Dynamic Liquidity Pricing

Different on-chain trading solutions within the DeFi ecosystem have various trade-offs and constraints to their fundamental model, but TsunamiX Finance has created a solution that solves the most significant downsides to an Oracle-based AMM in order to greater serve both LPs and Traders regardless of moment-to-moment market conditions.

We believe liquidity is a right, and Oracles allow us to bring liquidity for virtually any asset onto Mantle. Unfortunately, this solution isn't currently one which can easily support long-tail volatile assets with low liquidity - even if they were placed in isolated pools. Since we enable 0% price impact trading, tokens with low liquidity can be impacted greatly by external capital, then that same external capital can essentially impact the price and trade accordingly in order to drain the pool's liquidity. Our system prevents this.

Traditional Liquidity Pricing

In two-sided Uniswap-style AMM's liquidity is priced based on a flat fee & price curve. The price curve determines how much of token A to give per token B and visa versa depending on how many tokens there were relative to each other. In times of high volatility, the pool is simply drained of one asset & liquidity providers incur losses(IL). The issue here is that most liquidity providers provide liquidity in order to preserve and grow capital, and while traditional AMMs offer fees, impermanent loss often greatly outweighs the value gained from LP incentives. Although Uniswap style AMMs allow for long-tail assets to instantly get a market by being paired with something with a well-defined value, it fails to protect liquidity providers from toxic order flow & volatility.

In Oracle-based AMMs liquidity is priced based on a flat fee & external data. Not a price curve. There could also be multiple backup feeds, but they output a single price one after another for any given asset that has a price - from cryptocurrencies to commodities to forex & stocks. This allows LPs to offer a more forward-looking price for traders to trade against.

Smart contracts use this price feed data to determine how much of token A to give per token B. The oracle provides a price for both, so they are instantly priced relative to each other. Oracle pricing also allows for leveraged trading as liquidity can be partitioned without impacting its price. This system still fails to properly protect LPs in times of high volatility and fails to properly reward LPs in times of low volatility.

In high-volatility markets, LPs are negatively impacted by toxic order flow which aims to drain the pool. This is because a flat fee - or even a fee within a linear pricing model - is unable to price liquidity properly. Liquidity should be extremely valuable when the market is in a state of high uncertainty - and it should be less valuable when the market is more stable.

In low-volatility markets, LPs fail to capture the proper volume which is possible from arb bots - which are nonlinear in nature - by having fees that don't accommodate high-frequency trading. The vast majority of on-chain volume within the margin trading space comes from institutional users, which tend to get more value from their volume when fees are lower and markets are flat. Unfortunately, Oracle-based AMMs either have flat fees or a lower limit which is too high to properly incentivize these users.

Dynamic Liquidity Pricing

TsunamiX's liquidity is priced based on market conditions & external data. The moment-to-moment price feeds from Oracles are processed in order to provide a dynamically increasing and decaying fee on top of a highly competitive base fee. This allows us to properly protect and reward LPs regardless of market conditions. High-volatility markets can be as short as a few seconds or as long as a few months. Our system will adjust accordingly.

In high-volatility markets, LPs are protected by an increasing fee which reacts to the speed of price change in order to prevent toxic order flow from draining the pool. The fees will remain in a very competitive range within regular volatility, but in the outlier cases where pools are most often drained - LPs will be shielded from the intense market conditions and more properly rewarded for the increased risk.

In low-volatility markets, LPs are able to offer more competitive liquidity pricing by lowering fees in order to attract greater volume from high-frequency trading volume from institutional users. This results in greater rewards for LPs in markets with relatively stable prices and lower fees.

In the future, we plan to further incentivize high-volume users by providing greater fee incentives based on 30-day ADV (Average Daily Volume).

By being able to price the liquidity of any asset in its pool regardless of market conditions TsunamiX can remain efficient and transparent - while also incentivizing liquidity and volume providers to participate in the Mantle ecosystem.