A Game-Changer for DeFi Liquidity Fragmentation
Unifying Digital Assets to Enhance Liquidity and User Experience
The DeFi ecosystem is evolving rapidly, and Osmosis is on the brink of introducing alloyed assets, with Nolus being among the first protocols to integrate them. But what exactly are alloyed assets, and how do they address the persistent issue of liquidity fragmentation in DeFi?
Imagine you’re new to the crypto world, accustomed to trading on centralized exchanges (CEXs). Your friend keeps emphasizing the mantra, “not your keys, not your crypto,” prompting you to explore decentralized exchanges (DEXs). You decide to give Osmosis a try due to its user-friendly interface, withdrawing some USDC to your Web3 wallet and then transferring it to the Osmosis network with the intention of swapping it for BTC on the native DEX. However, on the swap page, you encounter three different BTC options. Which one should you choose? Confused, you might be tempted to revert to the familiar territory of CEXs.
This is where alloyed assets come into play. The concept behind alloyed assets is to provide a unified representation for multiple denominations of a given asset, similar to how CEXs handle various deposit sources for the same asset, presenting them as a single representation in the user interface.
How Alloyed Assets Work
Currently, Nolus Protocol users can only lease WBTC.axl due to its high liquidity and low fees. However, this leads to liquidity fragmentation, as other BTC representations with liquidity remain underutilized, causing higher slippage. Alloyed assets aim to unify these representations.
The key to this unification is a liquidity pool (LP) receipt token. When users deposit liquidity in a transmuter pool for a specific asset, they receive this LP token. A transmuter pool, a CosmWasm pool, allows for 1:1 swaps with zero slippage, meaning you can swap 2 WBTC.axl for 2 WBTC, provided there are sufficient reserves.
Benefits for Users and Protocols
This LP token can be traded like any other token on the Osmosis market, simplifying integration for Nolus and other protocols. This unified approach mitigates liquidity fragmentation and enhances the user experience (UX), offering better trading conditions for all Osmosis users, including Nolus protocol users who will directly benefit from improved liquidity and reduced slippage.
Potential Drawbacks and Risk Mitigation
However, holding an alloyed version of an asset means holding a mix of various representations. For example, an alloyed BTC might consist of nBTC, WBTC, and WBTC.axl, each with an equal weight. If one representation loses its underlying peg, the overall price of the alloyed asset would be affected.
To mitigate this risk, Osmosis employs strategies such as rate limits for the dominance of any single representation, and isolating damages to minimize a collapse in the alloyed asset’s price. Additionally, a SubDAO monitors and reacts to incidents, isolating or removing threats promptly.
Alloyed assets come with their pros and cons. For Nolus, which requires deep liquidity pools to facilitate leases, alloyed assets represent a significant step towards a better UX, bringing DeFi closer to mainstream adoption. By offering a higher exposure with better liquidation terms, alloyed assets align perfectly with Nolus’s goal of providing an optimal Web3 experience. This integration truly seems like a match made in DeFi heaven.
