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The biggest highlight of the upgrade of CoFiX 2.0 is the design of automatic hedging by market makers to attract professional arbitrageurs into the ecosystem.
Original title: “Uniswap V3”
Written by: ZHIYU
CoFiX 1.0, a new automated market-making protocol developed based on the NEST Protocol oracle machine, has been running for half a year since it went online in October last year. Many problems have been discovered during the operation. CoFiX was born to use the NEST oracle machine to solve the risks caused by price fluctuations, to quantify and calculate the risks, and to complete the perfect hedge off-market, to offset the losses caused by the price fluctuations, and to increase the utilization rate of funds. There is no problem in this direction, but in practice, it is not achieved overnight.
Reasons for iteration
CoFiX 1.0 has extremely high requirements for the professionalism of LPs that provide liquidity
Whether it is the NEST oracle or CoFiX, the design concept assumes that the market is a rational market, that is, most of them are rational people. A price that is not arbitraged is used by financial products on the chain. There is no need to create a pool, and directly introduce non-arbitrage. Price, so that there is no slippage in the transaction, only need to study and solve the risks brought by price fluctuations.
But in fact, the current market is irrational and cannot accept more complex computing interactions. Most people prefer more popular products.
Most LPs here don’t know how to hedge, or can’t do automatic hedging. Secondly, hedging still has a certain cost, such as a fee of 0.002, etc., and hedging requires additional preparation of certain assets in the exchange or hedging channel. This poses a certain challenge to LPs. In the case where the market is not so effective, the hidden cost of hedging is not low.
The main thing is to price data for NEST oracle, NEST block quote density, the exchange price data, the ratio of the size of funds and other changes CoFiX LP comprehensive monitoring of each variable may all change LP hedging strategies and market making strategies, This is a complex operation that requires time and practice to test, and everyone needs to formulate different strategies according to their own asset size, conditions and expectations. At the same time, in the case of hedging according to the strategy, they need to prepare for the same scale of market making The investment of funds into the hedging channel further raises the threshold of LP.
Increase CoFiX mining participation
CoFiX based on the NEST Protocol oracle machine will be restricted by the NEST Protocol’s quotation assets that can generate price information streams when participating in liquidity mining.
At present, the quotations of ETH/USDT and ETH/HBTC are temporarily in line with the requirements. The initial design is to increase the utilization rate of funds. Like BTC and ETH are mainstream assets with the best liquidity to meet the price needs and market of these two assets. , it could survive a direction, which is different from the long tail like Uniswap assets that rely on emerging trade route to mainstream asset pool to motivate Lock mainstream assets.
In the actual operation process, the high degree of correlation with the first reason led to the introduction of mainstream assets that did not go smoothly. Although it initially attracted more than 100 million US dollars to make the market, most of the “white prostitutes” like DeFi can’t do it. Effective market hedging results in the loss of market-making funds and “indirectly persuades” market makers to withdraw.
As a downstream financial product of NEST Protocol, enthusiasts who hold a large number of NEST Token and do not have more mainstream assets cannot participate in the ecological project, and the construction of domestic demand needs to keep up in time.
The output of CoFi Token has not decreased with the decrease of market-making share, the functional system dividend needs to be improved, and the governance rights need to be opened
In the early mining of CoFi Token, the interaction of tens of millions of dollars and the subsequent interaction of millions of dollars, the amount of mining is the same. When the market maker withdraws funds at a loss, the scale continues to shrink, and the amount of mining remains unchanged. If the price rises, the potential and demand are strong, then the capital utilization rate and income will become very high, and vice versa, it is an evil cycle.
In the CoFiX version 1.5, the calculation of the K value was changed, and the fixed value was changed to dynamic. After that, the mine output was reduced by 90% in order to buffer the time for the 2.0 version.
Since the project was launched, the system revenue has earned more than 6,000 ETH for CoFi Token holders. After 20% is distributed proportionally to the holding, there are still more than 5,000 ETH locked in the revenue pool . Because NEST Protocol has summarized the shortcomings of the dividend model in more than two years of research and development, you can read “NestCore: NEST Protocol Future Development Plan”, “Analysis | What if the NEST system “repurchase and destroy” 43,000 ETH kind? “These two articles. This point also exists in CoFiX, but the CoFiX dividend ratio is small, which is not a particularly big problem, but it still needs to be optimized and more reasonable model parameter design is required.
The lack of governance authority makes decentralized projects form a barrier between development and the community, and it is necessary to build a governance model to follow up community governance.
Most of the current DeFi projects use the Ethereum community’s infrastructure Snapshot for voting governance, which is relatively centralized and is not executed on the chain. The final trigger decision is also a multi-signature. There are also some established DeFi brands, like MakerDAO, which also have their own official governance models and channels. Regarding DAO governance, the entire industry is also in the groping stage , and CoFiX needs to follow up on DAO issues in a timely manner.
Improvements in CoFiX 2.0
In the existing public information, “Science | NEST Ecological Computational Finance CoFiX”, there are relatively complete improvements, and eventually developers need to make specific development documents and parameter settings on GitHub for system interpretation.
Analysis based on existing information
Solve LP’s hedging problem
The upgrade of CoFiX 2.0 introduces arbitrage hedging and changes the rules of market-making mining.
The continuous adjustment of the dynamic K value of CoFiX 2.0 can more accurately compensate for risks, encourage LPs to continue to provide liquidity, and greatly reduce the market-making threshold . Although unilateral asset pledges have been changed to bilaterals, which has increased the volume of funds, Invisible thresholds such as off-market hedging channels, fee consumption, and data monitoring tool research and development have been greatly reduced.
Although it is still a certain distance from CoFiX’s ambitious goal of fully automated hedging on the chain, it is also a solid step towards automation.
The output of market-making mining will be changed, and the specific parameter standards require developers to provide product documentation and public code on GitHub.
Increase ecological complexity
Set the proportion of the solid fund pool, and use arbitrageurs to automatically hedge the LP’s asset size when the market fluctuates. The introduction of arbitrage hedging is aimed at professional arbitrageurs, that is, traders in market fluctuations for trading, based on the NEST Protocol price Information flow, without slippage and gratuitous losses, is more conducive to the transaction of large assets and improves the utilization rate of funds .
The upgrade of CoFiX 2.0 allows more professional hedgers to participate in arbitrage hedging, and professional hedging institutions and funds are more suitable for trading with CoFiX.
The operating logic is: LP deposits bilateral assets, professional arbitrageurs do large hedging transactions, indirect automatic management of LP funds , and real arbitrage transactions to achieve automatic hedging of LP funds .
Lock in internal demand
NEST ecological internal demand is the key direction of this year, and it has been mentioned many times on various public platforms.
CoFiX 2.0 increases the NEST/ETH market-making capital pool and participates in the liquidity mining of CoFi Token, which can greatly increase the CoFiX protocol TVL and protocol income, and feed back to CoFi Token holders . This part of the NEST ecosystem’s domestic demand will be firmly locked by CoFix.
It is planned that CoFi Token will be repurchased on the chain through DAO to lock in the deflation of CoFi and capture the fee income. According to the practice of the NEST Protocol version 3.5 repurchase model, this is the direction that can be adopted.
CoFiX DAO model establishment
According to the public document of version 3.6 of NEST Protocol, the NEST DAO governance model will be launched and will be adopted by CoFiX in the future. However, due to the current insufficient liquidity of CoFi Token, multi-signature triggers are temporarily implemented in governance. Any changes will also be made in the community and GitHub in advance. To discuss it.
DAO’s repurchase also has liquidity issues, as well as the quotation density and participation issues of CoFi/ETH on NEST Protocol, which will take a certain amount of time. After the NEST Protocol 3.6 version is online, reducing the size of nToken quotation assets will improve the quotation problem.
In the end, the direction of CoFiX DAO governance will continue the NEST Protocol governance model, remove developer permissions, and conduct community 51% voting governance.
The biggest highlight of the upgrade of CoFiX 2.0 is the design of automatic hedging by market makers. In the future development of other financial products in the NEST ecosystem, their internal settlement needs will be locked in the CoFiX system. After the internal settlement needs have been locked, professional arbitrageurs will be introduced into the ecosystem. Internally, there are more opportunities and advantages to expand to external communities and attract more mainstream native assets to participate, such as YFI community and other DeFi ecosystems. I hope everyone will pay more attention to the public information and dynamics of NEST and CoFiX channels for a full understanding and interpretation.