Since SushiSwap forked Uniswap, the number of various swaps has not come. Many swaps simply copy the token distribution mechanism of SushiSwap’s liquidity mining, causing these swaps to go high and low, and even go to a death spiral. With current liquidity exceeding 100 million U.S. dollars and daily average trading volume exceeding 30 million U.S. dollars, in addition to traditional Uniswap, Balancer, and Curve, only SushiSwap remains. Other swaps are still on the way to catch up.
The DEX field has now entered a stage where innovation is needed. Simple copying is difficult to sustain. The innovations include the integration with NFT and the use of layer2 technology. Equalizer is also a DEX using AMM mode. What new improvement is it worth our attention?
Manually adjusted token distribution mechanism
At present, in various Swap liquidity mining, it is basically up to the development team to determine which token pair’s liquidity pool can obtain the reward of governance token. This leads to a situation where the tokens that can be rewarded are limited to some liquidity pools, while other liquidity pools that contribute to DEX cannot get corresponding incentives.
Currently, there are only 4 liquidity pools on Uniswap to get rewards, they are ETH/USDT; ETH/USDC; ETH/DAI; ETH/WBTC. At the time of writing, Uniswap’s liquidity was 2.38 billion U.S. dollars, of which the liquidity of these four pools accounted for more than 87%.
(Four token pool tokens that can be rewarded on Uniswap, Uniswap)
Not only Uniswap, SushiSwap and Balancer also have similar situations. At present, there are 29 liquidity pools that can receive SUSHI token rewards on Sushiswap, and there are currently about 50 liquidity token pools. Among them, the liquidity pool with token incentives provides more than 95% of liquidity.
(Long tail token pool on Sushiswap is difficult to obtain token incentives, Sushiswap)
Balancer uses a combination of whitelisting and weighting factors to control the fairer distribution of liquidity mining through this mode. The weighting factor is related to the total liquidity of the token pool, the ratio of token pairs, transaction fees, and transaction volume. It mainly relies on community governance to advance.
(On Balancer, token incentives are allocated according to the weighting factor of the liquidity pool, Balancer)
Uniswap, SushiSwap and Balancer adopt this partial liquidity pool to participate in mining mode, and its original intention is understandable. Because they want to prevent rubbish tokens from obtaining token rewards by providing liquidity, worry about bad coins eliminating good coins, worry about their overall fairness, worry about their business development focus and competitiveness. However, this has also led to many long-tail liquidity pools unable to obtain corresponding liquidity rewards.
The question here is, is there a better solution to this original intention? Is there an intelligent distribution mechanism based only on algorithms? There is no need for manual adjustment through team or community governance. It is a more decentralized rapid response mechanism. In this way, can a better and fairer distribution of governance tokens be achieved? Let the long tail token pool also obtain the incentives provided by liquidity, so as to attract more tokens to contribute to the liquidity? Let’s take a look at how the new DEX project Equalizer addresses this problem?
Equalizer’s intelligent token distribution mechanism
Equalizer is also a DEX based on AMM. Its trading mechanism is basically similar to Uniswap. Its main difference lies in the design of the liquidity mining mechanism. It tries to make the distribution of governance tokens fairer, more reasonable, smarter and more decentralized, returning to the original intention of DeFi and back to the original intention of Uniswap. Equalizer means equalizer in English. It can also be seen that the Equalizer project has a self-adjusting mechanism design.
Just like Uniswap has its own governance token UNI, Equalizer also has its own governance token EQL. This is the token used by Equalizer for protocol governance, which can be used for liquidity mining incentives. EQL can also capture the transaction fee value of its agreement.
- Equalizer’s value capture and distribution
In the DEX protocol project, the main value that the project can capture is the transaction fee. Whether it is Uniswap, Balancer or Curve, the value captured by these DEXs currently ranks not only in the forefront of DeFi, but also in the forefront of the entire encryption field.
Equalizer, like other DEXs, can also capture transaction fees. Currently, the transaction fee for token exchange on Equalizer is 0.3%. 50% of it is allocated to liquidity providers, and the remaining 50% is used to repurchase and destroy EQL. Of course, the distribution of transaction fees can also be adjusted through governance.
From the perspective of Equalizer’s fee distribution, it uses 50% (0.15% of the fee) to repurchase and destroy EQL. This is quite different from Uniswap. Of Uniswap’s 0.3% transaction fee, 0.25% of it is paid to users, and the remaining 0.05% is allocated to token holders. Token holders capture 16.7% of the overall value. In Equalizer In, token holders capture 50% of the value.
This design means the following things:
– In Equalizer, EQL token holders are more efficient in capturing value from business development.
– The liquidity provider’s fee income will decrease accordingly, while the mining governance token income will increase.
– If the amount of EQL repurchased and destroyed within a period of time is greater than the amount of newly generated EQL, EQL will enter deflation.
- Smart distribution of governance tokens
Equalizer’s token EQL can capture its handling fee, which is supported by its transaction volume. So, how is the governance token EQL distributed?
Equalizer’s governance token EQL has no pre-mining and no investor share, and its token distribution is all distributed through liquidity mining.
In terms of liquidity mining, how does Equalizer do?
– No mining whitelist
Anyone on Equalizer can add trading pairs. When the liquidity token pool generates transaction volume, it can participate in the distribution of EQL governance tokens. At present, there are only 4 liquidity pools on Uniswap to get UNI token rewards, and only 29 token pools for SushiSwap. SUSHI token rewards. On these two DEXs, a large number of long-tail token liquidity providers cannot obtain the corresponding governance token incentives. If all liquidity providers can obtain corresponding token incentives, this is a fairer distribution mechanism.
– Intelligent adjustment of EQL token distribution
Equalizer’s liquidity mining token distribution is intelligently adjusted and distributed according to the transaction volume of the transaction pair. It adjusts the distribution ratio every 6 hours, and each adjustment will affect the mining weight of each liquidity pool. The change of its mining weight is related to the amount of EQL repurchased by the liquidity pool in the previous round, which is related to the size of other transaction volumes.
The more EQL that the liquidity pool generates for repurchase and destruction, the higher the weight of the transaction in future EQL liquidity mining. In this case, users may have two worries, one is the sharp fluctuation of the trading volume, and the other is that someone will brush the volume (including newly opened trading pairs or single trading pairs).
First, let’s look at the dramatic changes in transaction volume. Equalizer introduced the EMA (Exponential Moving Average) mechanism, which is the exponential moving average mechanism. It is not only based on the current transaction data, but also based on the number of historical transactions, as shown below:
The second is about the worries about the amount of brushing, will it lead to unfair distribution? The design of Equalizer incorporates a game mechanism. If the user adds a new trading pair ETH/XXX, assuming that he has swiped 10 million US dollars in trading volume within 6 hours, incurring a 30,000 US dollars handling fee, 50% of which is returned to the liquidity provider, and 50% is returned Acquisition and destruction of EQL tokens, then, as a liquidity provider, you can recover 50% of the cost, and the cost of its 10 million US dollars transaction volume is 15,000 US dollars every 6 hours. If the Gas fee is taken into account, the cost will be even greater. High, not calculated here.
Assuming the EQL is $5, at this time, if the user can get 3000 EQL rewards in the next round of token rewards, then the amount will not be lost, and there is an arbitrage opportunity. However, since every 6 hours, each transaction pair token pool needs to compete for a fixed-scale EQL reward, which means that if there is an arbitrage space, other token pools will also participate. This is a design of a game mechanism. Eventually there will be a state of equilibrium.
Equalizer automatically adjusts the transaction volume ratio of different liquidity pools every 6 hours and distributes EQL tokens proportionally, which is a bit similar to the computing power competition in Bitcoin. In Bitcoin mining, in order to obtain block accounting rights and block rewards, miners need to win in the computing power competition. In Equalizer, these liquidity providers are like mining nodes. They can contribute more transaction volume by themselves or mobilize others to account for a higher reward ratio in the next block production. However, unlike Bitcoin mining where only one miner or mining pool obtains accounting rights and block rewards, all liquidity providers in Equalizer have the opportunity to obtain corresponding governance token rewards based on the transaction volume of their token pool.
While the liquidity token pool contributes higher transaction volume, they also provide the value of cost support for EQL and also contribute to the system. What’s interesting here is that the token incentives for different liquidity pools are adjusted every 6 hours (subsequently through governance adjustments), rather than through team or community governance. This distribution model is smarter and faster. .
– Smooth token production reduction mechanism
The current DEX token production reduction mechanism is quite controversial. In particular, Sushiswap previously introduced a measure of a 10-fold drop in token incentives a week later. This crude method was later adopted by some unreasonable Swap, which accelerated their death spiral.
A more reasonable token production reduction mechanism should consider the long-term incentives of the system. On the one hand, it should ensure that the current liquidity providers are profitable, and at the same time, it should also consider that subsequent participants have long-term incentives to provide liquidity. Equalizer’s distribution model is QFS (Quasi-fixed-supply) model, which will also be halved after each production cycle. This is similar to the production reduction model of other projects, but its difference lies in the lengthening of its production cycle. That is to say, although the EQL token reward will be halved in each cycle, the production cycle will be doubled, which lengthens the time of each token distribution and makes the token distribution itself smoother. Below is a graph of Equalizer comparing its production reduction model with other projects’ production reduction models.
Judging from the above picture, its production reduction is not as abrupt as a project that cuts production by half every week, nor is there no rhythmic change like a constant pattern. It is a relatively smooth token distribution mechanism. Corresponding to this is the return of liquidity providers. The rate of return of its tokens will not decrease sharply, nor will it continue to rise. It is a more gradual growth model. If the return of the token itself drops abruptly, it will lead to a sharp drop in the income of the liquidity provider, causing liquidity to attract other swaps. If the return of tokens continues to increase, it will cause the issuance of tokens too fast. If the agreement cannot capture the corresponding value simultaneously, it will increase the selling pressure of tokens, which may eventually lead to a drop in the actual rate of return, which will also promote liquidity providers. Away.
Specifically, after Equalizer goes online, based on the distribution mechanism of its QFS model, the first round of production cycle is 20,000 blocks, about 3.5 days, each block produces 10 EQL tokens, 3.5 days will be dug out 20 Ten thousand EQL. After the production cut, the second round time became 7 days, a total of 200,000 EQLs were dug; the third round time was 14 days, and a total of 20 EQLs can also be dug out. In this way, if you look at it every day on average, the EQL that can be produced every day in the following cycles is gradually decreasing.
Equalizer’s DEX exploration
If it can be proved not only in theory but also in practice that Equalizer’s token distribution mechanism is a more reasonable model, then it has the opportunity to gain more favor in the liquidity pool of “long tail tokens”, thereby bypassing Uniswap’s “Machino Line”.
As mentioned above, Equalizer’s token distribution mechanism is redistributed according to the amount of EQL burned by users in the previous round, and it is automatically adjusted according to the proportion of contributions in the previous round. It is not through team or community governance to adjust its mining whitelist, mining distribution weight, etc. This means that its response speed is faster, the distribution is less subject to human intervention, and the distribution is more universal and smarter.
If a team or community governance model is adopted, individuals or teams with a large number of governance tokens may adjust the mining whitelist or weights through the amount of tokens they own to promote the implementation of proposals that are more in line with their own interests. The advantage of Equalizer’s current token distribution mechanism is that it is decentralized. People can only play games on the mechanism itself, and temporarily cannot control future mining plans through governance or other means.
The mining game part of Equalizer is similar to the mining game mechanism of Bitcoin, which provides a new idea for the future token distribution model of DEX. If this idea proves to be successful in practice, it will encourage more DEX adopts this token distribution mechanism, and eventually becomes a generalized mechanism for DEX token distribution, which can reduce artificial token distribution control and promote the organic growth of DEX through intelligent distribution mode.
Although more and more teams have joined the AMM model DEX, various micro innovations will continue to overlap. In the end, only the collaborative drive of innovation and operation and more reasonable community governance can stand out from the crowd. In the DEX track, there will also be multiple coexistence states. Of course, in the end, there are only a few that are really heads.
With the advent of more innovations, the competition for liquidity and transaction volume in the DEX track will become more and more fierce, which will also prompt various teams to make more innovative attempts in terms of mechanism and scalability. This is a good thing for the positive development of the entire DeFi.
