Over the past year, three excellently designed Decentralized Finance (DeFi) platforms have been built for the ICON Network: Balanced, Omm and Optimus. The first two are money market finance hubs common in the DeFi space, with newcomer Optimus operating as an on-chain yield optimizer. With all three elegantly designed for a seamless user experience, they go a long way towards making the ICON DeFi options work together as a comprehensive finance ecosystem.
Now, a fourth ICON DeFi platform is in the works — Convexus. It’s an automated market maker with concentrated liquidity aimed at offering Liquidity Providers (LPs) with higher capital efficiency and traders with low-slippage trade execution.
This joint project by the ICONation and Protokol7 P-Rep teams is a newly approved proposal on ICON’s Contribution Proposal System (CPS). Development is expected to be a four-month process, with a mainnet launch expected sometime in May. A full breakdown of Convexus features can be found in their Medium article.
For those who are experienced in the world of DeFi, here’s a very succinct summary of what to expect for Convexus:
“We’re fully basing Convexus on Uniswap version 3,” said @hyper_connect, a Protokol7 team member and Convexus early contributor. “We’re taking the underlying engine of the most successful decentralized exchange today and bringing it to ICON. We’re using the core concepts and internals and deploying them on ICON.”
In this way, Convexus will be significantly different from the other existing ICON DeFi protocols. “We won’t offer any borrowing or lending. We won’t offer any staking,” @hyper_connect said. “It’ll be 100 percent focused on LPs and traders. We believe Convexus will be an excellent platform for LPs to build their trading strategies and for traders who want to swap tokens with low slippage and fees.
What is an automated market maker? How does concentrated liquidity work?
If you’re new to the world of DeFi and aren’t sure what most of the above meant, read on for a quick crash course in Making Markets 101. (For those who don’t need any explanations, feel free to skip to the next section!)
Simply put, an automated market maker allows traders to exchange one cryptocurrency for another cryptocurrency. This is made possible by having investors provide liquidity on the platform — so, in order to fully understand how Convexus will work, one must first understand how liquidity pools operate.
In a centralized bank, you can easily change from one currency to another because the bank has stockpiles of many kinds of currencies. You give them US dollars and they give you a proportionate amount of UK pounds based on the day’s trading rate, as an example.
But with decentralized finance platforms, there is no central bank hoarding vaults of different currencies — instead, investors called Liquidity Providers have to supply currency pools of specific trading pairs, and traders dip into these pools when they want to exchange different cryptocurrencies. For example, an LP might make a liquidity pool trading pair containing US $1000 worth of OMM and US $1000 worth of ICX. Traders who want to exchange ICX for OMM (or vice versa) would do so by adding one currency to the pool and withdrawing the commensurate amount of the other currency.
If the pool doesn’t contain enough liquidity, the trade would be completed by moving on to another liquidity pool to make up the difference. If the next pool has different fees from the first one, the end user might end up paying higher fees than expected — this is known as slippage. This is a common problem found on most DeFi platforms today.
But there’s another reason that this method of managing liquidity pools isn’t ideal: “The majority of the assets in these pools are never used, especially when you are trading against stablecoin assets,” @hyper_connect said. “Generally speaking, most DeFi protocols will pool all the liquidity from all the users and put it through an evenly distributed price curve with the whole pool of assets reserved for all prices between zero and infinity. This results in capital being pooled in a way that is inefficient.”
Convexus — and Uniswap version 3, on which it is based — does things differently. Instead of inefficiently pooling pools and applying a price curve, Convexus allows LPs to choose the price range they want to supply liquidity for. If the going price of a currency moves outside of their chosen range, the LPs have the option of changing their price range.
For example, if the price of ICX is at US $5 (one can hope!), an LP might choose to make a ICX/bnUSD trading pair liquidity pool with a price range of $4.95 to $5.05, thus increasing the likelihood that their pool will be used the most and sell for the intended price.
This also has the effect of dramatically increasing concentration of pooled liquidity at around the trading price, instead of having the liquidity evenly distributed across all prices. This is what is meant by “concentrated liquidity”, and is further illustrated in the following graphic:
Built for novices and pros
While the above may be quite technical and will mostly only be useful for highly experienced DeFi users, Convexus is also being made with regular users in mind.
“Beginner DeFi users who only wish to swap tokens in and out will be able to just use the swap page to select the tokens they want to swap into,” @hyper_connect said. He also explained the advantage of using Convexus over other currency swapping protocols: “The end user will be able to experience very low slippage since the liquidity pool will be very concentrated around the current price range, and very low fees as well, especially if it’s a stable swap fee at 0.05%.”
For advanced users — the LPs — having complete control over their trading ranges will let them allocate their capital more efficiently. “The system is designed to reward users who concentrate their liquidity in the accurate price ranges. If price discrepancies exist, then there is an opportunity for arbitrage there as well,” @hyper_connect said.
LPs will also enjoy some other great features, including the ability to decide the fees for their trading pool. LPs will choose from three fee options — 0.05%, 0.30% and 1.00%. When a user wants to swap currencies and there are multiple pools with varying fees available, an algorithm will automatically choose which pool offers the best deal with the least slippage for the trader.
Another option for very experienced LPs is the ability to create a liquidity pool outside the current trading range — on purpose — although this does come with risk and isn’t recommended for novice users.
“When your liquidity pool is outside of the trading range, you are automatically moved to a single-sided range order. Currently in most DeFi protocols, you can only create market buy and market sell orders. But essentially now, if you want, you can move your liquidity outside of the trading range to put a buy or sell order,” @hyper_connect said.
Education is paramount
The Convexus team is placing a high importance on education, so as to avoid the type of “Black Swan event” that took place on Balanced recently when the price of most cryptocurrencies, including ICX, suddenly plummeted overnight. That is to say: while using the platform to swap funds is safe, LPs need to understand that providing liquidity does come with risk.
One major risk with putting money up in a liquidity pool that new users may not realize is a concept known as “Impermanent Loss.” This happens when crypto prices change after money has already been locked into a liquidity pool, causing a loss of value in the assets the LP invested. For example, if you put US $1000 worth of ICX and bnUSD into a liquidity pool, you start with a 50/50 even split. If the price of ICX then drops, you end up with more ICX and less of the bnUSD stablecoin when you exit the liquidity pool.
“Liquidity Providers should know this,” @hyper_connect stressed. “They are essentially betting that the fees they receive plus additional tokens they get should offset impermanent loss. That’s a calculation that they need to make.”
Making the rewards worth the risk
With great risk should come the potential for great rewards — and Convexus is being built with this goal in mind.
Firstly, the protocol is being built as a DAO. Their governance token, called CXS, will be paid out to LPs as a reward for providing liquidity on the platform. At launch, CXS will only be used for governance, but later on there will be the option to collect a very small percentage of trades — around one percent — and redistribute it to CXS holders. The DAO will also have a fund, and CXS holders can vote on how this capital is spent.
There will also be a higher potential for reward for LPs who join the protocol early on.
“Liquidity providers will capture all of the trading fees at launch — Convexus protocol will not take a cut at all of any of those launch fees. All of the risk and also all of the rewards will be focused purely and solely on the liquidity providers early on,” @hyper_connect said.
