Solving Critical Problems in DeFi

Diatomix Ideas

Our team conceived a protocol to hedge against impermanent loss in 2022. It was at a time when the bear market, exacerbated by the collapse of multiple leading Web3 giants, was stalling the growth of the DeFi space. As serious believers in decentralized finance, we were committed to contributing to its rebound and began looking for critical weaknesses to improve on.

We knew that decentralized exchanges were the key to DeFi’s success and that there was a need to strengthen DeFi at its core before the space could transition to more advanced implementations. Low liquidity on DEXs needs to be addressed because it negatively impacts trade execution, causes inefficient price movements, and damages the integrity of DeFi applications relying on DEX prices (think of lending dApps). We reverse-engineered the DEX liquidity problem and identified two contributing factors to address.

1. Downside Risk from High Volatility

The first problem relates to the extreme downside risk with crypto assets, which prevents sophisticated non-crypto investors (both prominent retail and institutional players) from deploying their capital in liquidity pools. Crypto’s volatility would expose them to wild price fluctuations in the pool’s assets.

DEXs have introduced a new paradigm in sustainable yield because simply depositing funds into a liquidity pool governed by smart contracts allows anyone to earn transaction fees without having to lend capital to an unknown party. As a result, we are confident that this yield-generation technique will be included in professional investment strategies over time. But, for this to happen, volatility and the inherent risk of crypto assets must be hedged.

2. Impermanent Loss

The second issue is impermanent loss, a real plague for liquidity providers who, according to research, would have been better off adopting a simple buy-and-hold strategy over contributing to the pool 50% of the time.

Creating On-Chain Risk Management

Understanding these factors has led us to pursue the creation of a comprehensive set of solutions that deliver on-chain risk management.

Solution 1: Dollar Value Hedging

Diatomix Product 1 is a lean and capital-efficient solution for liquidity providers who want to earn transaction fees on DEXs while keeping the value of their liquidity pool share constant. Let us explain how Diatomix Product 1 works, starting from a hypothetical ALGO/USDC pool:

1. Users access the Diatomix web app and deposit USDC or ALGO in the Diatomix pool.
2. Depositors are awarded a DTX pool token representing their proportional ownership over the Diatomix pool.
3. Half of the deposited capital is contributed to the liquidity pool. For example, if the user deposits 100 USDC in the Diatomix pool, 50 USDC will directly contribute to the liquidity pool.
4. The remaining 50 USDC are used as collateral on a lending platform to borrow ALGO.
5. Borrowed ALGO tokens are contributed to the liquidity pool on a DEX.
6. Users earn APY from the resulting net position but are only exposed to their preferred asset in the pool, in this case, USDC.
7. An automated rebalancing mechanism within the Diatomix pool ensures stability for the whole duration of the process.

Overall, this design serves users in all market conditions. By allowing depositors to be exposed to their preferred tokens or stablecoins, Product 1 is a perfect choice for investors with a bullish or bearish bias. We expect Diatomix Product 1 to generate sustainable revenues which are not correlated to broader market cycles.

Solution 2: Perpetual Volatility Options

While Product 1 represents an essential contribution to DeFi and liquidity provision at large, we believe that Diatomix Product 2 will be the catalyst leading to new frontiers in decentralized finance.

We envisioned Product 2 by researching two of the primary needs in DeFi:

1. The limited scope of LP tokens too often sitting idly in investors’ wallets
2. The lack of liquidity in DeFi options, which prevents the large-scale development of a potentially huge market

Diatomix Product 2 will be released shortly after Product 1: we are currently working to lock partnership agreements with “gold standard” DeFi applications to integrate with them and create a robust ecosystem as soon as possible.

Product 2 leverages short positions to replicate payoffs mirroring impermanent loss for any token pair. As impermanent loss is typically higher with higher volatility, creating a short impermanent loss position will enable users to trade a new asset class: DeFi volatility. This product is perfect for retail and institutional investors who want to hedge their liquidity provision positions against impermanent loss (hedgers), as well as traders who wish to bet on market volatility with an unprecedented financial instrument (speculators).

Both Product 1 and Product 2 are based on robust quantitative research by our team and introduce an institutional-grade standard to DeFi at large. We expect Product 1 to pave the way for Product 2 in terms of the user base, community, and market positioning: this should allow Product 2 to be deployed smoothly, and reach a meaningful user base from the start.

Who’s Behind the Diatomix Solutions:

Diatomix is a team focused on the future of DeFi: our project is led by four PhDs (Math, Finance, Physics, and Computer Science). The Diatomix team is composed of experienced financial quants and pioneering developers in the blockchain space working to reduce downside risk for DeFi users.

WHAT WE DO & WHERE WE ARE GOING

As a team, we are here to deliver risk management tools for DeFi users. Diatomix has the following risk-management tools in the pipeline:

• Product 1: Dollar Value Hedge for Liquidity Providers
• Est. launch date: mid-2023
• Product 2: Volatility Trading and Impermanent Loss Hedging
• Est. launch date: late 2023

We aim to become the leading on-chain risk management entity: we want our efforts and progress in the industry to initiate a new “DeFi season” built on solid foundations and institutional-grade robustness.

We are also aware that protecting DeFi users against downside risk with fully decentralized products will be essential for the future of DeFi, so we will release a total of four products over the next two years, offering security to DeFi users in multiple ways.

We believe that the next wave of DeFi will be driven by institutional adoption, and to facilitate this participation, DeFi products will need to do the following:

• Build everything on-chain: after the collapse of FTX, Celsius, and BlockFi, users demand fully decentralized solutions.
• Protect against downside risk: impermanent loss and downside risk make DeFi opportunities unattractive for the average user. Solutions that reduce these issues will make liquidity provision more feasible, strengthening DeFi through increased participation.
• Adopt an institutional-grade standard: DeFi’s first wave is characterized by unregulated experiments that created new opportunities for users. As solutions become more complex and robust, users — individuals and institutions — will demand products at an institutional standard.

IMPORTANT INFORMATION

This content does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or any other product (token) or service by DTX Inc, its affiliates or any other third party regardless of whether such security, product (token) or service is referenced in this brochure.

Furthermore, nothing in this content is intended to provide tax, legal, or investment advice and nothing in this content should be construed as a recommendation to buy, sell, or hold any investment or security or to engage in any investment strategy or transaction. DTX Inc does not represent that the securities, products, or services discussed in this content are suitable for any particular investor.

You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your business advisor, legal advisors (attorneys), or tax and accounting advisor regarding your specific business, legal or tax situation.

NEITHER THIS CONTENT NOR ANY COPY THEREOF MAY BE SENT, TAKEN INTO OR DISTRIBUTED TO THE UNITED STATES OR TO ANY US PERSON.