Democratising Liquidity
Greetings to old and new community members. The last few months were pivotal to the progression of the Cargo project with more announcements planned in the coming months. We have discussed value propositions with potential partners in crypto and Fintech and we felt the need today to reiterate some of the value propositions of permissionless blockchains, their utility and specifically why DEXs are important at all. Specific chains are important which incubate the appropriate culture to launch products, but what we will be focusing on here is where Cargo fits into DeFi and what you can build on Cargo today. Special thanks goes to the Celo Foundation and to our bank supported accelerators for getting us here.
Introduction
For those of you joining us for the first time, you may enjoy some of our earlier milestones. The project launched after winning first prize for a Novel Hack at ETHGlobal, we announced a realignment of technical development to begin research into Structured Deposits, and we released our app on the Celo mainnet during the summer of ReFi.
Fundamentals
Let’s jump right in. Decentralised Exchanges (DEXs) enable two tokens to be exchanged (or more specifically swapped) without a counterparty. They require permissionless blockchains that utilise smart contacts in order to allow the exchange of tokenised assets without the risk of any interference.
All DEXs rely on Liquidity Pools in which users receive a return on being a Liquidity Provider. Any user can access a DEX through wallets such as MetaMask, WalletConnect or Coinbase. These wallets receive LP tokens which is a receipt for assets deposited. Upon redemption (burning the tokens through interacting with the DEX), the wallet receives the assets at the current price and any trading fees accrued during that period.
The most popular DEX is Uniswap however there are many others such as Sushiswap or Quickswap which operates on the Polygon network. Tokens that can be exchanged follow the ERC-20 standard or in the case of PancakeSwap, this follows the BEP-20 standard on the BNB Chain.
Challenges facing DEXs
There are a number of challenges such as the reliance on external Oracles for safety or the quantifying of settlement price however these can be managed and are not showstoppers. The main issues for DEXs however are the following:
- Idle liquidity — large balances of each trading pair are constantly required for an efficient market
- Impermanent Loss (IL) is a risk for LPs — providing a pair of assets binds the risk of either token appreciating or depreciating and carrying that loss or gain to become averaged out against the other asset
Fortunately, these are addressed and being addressed in different ways even if imperfectly:
💥 Trading fees are returned to LPs in order to provide an incentive to deposit assets
💥 Single-sided staking and delta-neutral strategies are attempting to resolve IL
Uniswap v3
Uniswap V3 is a game-changer as a DEX—this offers a new interface for depositing and withdrawing assets for orders of magnitude higher returns from trading fees to further incentivise deposits. The additional complexity has also enabled a slew of research into more complex trading strategies that can limit impermanent loss. This complexity also touches on ways that other trade-offs can be addressed.
The platform however intentionally does not provide every management interface or tooling suites to address all user needs. The reason is to remain neutral as a source of liquidity and enabler of trade. At Cargo, we remove the complexity behind Uniswap v3 by providing a unified interface. Regular users are able to use a simplified risk management interface and advanced users are able to create customised strategies. Specifically, here are some of the business cases you can get started with today:
- Next-gen business models (hold tokens for services — no renewal fees)
- Operate businesses or projects inline with a treasury (DCA management)
- Instill confidence in small projects (non-custodial budget allocations)
Summary
Our goal from the outset was always to improve the experience of liquidity management and we believe that DEXs will be at the centre of this. Once the industry understands how they work, we may be led to a world of unencumbered price discovery. In today’s world, assets and stocks, even products and services, are brought to different markets at various stages through multiple scaling models. The requirement of blocks of capital is slowly distributed amongst different participants, whether they be workers, ambassadors, investors or drivers. This is no longer required. With DEXs, the price of everything, whether it is salary or stock can be assessed with greater granularity. With Cargo, projects can be built up to commercially viable economies that grow inline with ‘real’ traction. Ultimately, DeFi may be responsible for the elimination of boom and bust economies 💥
But before we get there, we can start right now building out real solutions that manage tokenised assets, enable smart treasuries to improve the capital efficiency of business operations or create composable subscriptions that can create new business models or salary delivery methods.
What do you want build today?
