Element VS DeFi 1.0 Stableswaps

ELEMENT is quite different from typical exchanges in the Algorand ecosystem, assuming a unique design and employing novel technologies with a different mindset from DeFi 1.0 exchanges in the crypto economy. This section discusses some significant differences between ELEMENT StableSwap and existing Stable Automated Market Makers.

Shared liquidity

As mentioned in the previous sections, decentralized exchanges in DeFi 1.0 are designed to use closed liquidity pools. Such a model creates fragmented liquidity since liquidity is not shared between separate pools. For example, in Fig 1, when a user exchanges USDT for DAI, the slippage is determined using the invariant Curve between the liquidity in the USDT-DAI pool. In this case, assuming A=100, the slippage is 0.05 percent.

Fig 1: Liquidity in separated pools is not shared; hence higher slippage

ElementSwap protocol addresses this issue by sharing liquidity across all pools. Fig 2 demonstrates how liquidity is shared across pools in the ElementSwap protocol. From the illustration, USDT’s liquidity between the two closed pools is now shared. Consequently, the slippage is just 0.01 percent.

Fig 2: Liquidity between tokens is shared hence reduced slippage.

Flexible pool composition

In current decentralized exchanges, the invariant’s equilibrium state is predefined when all tokens in a pool have the same liquidity. When the organic supply of one token is diminished, the entire pool’s liquidity equilibrium is adversely impacted. As a result, it is impossible to introduce new assets in DeFi 1.0 Stable Swaps, as seen in Fig 3

Fig 3: It is almost impossible to add new tokens to a pool in traditional DEX.

For example, Curve has a complex pool composition that involves pairing up the 3CRV LP token with the new token. ElementSwap makes it easier to introduce new tokens in a liquidity pool. The protocol’s equilibrium state is determined by the same coverage ratio instead of the same liquidity. This model enables pool assets to scale naturally by their organic supply and demand.

Single-sided token

One of the distinct features of ElementSwap is allowing users to deposit and withdraw the same type of tokens without worrying about the size, composition, and difference between their tokens and LP tokens. This quality makes the liquidity provision process much more convenient. Also, the convenience allows more users to become liquidity providers since LP must not provide liquidity in pairs, thus categorizing the entire exchange as an open liquidity pool, as seen in Fig 4 below.

Fig 4: ElementSwap supports single-sided tokens. Paired LP token is not necessary.