Background

Latest DeFi developments

DeFi is experiencing tremendous growth in terms of products and user acceptance. A variety of financial products are being deployed on multiple blockchains in a decentralized, highly accessible, and trustless manner. The total value locked in DeFi has increased to $53.18 billion in 2021, up from $1.08 billion the previous year. In the same period, the total value locked on the Ethereum blockchain has increased by 771%. Uniswap, a decentralized exchange on the Ethereum blockchain, is one of the most well-known and widely used DeFi protocols, with a fully diluted market capitalization of 5.8 billion USD as of July 12th, 2022.
However, since the summer of 2021, new projects have emerged with more efficient protocols and pool architectures to manage liquidity. The primary focus of these platforms is to manage liquidity more intelligently to increase the APY output and reduce the risk of impermanent loss, while also improving the overall user experience of liquidity providers. These new protocols are pushing the boundaries of DeFi innovation, and we are excited to see how they will continue to evolve in the future.

Current challenges within the DeFi space

What we realized during market research is that all DEXs within that ecosystem work like Uniswap, Sushiswap, or most other DEXs. But due to their concepts, these DEXs have several design flaws that lead to impermanent loss risks and low APY for liquidity providers, and high slippage and price impact for traders.
On the one hand, 50/50 pool architectures and concentrated liquidity are two architectural design flaws that result in a higher impermanent loss risk.
On the other hand, the biggest problem is cured by liquidity providers that must manually identify and manage as well as rebalance their liquidity allocations which is capital inefficient and leads to lower APY and high impermanent loss risks if done by a human being. On top of that, it also leads to a nonlinear liquidity distribution across pools. Resulting of the nonlinear liquidity distribution, high price impacts and slippage occur in pools when traders execute too large trades at low TVL which is a direct financial loss for the traders and leads to arbitrage opportunities that drain assets and value out of DeFi protocols.
Why is that problem relevant?
Let me explain that in numbers: A 22k USD swap on Orca at 630k USD TVL results in an over 4.5% price impact and 43% of all Uniswap Pools are exposed to impermanent loss, so almost every DeFi user is experiencing this problem.
Looking at the EVM ecosystem, which is the biggest and most innovative DeFi ecosystem, there have been several attempts to address this problem, for example, the projects Curve and Balancer, or Tokemak but no solution succeeded in both aspects – eliminating the liquidity provider’s and trader’s losses.