This DeFi Friday we are bringing you guys another educational piece — MonoX Finance’s single asset liquidity pool. Every client we bring into Tidal’s ecosystem has their own unique offering for the crypto industry. While we are safe guarding their progress, it would be more fun to make it a learning experience for all of us.
For those who are not familiar with the concept of a DEX liquidity pool, it would be helpful to start with the most popular DEX known as Uniswap. Uniswap requires 2 assets to create a liquidity pool. For example, Tidal has a Uniswap pool with a TIDAL and USDC pair, and when we set up the pool back in April, we provided USDC as well as an equivalent amount of USD in TIDAL into the pool. MonoX is creating an innovative solution by using only one asset — in this example, we would only need to deposit TIDAL to start the liquidity pool.
How does the single asset become a pair? This is the core design of MonoX’s system — by creating a virtual pairing asset — vCASH, which is a new kind of stablecoin introduced by MonoX. When a user first deposits liquidity to create a new pool, they set a starting price for the asset. This means that every asset in MonoX pools expresses their value in vCASH. Then, the trading process works just like Uniswap’s AMM constant algorithm by adhering to a price curve: when a token is bought, its price goes up; when it’s sold, its price goes down.
vCASH is represented as a balance within the pool. The balance starts at 0, however, it increases or decreases based upon Token A’s trading activity (being bought or sold).
- Token A is bought — vCASH balance increases
- Token A is sold — vCASH balance decreases
Below is one example how buying and selling ETH on MonoX would change the balance of the paired vCASH, which reflects the price change of ETH.
Now that we understand how buying and selling works (Swap), it is easier to use the graph below to connect the dots between each party:
1. Liquidity provider provides a single asset to start the liquidity pool (left side).
2. Monoswap pool holds the reserve of that particular asset and vCASH pair (middle part),
3. Trader swaps in and out of that asset which impacts the balance of that asset and vCASH.
From the example in the introduction section, MonoX’s biggest advantage is the cost savings to the project team when setting up a DEX liquidity pool. Instead of providing their native token and another asset (usually ETH or USD) as a trading pair, only the native token is required. With more project teams adopting this solution, MonoX’s ecosystem will strive to further benefit liquidity providers, as they only need to provide one asset as LP.
Traders would also benefit from low trading fees since the lengthy transaction paths are avoided thanks to our vCASH stablecoin. Token A will not go through a ‘path’ of pairs to swap into Token B.
Below is a good summary of MonoX’s single asset pool current use case:
- As a project or developer, you can launch your token with zero extra capital.
- As a liquidity provider, you only have to deposit one token to the liquidity pool.
- As a trader, swapping tokens is much cheaper.
We hope you all enjoyed reading this and learned something new about DEX and Swaps. Tidal’s core value is innovation, and it normally takes some time to study and identify a new client with something unique to offer. We feel significantly more valuable as well by supporting these projects from a safety standpoint.