Bringing more volumes and fees to xExchange

[angie44120]

Hello everyone,

I’ve recently discovered the new dex DX25 on MultiversX and i don’t think we see how it was really and dearly needed.

The only feature who makes it really revolutionary for all MvX ecosystem are the Dynamic fees.

Now why it is important for xExchange ?

xExchange has a fixed 0.3 % fee on all swaps.

Now on DX25 you can go as low as 0.01%, what this create is a way to supercharged your volumes on your own DEX (here xExchange) but honestly i think all DEXS in the ecosystem should create a pool with their own token on DX25.

Explaining the situation here is simple, when there is 2 pools with different amount of liquidity and different fees, you encourage trading and arbitrage between those pools, what it actually create is an healthy loop, traders will check prices on DX25 and on xExchange and as long as there is opportunity to arbitrage, traders will just trade and create volumes on both DX25 and xExchange and the opportunity is both ways, sometimes you can arbitrage buying MEX on xExchange and selling on DX25 and sometimes you can buy MEX on DX25 and sell on xExchange.

This is highly beneficial for all parties involved, liquidity providers, traders, arbitrageurs, protocols.

Also it is obviously crucial to put a very little fee because the higher you set the fee the less opportunity to arbitrage there is.

I think xExchange should put a little liquidity on it like 50k in EGLD/MEX should be enough at this moment to create what i call a “flywheel” where trades are encouraged.

What do you think about this ?

Good day to all.

[martzos]

Maybe a good way to use part of the future Strategic Fund

[lucaswillems]

Hey @angie44120 , thanks for sharing your thoughts here!!

If I understand well, you’re saying that because DX25 has lower fee, it creates more arbitrage opportunity with xExchange. If xExchange were to reduce the swap fee to as low as 0.01%, it would reduce the arbitrage opportunity, no?

[angie44120]

Well yes, kinda something like this, but the price feed, the unbalance in the pool, the total LP pooled in $ and the range where the most liquidity is concentrated greatly influence this too.

Example :
Pool MEX/EGLD on DEX A has a TVL of around 50 Millions $ and a swap fee of around 0.3%
Pool MEX/EGLD on DEX B has a TVL of around 50k $ and a swap fee of around 0.01%

When you swap 100$ MEX for 100$ EGLD on DEX A, the quotes gets you let’s say 99.7$ worth of EGLD
Now you go to DEX B and see that since liquidity is very concentrated in a tight range, it allows a greater efficiency for the swaps and the fee being also very limited provide you a swap of 99.7$ worth of EGLD, add it a potential unbalance in the pool favoring MEX for example —> An arbitrage opportunity then arise to swap 99.7$ of EGLD into let’s 101 $ worth of MEX.

There you go, you just won 1$ doing 2 trades, favoring you the LP providers, DEX A and B and potentially the holders of both exchanges tokens if there is a redistribution mechanism linked to fees earned or something like this.

How can we encourage this :
_Different fees on both exchanges
_Different amount of liquidity between both exchanges
_Different ranges selected with different fees to also protect the LP providers (for example if you swap a big amount and will unbalance the pool of DEX B thus greatly increasing IL, your fee for swapping should be higher)
_A minimum worth of $ of a full range LP on both DEX (in case of CLMM) to allow pool to rebalance itself and prevent one sided liquidity thus preventing any arbitrage opportunity to arise

The tricky part is to solve the mathematical problem behind this and uncover the most optimized numbers where most arbitrages opportunity can arise and monitor the situation with an active liquidity manager who will follow the price for the range you selected (DX25 plan to implement this in the future to prevent one sided liquidity when you use leverage).

I think a test where all is recorded should help us to enlighten those numbers :
_What is the market volatility (high, low, medium)
_What range (what leverage) is the most efficient
_What is the most efficient difference in $ between both pools
_What minimum of full LP range should be provided

I hope this is clearer, i think a mathematician could help you on this

Good day anyway

EDIT : also of course, need to take an average volume on DEX A and see if volume picks up if you implement this solution after some time. If not this solution should not be implemented because pooling the liquidity of DEX B into DEX A would be more efficient obviously
But i think it’s worth a shot !

[lucaswillems]

Thanks for the explanation!

If I get it right, you are saying that the lower the fees, the more there are arbitrage opportunities?

[angie44120]

Hmm yes basically because with highly volatile assets it often offset the percentage taken by the fee but as i explained above it’s a bit more complex Ahah

Also setting a very low fee can increase Impermanent loss for big movements in price for liquidity providers obviously if traders are allowed to do big trades while paying low fees, it wouldn’t be fair to liquidity providers but Impermanent Loss is only realized once you withdraw as we all know.

So what is the perfect formula ?

If fees generated > Impermanent Loss, then the LP will be fine, traders will be highly incentivized to be active to trade and generate fees.

So while setting a low fee, a strong strategy for providing liquidity should be researched.

How to offset the IL but still captures opportunities and so more volume and fees.

For me if you were to provide liquidity on DX25, i would set liquidity at all fee range and i would increase the percentage as the fee lowers.

So there is 8 level of fees on DX25, so distribution could look like this :
_0.01% fee —> LP 35 %
_0.02% fee —> LP 20 %
_0.04% fee —> LP 15 %
_0.08% fee —> LP 10 %
_0.16% fee —> LP 7.5 %
_0.32% fee → LP 5 %
_0.64% fee → LP 4 %
_1.28% fee → LP 3.5 %

As for the leverage part, you can as high as 1000X to concentrate your liquidity but it is very dangerous as once your position is out of liquidity range your asset become one sided and then you have to then close position and reenter and swap the amount, so i would still use leverage but in a very moderate way and to me a standard distribution could look something like this :
_LP 0.01% Leverage at x10(you become single sided if price movement is at least 19% up or down)
_LP 0.02% Leverage at x8 (you become single sided if price movement is at least 24% up or down)
_LP 0.04% Leverage at x6 (you become single sided if price movement is at least 31% up or down)
_LP 0.08% Leverage at x5 (you become single sided if price movement is at least 36% up or down)
_LP 0.16% Leverage at x4 (you become single sided if price movement is at least 44% up or down)
_LP 0.32% Leverage at x3 (you become single sided if price movement is at least 56% up or down)
_LP 0.64% Leverage at x2 (you become single sided if price movement is at least 75% up or down)
_LP 1.28% Full range

Also and i hope it will be implemented on DX25 as soon as possible but an automatic liquidity manager who follow the price range you submitted on the DEX would be amazing but it implies an automatic rebalancing events whenever the range is at risk (price move closer to the higher or lower band of your range).

So that would look like a good test event to see how it goes and if trading is incentivized and if liquidity providers also get a greater return than on a normal pool with a fixed fee/concentrated liquidity.

Sorry for the long response lol.

[lucaswillems]

Thank you very @angie44120 for the details!

[johnnyxmas]

I like the parallel with what offers DX25, indeed they have a concept of MFL (Multiple Fee Levels) which is pretty unique in the Crypto ecosystem (to my knowledge). Is there any other DeFi protocol on other BC using alike system to your knowledge ?

[xfoudres]

Hello @angie44120,

To make things clearer, not everyone benefits from this kind of arbitration. Otherwise that would mean there are no losers, and without losers, there are no winners. The user who created this arbitrage opportunity paid more for his swap, and the arbitrageur captured this inefficiency to make a profit.

Arbitrage leverages market inefficiencies. And in so doing, it removes liquidity in one side, to put it in another place.

Here, everything is on-chain, so liquidity remains on MultiversX, and only changes protocol.

But in the case of arbitrage between a blockchain and a CEX, for example, this can remove a lot of stablecoin liquidity from the blockchain if the latter doesn’t protect itself from mercenaries !

So I wouldn’t say it’s really a benefit for everyone to intentionally create this kind of inefficiencies !