A glance of Development of Liquidity and DEX

5 min readMay 14, 2021

From Uniswap，Synthetix to our Crafting Finance and other DEX，asset liquidity has always been a top priority for development teams. It can be seen that liquidity has always been a clear optimization direction for DEX. With the rapid development of DEFI, a variety of different liquidity solution projects are coming to us.

Uniswap , the mature DEX, just launched V3 a few days ago. At the core of this version is an update to its liquidity addition tool. Uniswap’s AMM exists in the form of trading pair. The liquidity exists only in the trade between the two assets.The common assets for those with large pools of capital, because have arbitrageurs who will make the trade back on track, so can keep the trade in lower slippage, but for those relatively small assets, which lacks of liquidity , once appear large orders, then there will be a very exaggerated slippage.

So Uniswap V3 updates the liquidity addition tool , which allows users to add their assets to a price range with Min price and Max price, thus providing liquidity within this price range. Compared with V2, V2 only supports users to add liquidity to a trading pair , which will waste a part of liquidity. V3 allows users to choose the price range of trading pairs they want to provide liquidity, which aggregates the liquidity of trading pairs and greatly improves the capital efficiency. But Uniswap still needs to solve the liquidity of those small assets, like how to motivate users to provide the liquidity of small assets and reduce the slippage of them.

Talking about the solution of the Synthetix and Crafting Finance to the liquidity problem of DEX. The SDP (Sharing Debt Pool) is at the heart of the entire economic system, where users crate synthetic assets by using collateral with to forge(different collateral with different collateral rate), then put all synthetic assets in a pool, Theoretically, since all the various types of synthetic assets are in one pool, this pool can obtain nearly unlimited liquidity. This is a very elegant solution. The process of assets into the pool is like the flow of a river into the sea. The transaction pattern of users in the pool is :

When the users want to enter the market , they use token as collateral with different collateral rate to forge different kinds of synthetic assets and trade , and when the user leaves the market , the system burns the synthetic assets he holds and receives the amounts of tokens calculated by the feeding price of Oracle.
When the users trades in the DEX , assuming that there are two assets, rUSD and rBTC , which have been forged into the pool. The user owns the rUSD and uses the rUSD to buy the rBTC, then DEX will burn the rUSD and forge the some value of rBTC(calculated buy the feeding price of Oracle)。

So you can see the total amount of the assets in the pool is going to stay the same throughout the trading process. And because the trading process is just simply burns the original asset and create the new asset, the trading slippage will be very low to almost no slippage at all. And due to the slippage generally increases as the volume increases, zero slippage is more beneficial for larger trades than for smaller ones. Here, the SDP model largely solves the slippage problem that has been criticized on Uniswap. At the same time , the synthetic asset of the relatively small assets are also in the pool and share the liquidity with other synthetic assets, so the liquidity of them is also guaranteed.

Crafting Finance and Synthetix are both using SDP. What are the differences between Crafting and Synthetix? Firstly, Synthetix has only one SDP and all of the synthetic assets are put into one pool, which cause some disadvantages, due to the various types of synthetic assets forged are placed in one pool, include digital assets, stock assets, or traditional Futures assets, etc. If a user wants to buy more stocks in the pool, he will be affected by other synthetic assets. If the growth rate of other assets in the pool is higher than that of stocks, and the user has not outperform the market, In fact, users are losing money, which is a relatively unreasonable mechanism. Crafting Finance distinguishes different types of SDP pools, such as traditional crypto asset SDP, bond SDP, etc., which means users can choose which synthetic asset SDPs they would like to join. While following the concept of unlimited liquidity, it also ensures the cleanliness of the asset types in the pool, and is not affected by the rise or fall of other types of synthetic assets. Therefore, the separation of these assets with different properties from financial properties is more in line with the subsequent combination of Traditional Finance and Defi, and more in line with the original concept of Finance. This is the answer of Crafting Finance gived in the development of DEX.

Based on this, the Crafting Finance team also provides more innovative ideas for the development of DEX. Assuming that we already have two separate debt pools for cryptocurrency and stocks, but we also want to use the two pools more efficiently to use of Liquidity and improve capital efficiency. Then a new synthetic asset can be introduced, and the debts of two separate pools can be combined proportionally. At this time, the debt pools of cryptocurrencies and stocks can share each other’s liquidity. This is Crafting Finance’s further exploration on the issue of DEX liquidity. Infinite liquidity will lead to a slippage close to zero and higher market efficiency. Our development team is still discussing the specific proportion parameters of this idea.