3. In this model, liquidity is allocated within a custom price range. In the x*y=k model, the liquidity was distributed uniformly through the entire price range. In this new model, you can choose the price range where you want your tokens to be allocated. For example, an LP may allocate their tokens in the $20-$30 price range. LPs only receive rewards if the token price is within this range.
There are several advantages to this approach:
As you can see, the concentrated liquidity model has plenty of advantages and has been widely adopted by DEXes for its versatility when dealing with both volatile and stable assets. This is why Veax has adopted the concentrated liquidity model to fulfill this vision.
However, there is a major flaw with the concentrated liquidity model – impermanent loss. As per a study by IntoTheBlock, providing concentrated liquidity in a specific price range increases potential impermanent loss, despite making the whole process more capitally efficient.
To counteract this, Veax implemented multiple fee levels.
Any exchange, decentralized or otherwise, must define a "fee" for each trading pair. These fees are used to economically incentivize liquidity providers. DEXes can choose one of the following fee models:
The fixed and dynamic models are extremely limited, while the governance approach creates a conflict between traders looking for short-term value and liquidity providers looking for long-term gain. By the process of elimination, the obvious model to choose is the “free market” approach.
This approach works for both traders and LPs since:
LPs are free to choose a fee level. As with anything, there are pros and cons in selecting a high or a low fee level:
This competition between different LPs will eventually bring the transaction fees to the fairest level. This “fee equilibrium” is dependent on various factors, such as:
Can you change the fee level?
It’s not possible to change the fee tier of an existing position because:
To change fee tiers, LPs must close existing positions and open new ones.
Uniswap isn’t precisely offering their LPs multiple fee levels. Instead, they provide multiple pools per liquidity pair with different fee levels. So, let’s say we have the DAI/USDC pair. Uniswap V3 provides us with four DAI/USDC pools with a unique fee percentage – 0.01%, 0.05%, 0.3%, and 1%.
An LP should be able to choose the fee percentage and provide liquidity to any pool they want. However, in practice, LPs would be more incentivized to give liquidity to the most popular pool.
Why is that the case? The profits collected by an LP roughly follow this formula:
Profits = Fees - Impermanent Loss.
So, the profit generated is directly proportional to the fees collected, which is directly proportional to the frequency of pool usage. In simpler terms, if an LP provides liquidity to a popular pool, the increased usage will generate more fees and profits.
Also, note that in this formula, the only factor within an LP’s control is the Fee range. The spot price directly determines impermanent loss. However, Uniswap’s multi-pool solution doesn’t encourage LPs to choose their preferred fee percentage. It ultimately boils down to LPs providing liquidity to the most popular pool.
So, how does Veax fix this conundrum? By offering multiple fee levels within the same pool.
Each pool in Veax offers 8 different fee levels for each pool, with fees ranging from 0.01% to 1.28%.
LPs may select any fee level for their positions. This approach is far more advantageous for both LPs and traders.
For LPs
For traders
As mentioned above, each liquidity pair in Uniswap V3 has four pools which require a dedicated smart contract. This dramatically increases the cost of transactions and required processing power. In Veax, all fee levels are managed in the same smart contract – reducing the cost of transactions and simplifying swap implementation.
Plus, by building on Near Protocol, our developers have far more flexibility when implementing complex and sophisticated processes without incurring massive gas fees.
By combining concentrated liquidity with multiple fee levels, Veax gets all the advantages of the former without falling prey to its biggest flaw – higher impermanent loss. In addition, by providing true fee levels to each pool, instead of implementing multiple pools for each pair, Veax drastically reduces processing time and fees. All these factors combine to make Veax one of the most efficient and affordable DEX implementations.
NOTE: Unlike Uniswap, liquidity positions in Veax aren't minted as NFTs yet. However, for all intents and purposes, Veax liquidity positions act as NFTs since they are non-fungible and immutable.