DeFi 2.0: Asset-centric VS. Liability-centric Model

In DeFi 1.0 StableSwap platforms, liquidity providers are awarded LP tokens when they deposit to represent their partial ownership of the pool (Asset centric). Such token models do not specify the exact type of tokens awarded. Pools are composed of multiple assets, and if the token ratios are altered, the liquidity provider’s asset amounts may change at withdrawal. Consider the example below.

Fig 5: A protocol built on the DeFi 1.0 asset-centric Model

In Table 1, Peter owns 100 units of token A before Mary’s action. After Mary deposits 100 units of Token A and 300 units of Token B into the pool, Peter owns 40 units of token A and 60 units of token B, totaling 100 units.

ELEMENT introduces a new dimension to the Automated Market Maker concept called Liability (Liability Centric - Asset Liability Management). Liability is a new concept not available in existing StableSwaps that handles the deposit ratio differently. Liquidity provider deposits are converted into LP tokens, but ELEMENT specifies the exact number of tokens and precise token type deposited. This information ensures that liquidity providers receive the same token type and amount at the withdrawal time. See the illustration below.

Fig 6: Liability-centric system

In the diagram above, tokens A and B have independent balance sheets, implying that the tokens cannot be mixed up regardless of the activities in the liquidity pools. Unlike in the previous scenario, Peter is guaranteed to withdraw the exact number of tokens irrespective of Mary’s actions.