Development progress update May 19: Chai DEX with Dynamic AMM, Stable AMM and Limit order!
Hello everyone, every day goes by and Chai is one step closer to becoming a complete DeFi Hub for Aurora’s community. We are honored to introduce our users to our new products including Chai DEX with Dynamic AMM, Stable AMM, and Limit order, with the presence of $USN — native stablecoin of the NEAR protocol.
So… what is Chai Dynamic AMM?
An automated market maker (AMM) is the underlying protocol that powers all decentralized exchanges (DEXs), automated market makers are autonomous trading mechanisms that eliminate the need for centralized exchanges and related market-making techniques. AMM uses smart contracts to define the price of digital assets and provide liquidity. In essence, users are not technically trading against counterparties — instead, they are trading against the liquidity locked inside smart contracts. These smart contracts are often called liquidity pools.
Instead of using dedicated market makers, anyone can provide liquidity to these pools by depositing both assets represented in the pool. For example, if you wanted to become a liquidity provider to earn yield for a WNEAR/USDC pool, you would need to deposit a certain predetermined ratio of WNEAR and USDC.
To make sure the ratio of assets in liquidity pools remains as balanced as possible and to eliminate discrepancies in the pricing of pooled assets, Chai Dynamic AMM uses preset equations to set the mathematical relationship between the particular assets held in the liquidity pools:
- x represents the value of Asset X
- y represents the value of Asset Y,
- k is a constant.
In essence, the liquidity pools of Chai Dynamic AMM always maintain a state whereby the multiplication of the price of Asset X and the price of Y always equals the same number. WNEAR/USDC liquidity pool for example, when WNEAR is purchased by traders, Chai adds USDC to the pool and removes WNEAR. This causes the amount of WNEAR in the pool to fall, which, in turn, causes the price of WNEAR to increase to fulfill the balancing effect of x*y=k. In contrast, because more USDC has been added to the pool, the price of USDC decreases. And vice versa, when USDC is purchased, the price of WNEAR falls in the pool while the price of USDC rises.
This means WNEAR would be trading at a discount in the pool, creating an arbitrage opportunity. Arbitrage trading is the strategy of finding differences between the price of an asset on multiple exchanges, buying it on the platform where it’s slightly cheaper and selling it on the platform where it’s slightly higher.
For Chai Dynamic AMM, arbitrage traders are financially incentivized to find assets that are trading at discounts in liquidity pools and buy them up until the asset’s price returns in line with its market price.
Users can choose between 3 types of fees of gas fees with different transaction speeds. Chai also supports advanced options such as setting for Slippage, Tx deadline, Expert Mode, and Disable Multihops.
Why Launch an additional Chai Stable AMM?
If you’re swapping between stablecoins on a standard AMM, you need to pay high fees and incur high slippage with the constant equation. This model has the advantage of continuous liquidity, but a drawback is inefficient capital deployment. That is why it causes high slippage on swaps.
Chai Stable AMM facilitates extremely efficient trades between assets of the same value that ensures ultra-low slippage and fees. Chai stable AMM will launch with 2 stable pools at first: USDC/USDT and USN/USDC/USDT.
Different blockchains can use different stablecoins, Chai Stable AMM helps you to have various stablecoins depending on your purpose, also optimizing profits when the APY of stablecoins differ.
And do not forget the Limit order on Chai DEX
Although AMM provides customers with a great deal of convenience, Limit order remains an important role in the Chai DEX. Unlike trade with potential slippage, a limit order is executed at a predefined price as soon as it is reached. In turn, limit orders are intended for more advanced traders, since they require analyzing the market situation and assessing the probability of an asset’s price reaching a specific level. Considering filling limit orders on a blockchain also requires taking gas costs into account, which, based on order size, could make the trade more or less profitable.
The biggest advantage of the limit order is that you get to name your price, and if the token reaches that price, the order will probably be filled, you don’t have to watch compulsively to get your price.
You can consider going with a Limit order on Chai DEX when:
- You want to specify your price, sometimes much different from where the token is now
- You want to trade a token that’s illiquid or the bid-ask spread is large
- You’re trading a high number of tokens
Chai will provide more detailed information in upcoming articles.
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