DODO — increasing DeFi Liquidity
While decentralized finance continues growing, some challenges remain. Most dApps still have some way to go when it comes to user-friendliness as well. However, one more broad problem that decentralized platforms enabling money-flows are dealing with is a lack of liquidity.
Liquidity, broadly speaking, refers to the ability to buy and sell a certain asset. It’s visualised on trading platforms in the form of the market depth chart. This chart represents all the standing orders to buy (bids) and sell (ask) at various price levels. The market depth chart also considers the volume and order size at each price level. Normally, the more buy and sell orders exist in a market, the more liquid it is. This also means that the market has a higher ability to absorb larger orders without significantly impacting the price. If you think of small market-cap coins, they tend to have less liquidity, so one single sell order can significantly drive down the price.
When trading on a centralized exchange, traders enter their orders and are matched with other traders willing to take the other side of the trade. However, sometimes that’s not enough liquidity to ensure smooth trading, where market makers came into play. Like in traditional finance, market makers will provide liquidity by quoting prices to buy and sell an asset.
Obviously, using a market maker in a DeFi ecosystem would defy the whole idea of being decentralized. Therefore, DEXes rely on market making that isn’t provided by a centralized party but by code.
To understand what differentiates DODO from other DEX and liquidity providers, we need first to understand how the latter function.
Automated Market Making
When trading on a decentralized exchange like Uniswap, traders don’t trade directly with each other but interact with a smart contract. The smart contract then sends the tokens to a liquidity pool to exchange them. The price is hereby calculated using a mathematical formula that’s similar in most. In Uniswaps case, it’s calculated by x * y = k. X and y represent the amount of each token in the liquidity pool, while k is a pre-defined constant. Whenever trading in such a setting, there will be some slippage (= divergence from the price). This is called automated market-making (AMM).
The liquidity in the liquidity pools is provided by tokenholders that decided to lock up their assets in return for an interest payment or a share of earned trading fees. One of the risks that tokenholders face when locking up their holdings in an AMM liquidity pool is an impermanent loss as the token value can decrease by depositing into the pool more than it would’ve by just holding it. AMMs can’t adjust the token exchange rate like traditional market makers. The only way token prices reflect the price outside of the protocol is when arbitrageurs start selling overpriced tokens or buy underpriced ones. Once this has happened, token prices should be restored, making it “impermanent”. Nevertheless, if a trader sells before the token value has recovered, the loss will be permanent.
DODO uses a different approach.
What is DODO?
First and foremost, at its core, DODO is a decentralized exchange built on Ethereum. At first glance, it seems very similar to Uniswap, but it has some notable differences. For one, the DODO product suite encompasses several products that cover liquidity provision and a tool for anyone to mint their own token and more.
Dodo is also an on-chain liquidity provider, but instead of using automated market-making like so many liquidity pools, DODO employs a mechanism called “Proactive Market Making” (PMM).
Proactive Market Making
The challenge with the AMM algorithm employed by other DEXs is that prices sometimes diverge significantly from prices outside of the platform. Proactive market-making addresses this by employing oracles to checks the market prices of assets in the liquidity pool and allocates funds near the market price while decreasing liquidity at price levels that diverge from the market price. The algorithm essentially copies the behaviour that human traders and market makers show. This allows the DODO protocol to use capital more efficiently while minimizing slippage for traders.
It also allows liquidity providers to deposit just a single asset into the protocol. Whenever a trade happens, PMM adjusts the price accordingly, attracting arbitrage traders to rebalance the provider’s portfolio. This mechanism aims to deal with the risk of impermanent loss that traders face on AMMs.
PMM was developed entirely in-house by the team, optimized to run on a blockchain, and has a capital-efficient track record.
Like all Defi protocols, DODO is fueled by its own currency: DODO. DODO holders get to create and vote on proposals to make changes to the platform. They also get to participate in Crowdpooling and IDO campaigns.
IDO: Initial Dex Offering happen when a project decides to raise funds using a decentralized exchange. Unlike initial exchange offerings, projects are vetted by active community members.
DODO can also be staked by holders or be used to access trading fee discounts when trading on the DODO Dex.
The total supply of DODO is 1,000,000,000, and the project raised 5.6 Million during seed and private sale. The tokenomics of DODO also introduce a membership system that entitles members to trade fee dividends and membership rewards. To become a member, users can mint vDODO tokens that serve as proof of membership.
Just recently, DODO has also launched an NFT platform, building upon the latest NFT craze. With DeFi booming, we’re excited to see what DODO will achieve in the future.
DODO can be traded on our exchange with USDT and BTC pairs.