Providing Liquidity on Connext

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TL;DR: Connext’s Amarok upgrade is in its final phase before full launch this Thursday. You can now help bootstrap liquidity on Polygon, Arbitrum, Optimism, Gnosis chain, and BNB!

Our Road to Public Launch recently highlighted the next steps for the Connext network to complete its upgrade:

As a final milestone before the full Connext Amarok launch, it’s time to start bootstrapping liquidity in the network. Before we get into the details on providing liquidity, let’s start with a quick overview on how liquidity is structured in Amarok.

How Does Liquidity Work After the Upgrade?

A key goal of the Amarok upgrade is to improve the availability of liquidity on each chain by removing the need for routers, the nodes of the Connext network, to rebalance their capital between chains.

The new network does so by introducing two types of liquidity, active and passive, as well as nextTokens, an internal unit of account that represents a router’s ownership of locked funds on Ethereum L1, similar to other liquidity networks like Hop and Across.

To understand why there are two types of LPing as well as how nextTokens work, let’s walk through the core Connext flow.

How Data Moves Between Chains with Connext

Connext enables communication of data and funds between chains/rollups by passing a merkle root of data through Ethereum L1 using the canonical messaging bridges of each chain.

In other words, a transaction going from Polygon to Optimism would:

1. Get added to a Merkle root on Polygon
2. Be passed through the Polygon PoS bridge to Ethereum
3. Be combined with the merkle roots of every other chain into an aggregated root.
4. Get pushed as part of the aggregated root to every connected chain/rollup (including Optimism through the Optimism rollup bridge).
5. Finally, be unpacked from the root using a merkle proof to be executed on Polygon.

This approach brings up two important problems:

First, ERC20 tokens cannot directly be passed between chains this way. This is because there are already “adopted” tokens (e.g. PoS-USDC on Polygon) that are the canonical token used for a given ecosystem, and ensuring that a user receives the correct token on the destination chain requires bootstrapping liquidity in the adopted asset.

Second, it takes 30–60 minutes for a merkle root to travel from the origin chain (Polygon in the above example) to the destination (Optimism) through Ethereum L1. This is far too long for any user-facing applications.

Internal Accounting Using nextTokens

One way to fix problem #1 is to remove the need for the core protocol to interact directly with adopted assets altogether. Instead, we can use a unit of account, an internal token (nextTokens) that can be programmatically burned/minted by the protocol to track the ownership of value in the network.

NextTokens are generated by locking up tokens on their “home” chain (in almost all cases this is Ethereum L1). In Connext, this is done in a highly secure way by utilizing the existing, battle-tested canonical bridges that power every chain/rollup ecosystem today and through a network of watchers that verify the integrity of balances (and Merkle roots!) across all chains.

Now, naturally, the above isn’t very useful for users who only want to send and receive adopted assets.

For this reason, the protocol also implements stableswap AMMs on each chain that enables swaps between Token-nextToken as part of the core transaction flow. In effect, this construction prices adopted assets on each chain against their base assets on Ethereum.

For projects that do not yet have their token migrated across chains, it is entirely possible for the nextToken to be their adopted asset. This allows projects to do zero slippage transfers between chains.

Token-nextToken liquidity can be provided by any user directly into our AMMs, constituting the passive liquidity provisioning in Connext.

Fast Liquidity & Execution

Fortunately, we already have a method for fixing problem #2!

Connext routers already, as part of the current version of the system, front liquidity on a destination chain in order to be repaid later by the protocol. Doing this is safe for a router because, as soon as the user initiates the transaction on the sending chain, the router can see off-chain that this has occurred and is guaranteed to be repaid any capital they front to the user.

This core idea can also be applied to some types of generalized communication too! Check out our guide on authentication for details.

Note that this method only works for an off-chain actor that is supplying their own capital. That is why this constitutes active liquidity provision in our network.

Putting It All Together

Passive LPing within Connext ensures that there is available liquidity for a given adopted asset on each chain by incentivizing liquidity provision and rebalancing by the market. In other words, passive LP affects the price of transactions.

Active LPing within Connext allows routers to effectively loan funds to a waiting user and be repaid by the protocol. In other words, active LP affects the latency of transactions.

Together, the combination of these approaches ensures that users & applications can transfer adopted assets and data from an origin chain and receive adopted assets and data on the destination chain nearly instantly and with minimal added security/trust assumptions.

Individuals Can Now Provide Liquidity

We are opening up the opportunity for community members to provide passive liquidity and contribute to Connext Amarok from the start. Find more details on this below.

Liquidity will be temporarily capped to mitigate any potential risk. After a short provisional launch period, liquidity caps will then be removed.

While there is no required lockup period, special Galxe NFTs will be available to be claimed by the top 30% wallets on every chain that provide liquidity over the course of 3 months — stay tuned for the launch of the campaign!

How to Provide Passive Liquidity

This guide gives an overview of providing passive liquidity to Connext after the Amarok network upgrade.
Also available in: Chinese, Japanese, Korean, Spanish, Turkish, Thai, Russian

Select a Pool

1. Head to the new Pools tab in Connext: https://amarok.bridge.connext.network/pools
2. In this tab, you will see an overview of all pools currently available. All Pools hold a pair of the canonical asset (ie USDC) and local asset (ie nextUSDC).
3. Click on the row of the pool where you want to provide liquidity.

Add liquidity

Once you select a pool above you will enter into a screen like below (for Arbitrum USDC Pool)

1. Here you will see 4 panes:
   a. TVL — The current net amount of liquidity held in the pool
   b. Volume (24h) — The total volume of transfers that used this pool in the last 24 hours
   c. Liquidity Provided — The amount of pool liquidity held for each asset. You can reference this to see which asset is overweighted vs. underweighted
   d. My Positions — The number of LP tokens you already have in the pool, if you provided liquidity in the past. Share % is your relative share of the overall pool TVL.
2. Enter the amount of liquidity you would like to provide. You can provide liquidity on only one side OR on both sides as a pair. It’s totally up to you.
3. Review your estimated Price Impact
   a. If Price Impact is positive, then congrats! You will receive bonus LP tokens because you are helping to better balance out the pool with the currently underweighted asset.
   b. If Price Impact is negative, then the capital you are providing is further imbalancing the pool. So you are receiving slightly fewer LP tokens.

NOTE: If you are looking to obtain local nextAssets such as nextUSDC below, you can click the ‘GET nextUSDC’ button and follow along here How to Obtain nextAssets.

4. Click Supply and confirm in your wallet to add funds to the pool. Congrats, you are now earning yield!

You are done! You can monitor your positions (soon rewards) in the ‘My Positions’ tab of the Pools UI

How to Obtain nextAssets

💡 nextAssets are effectively the backbone liquidity in Connext’s Amarok upgrade. Routers in the network supply liquidity entirely in nextAssets which are being swapped into canonical assets for end users through these stableswap AMM pools.

Especially during the early stages of bootstrapping this AMM network, you will likely see the best opportunities to earn yield by providing local nextAssets.

You have two options to obtain nextAssets:

1 — Bridge from Ethereum (Recommended)

This is the best option as you will not incur any slippage! When bridging from Ethereum and receiving nextAssets , you are receiving these assets directly from routers on the destination chain and bypassing AMMs entirely.

Steps:

1. Begin with assets on Ethereum.
2. Head to the Connext Bridge UI. Select your desired destination chain + asset.
3. By default, you will notice that transfers send and receive the canonical asset.
4. In the advanced settings cog, toggle the Receive NextAsset setting to true and click APPLY. You will see the ‘You Receive’ section has been updated to show you receiving nextAssets

1. Click ‘Send’ to being your transfer. Your assets will arrive shortly on the destination chain to use as passive liquidity!

2 — Swap on Connext

If you instead prefer to swap into nextAssets with existing liquidity on a given chain, you can do so extremely easily in the new Connext UI. Swapping has slippage risk, so just evaluate tradeoffs against supplying canonical assets directly in the Pool.

Steps:

1. Head to the Connext Swap UI
2. Select your desired chain and amount.
3. Click Swap and you’re done. Easy!

Need Support?

Join our Discord and hop into the #💡liquidity-support channel, where our team and community are standing by and are ready to help you.

Join the Connext Discord Server!

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About Connext

Connext is a network for fast, trustless communication between chains and rollups. It is the only interoperability system of its type that does this cheaply and quickly without introducing any new trust assumptions. Connext is aimed at developers who are looking to build secure bridges and other natively cross-chain applications. To date, over $1.5b in transactions have securely crossed the network.

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