WELL HELLO, BOW!
INTRODUCTION
We’re excited to introduce BOW, Kujira’s latest product. BOW is our version of an Automated Market Maker for Kujira’s on-chain orderbook dex FIN (with a few key differences). This post runs through how BOW works, how to use it, and the benefits it brings to the ecosystem.
OVERVIEW
BOW is the framework that ensures trading pairs on FIN have everything needed to function optimally; narrow price spreads to attract traders, and fees to incentivize deep order books.
It offers liquidity providers a chance to earn yield by adding to the depth of a given trading pair. In turn, this liquidity is put to work providing an optimal environment for traders by narrowing the price spread and ensuring order books are deep enough to handle volume.
BOW also enables protocols to further incentivize pool depth by allocating token rewards to liquidity providers as needs be.
Let’s break this down into key components; stability and depth.
Order flow is vital to an exchange’s success. This is what generates volume.
This success requires lots of orders placed by many traders. The more, the better. However, traders expect a narrow spread, and enough depth in the order books to be able to make the trade they want at the price they want (the market price).
When the spread is too wide and the book too shallow, trading slows down and price becomes more volatile, making the exchange less attractive, and causing volume to dry up. Success requires volume and stability, and stability comes from depth in the order book, which usually follows volume. Which comes first? It’s a classic chicken and egg problem.
One way exchanges resolve this is by incentivizing with yield; fees are earned by providing liquidity to a pool for a given trading pair.
BOW does this in a slightly unique way.
HOW IT WORKS
BOW uses an internal algorithm to automatically place a set of orders on a FIN pair, based on its own internal token balances. It uses the same XYK algorithm that AMMs like Uniswap use to place its orders — placing smaller orders closer to the mid market price, and increasing in size when further away. As market buys and sells come in, these orders are hit — buying low and selling high.
When orders are filled, the contract’s internal price calculation moves up and down as the mid market rate on the pair moves, causing the order placement logic to re-submit orders at the new mid-market rate.
The combination of the internal pricing algorithm with the internal order placement logic means BOW is an entirely self-sufficient and 100% on-chain market maker for the FIN order book.
Trading strategies can make use of off-chain bid placement calculations that also rely on a 3rd party price feed. BOW is different. The price feed comes from the same source the order book relies on (the validators) and the market making benefits traders, except benefits aren’t extracted from the ecosystem, but rather fed back to participants through fees and incentives. And because BOW is owned by the protocol itself, there isn’t an additional risk created by relying on a third party. And everything happens on-chain.
HOW TO USE IT
BOW is extremely intuitive. Start by going to the Pools tab and connecting your wallet. If you need more of the tokens in the pair you’d like to provide liquidity for, top up by using the Swap tab.
Choose the pool you’d like to participate in, deposit the amount of tokens you’d like to provide and create LP tokens.
Holding LP tokens means you earn a share of the fees from the transaction using that pair. The amount of fees depends on both the trading volume on that pair and the amount of liquidity you have provided relative to the size of the pool.
Once you have deposited tokens and received your LP, they can be staked to earn additional incentives. This is done by navigating to the Stake tab of the relevant pool’s page, where you can choose how many LP tokens you wish to stake.
The page will show the incentives for each pool, including how many tokens are offered, when each incentive expires, and the release schedule. This changes dynamically as more incentives are added and under what conditions they are released.
Anyone may add incentives to any pool, at any time.
ECOSYSTEM BENEFITS
BOW is a market maker with very high capital efficiency as it only needs to cover the range of orders that are posted, as opposed to other MMs covering the entire range.
BOW makes trading on FIN more attractive, which encourages greater volume in trade and in turn earns more fees for $KUJI stakers.
Adding incentives to various pairs allows protocols to encourage pool liquidity, and also offers an incentivized means to reward token holders without resorting to airdrops, thus ensuring tokens go into the hands of holders who are actively using the protocol in ways other than staking.
All this amounts to a myriad of benefits to the ecosystem, ensuring a stronger, and more diverse platform.
USER BENEFITS
Until now, a $KUJI holder who wanted to earn a return in exchange for supporting the network only had one option; staking with a validator. This remains a great option for $KUJI holders who wish to earn a diverse bouquet of tokens at relatively low risk.
While BOW’s purpose is to increase the volume of trading on FIN and therefore increase the benefits of staking, it has the added benefit of enabling token holders to diversify their yield strategies.
Providing Liquidity has a different risk/reward profile compared to staking with a validator, and allows token holders to refine their portfolio distribution to suit their appetite for risk. By doing so they improve the function of FIN and make it a more attractive trading destination, which benefits stakers and creates a better experience for higher frequency traders.
The end result is more opportunity for token holders looking for ways to deploy their long term token holds and benefit from contributing to a robust trading environment.
CONCLUSION
BOW is the latest stone laid in the foundation of what is quickly becoming a home for users and protocols seeking to build better financial products that do not require inflationary mechanics and short term benefits at the expense of long term sustainability.
Market Making is nothing new or revolutionary, however we’re confident our implementation is novel and certainly fits in with our ethos of sustainable, responsible growth.
It’s an important piece in the structure to provide a great trading experience and manages to do so while also offering an opportunity for less active token holders a means to derive yield from their portfolios, and customize their tolerance for risk in the pursuit of reward.
Please go explore BOW, and let us know what other features or functions you’d like added. We’ve only just begun!
