Limitations of DeFi 1.0

Even though DeFi 1.0 StableSwap protocols have significantly impacted the crypto industry, the technology has flaws that have limited various functions and conveniences. For instance, these protocols are vulnerable to high slippage and poor user experience, hindering efficiency and scalability. This section discusses some of the top DeFi 1.0 protocol weaknesses and elaborates how ELEMENT addresses these issues from both the user and liquidity providers’ standpoint.

Impermanent loss

Decentralized exchanges that use automated market maker models rely on liquidity providers to provide market liquidity. While this model has been effective for a long time, it subjects liquidity providers to the risk of impermanent loss. Impermanent loss is when a user injects liquidity into a liquidity pool, and the price of the acquired assets changes negatively. This result in users getting a reduced value at the withdrawal time compared to when they deposited. In StableSwap protocols, the impermanent loss can result in liquidity providers getting their assets back as a combination of crypto assets different from what they initially provided. Even though stablecoins are designed to remain resistant to value shifts, they are vulnerable to impermanent loss, especially when a coin loses its peg. ELEMENT is carefully designed to eliminate/ shield liquidity providers from impermanent loss problems.

Liquidity fragmentation

Most automated market maker protocols have a closed liquidity pool structure. Closed liquidity is a model where liquidity is not shared between separate pools. One of the repercussions of fragmented liquidity is susceptibility to high price slippages. Another common practice in most exchanges is locking a portion of capital in smart contracts leading to capital inefficiencies, where the locked capital is not fully maximized. Capital inefficiencies challenge is most evident in how exchanges handle liquidity in closed pools. For example, USDT liquidity in Curve is spread in five fragmented pools, making the capital requirement for USDT five times higher than what is required. The same scenario replicates Uniswap, over 100 fragmented pools containing USDT. ELEMENT does not use a closed liquidity pool model, and the tokenomics are also designed to address the issue of capital inefficiencies.

Limited scalability

Most Algorand blockchain exchanges only accept liquidity providers capable of offering liquidity in the form of pairs. In other terms, for users to be liquidity providers, they must have two equal tokens. Some exchanges, such as Curve, have tried to address this challenge by allowing single-sided deposits. However, these exchanges only allow liquidity up to the least productive token in the pool, making unpopular tokens a barrier to the collection’s growth. Besides, in these exchanges, adding new tokens to existing pools is impossible, particularly if the new tokens’ liquidity does not match existing tokens. This is a significant setback to the scalability of a protocol. ELEMENT allows unconditional single-sided liquidity provision. This means users can become liquidity providers even if they only have one token.

Poor user experience

User experience is a fundamental aspect of a crypto platform. Regardless, most Algorand ecosystems exchange struggles to offer users a seamless experience. One reason exchanges cannot provide a satisfactory user experience is the practice of composability. Composability mandates users to navigate protocols to access some features, which complicates the protocols’ usability, making it difficult for inexperienced users. Composability is also a security threat; it increases the attack surface for hackers since users’ assets are spread across different protocols.

ELEMENT addresses all the challenges above by providing a user-friendly, StableSwap by employing a simple user interface that appeals to many users, address impermanent loss problems, and offers maximum capital efficiency.