Private and institutional capital continues to flow into cryptocurrencies at a record rate, largely facilitated by centralized exchanges such as Binance, Gemini and the NASDAQ NDAQ-listed Coinbase, which process over $ 50 billion a day. Despite hosting new and innovative crypto assets that promote decentralization, central exchanges require users to continue to hand over the custody of their assets to third parties.
In 2020 there was an increase in the decentralized exchanges (“DEXs”) from UniSwap and SushiSwap on Ethereum to other niche products such as Project Serum for Solana users and PancakeSwap on Binance Smart Chain. With a DEX, users can not only trade, but also earn a portion of the platform transaction fees by listing or lending digital currencies to the exchange. Crowd-sourced liquidity is at the heart of what is known as “DeFi”, but it is a double-edged sword as decentralized exchanges are only as useful as their users’ willingness to pocket assets.
SORA is both a new economic system that decentralizes the concept of a central bank, and a … [+] Network implementing a new method of creating a Parachain blockchain that uses built-in tools for DeFi to connect to the Polkadot relay chain and ecosystem.
With the upcoming launch of the Polkadot and Kusama ecosystems, an entirely new network of projects is emerging, including Plasm (a dApp platform on Polkadot), MoonBeam (an Ethereum-style smart contract platform on Polkadot) and Clover (an operating system parachute on Polkadot). . The goal of this new ecosystem is to move the blockchain from theoretical to practical by facilitating cross-chain development.
Polkaswap is the first UniSwap-style DEX for the Polkadot and Kusuma ecosystems created on the SORA network. SORA’s mission is to build a new world economic system that allows developers to efficiently allocate capital to produce new products and to act as a decentralized “central bank” providing liquidity to the Polkadot ecosystem. SORA’s developer toolkit is designed for a variety of uses cases such as parachutes, atomic token swaps, and cross-chain bridges.
This week I sat down with the SORA team to discuss some of the technical elements of building a DEX. Polkaswap’s secret sauce is the token bonding curve, a smart contract that seamlessly swaps one token for another without the addition of intermediaries or third parties. The DEX adopts the concept of central banks’ liquidity injections for traditional trading and uses this concept to increase liquidity for trading digital assets.
A simplified token binding curve.
A tie-in curve commonly used by economists is a mathematical concept that describes the relationship between the price and supply of an asset such as a currency or a token. For example, when a person buys an asset that is available in limited quantities, such as B. Bitcoin, the cost of each subsequent buyer is slightly higher as the number of coins available decreases. As a result, the earliest investors make the most profit.
In developing a decentralized exchange, the cryptocurrency industry implemented retention curves in smart contracts to create a fair exchange of assets. Bonding curve contracts sell tokens to users by calculating the token price in an underlying asset such as Ethereum and quoting the prices in the same underlying asset. In both cases, the smart contract calculates the average price and offers the user a transparent tariff.
“Our economic research team suggested the idea of a peg curve when it came to market operations by central banks, particularly in developing countries, trying to control the exchange rate of their currency. We were able to apply the same concept for a token exchange and thus create transparency for all market participants about future prices based on the available liquidity, and in a completely autonomous and decentralized way, ”says Makoto Takemiya, CEO of Soramitsu and one of the contributors SORA.
Concepts similar to the bonding curves have been used in the past by central banks to control fiat exchange rates. For example, the Hungarian central bank usually intervenes in HUF / EURO markets in order to keep exchange rates within a desired volatility band. They do this by selling forints for euros when the price is too high or by using reserves of euros to buy forints when the price is too low. Countries with national currencies can carry out such open market operations successfully because they have a high degree of centralization of their currencies and hold considerable financial assets in reserve. In cryptocurrency markets, however, centralized actors are frowned upon.
Polkaswap was created to create a solution that does not rely on human engagement. The project was launched with a grant from the Web3 Foundation, the non-profit foundation that contributes to technology in the Polkadot and Kusama ecosystem and led by Dr. Gavin Wood, a co-founder of Ethereum and Polkadot.
As cryptocurrencies become more and more mainstream, the traditional financial infrastructure has been checked for centralization and proprietary trading, so that the private investor often has to pick up the failed financial attempts. The decentralized exchange provides valuable insights for the financial architecture of the future, in which access to values is democratized and can have significant financial effects on the lives of ordinary people.