It certainly is an exciting time to be involved in the Cardano community! With the launch of the Alonzo White test net, the full integration of smart contracts is fast approaching. With that comes the development and implementation of a number of exciting platforms that serve a wide variety of functions. I don’t know about you, but I consider myself to be pretty lucky to have the chance to watch this unfold from the very beginning. A look at the chart below from @Coin98Analytics highlights all of the amazing work currently underway.
Among the most exciting of these platforms are automated market makers (AMMs), also known as decentralized exchanges (DEXs). AMMs play a vital role in the decentralized finance (DeFi) ecosystem and you may even be likely familiar with those which already exist on Ethereum (e.g., AAVE, Uniswap, PancakeSwap, SushiSwap, etc.).As the Alonzo hard fork combinator is expected sometime in September, the time has come for the integration of these financial platforms into the Cardano ecosystem. We here at AdaPulse have covered a few of these Cardano-based DEXs in the recent past (see our articles on: ErgoDEX, RAY, Cardax, and Polyswap). However, the focus of the present article is to discuss the Fund5 proposal from Daemon Capital to help fund their unique and innovative DEX, formally known as the Maladex. Before we get into the details of the unique characteristics of the Maladex, let’s dive into some DeFi basics so that you understand the need and importance of DEXs.
Centralized Exchanges vs. Decentralized Exchanges
A key ideological pillar and goal of blockchain based technology is to help create a more equitable financial system which eliminates the reliance on centralized institutions. These centralized institutions (i.e., banks, lenders, exchanges, etc.) have many issues (e.g., security risks, liquidity issues, censorship, etc.) and inherent inequities.
At the present moment, if an individual wants to exchange his or her fiat currency for a crypto asset, he or she would have to do so using a centralized exchange (CEX). In this context, a CEX is a convenient platform for the buying and selling of crypto assets, a gateway to the cryptoverse so to speak. CEXs operate on classic client-server technologies and do not have the security features provided by blockchain networks. Even though CEXs offer important services, they are vulnerable to security breaches (e.g., the Mt. Gox hack which resulted in a loss of over 700,000 Bitcoins and conveniently timed crashes (e.g., the recent Robinhood crashes). Furthermore, when one purchases crypto on a CEX, he or she does not truly own that crypto until it is moved into a private wallet. That is because CEXs trade on their own books, or off-chain, meaning that users do not have full control over their private keys. Remember, not your keys, not your crypto. Smaller exchanges also have less liquidity and can experience price volatilities such as flash crashes and price spikes. CEXs are also subject to government regulation and must therefore meet the countries “know your customer” (KYC) requirements, which means that customers have to fully identify themselves when registering on an exchange; this could raise privacy or censorship issues and can be pretty invasive.
What are AMMs?
Creative approaches are required to enable the decentralization of financial systems and AMMs are at the heart of how that is achieved. AMMs are a key facet of the DeFi ecosystem and they allow digital assets to be traded on-chain and in a permissionless and automatic way using liquidity pools rather than a traditional market of buyers and sellers. On a traditional CEX, buyers and sellers offer up different prices for an asset. When other users find a price to be acceptable, they execute a trade and that price becomes the asset’s market price. Trading stocks, gold, real estate, and most other assets rely on this traditional market structure.
AMMs have a different approach to trading assets. In AMMs, buyers trade on-chain against a pool of tokens (i.e., a liquidity pool), rather than between buyers and sellers. To incentivize participation in the liquidity pool, which is crucial for AMMs to function, liquidity providers earn interest on their contribution to the pool. The more assets in a pool and the more liquidity the pool has, the easier trading becomes on decentralized exchanges.
What is the Maladex?
Now that you understand the drawbacks of CEXs, the importance of DEXs, and the general idea of an AMM, let’s dive into this Fund5 proposal from Daemon Capital to help build the Maladex.
The Maladex seeks to become the world’s first comprehensive crypto DEX giving ADA holder’s access to the following financial tools and services:
- Liquidity providing (LP) and farming solution with innovative curve solutions
- Bridges to all crypto assets, providing one place for trading assets native not only to Cardano blockchain
- Crypto indexes
- Crypto financial derivatives (covered options, shorts/calls, etc.)
- Mirrored (synthetic) instruments allowing trading non-blockchain native assets (e.g. stocks) and providing additional ways of creating inverted instruments and financial derivatives (via collateral)
- Develop educational materials and access to data and indicators decreasing information asymmetry and helping people make more informed investment decisions
The integration of all of these financial services into a single platform, i.e., the Maladex, is truly a monumental step in the DeFi space and is eagerly awaited by the Cardano community. If you are new to DeFi and want an in-depth description of the above listed features and the accompanying mathematical modeling, visit the full Fund5 proposal on Catalyst (https://cardano.ideascale.com/a/dtd/DEX-Cardano-Decentralized-Exchange/352819-48088).
The Maladex launch plan will closely follow the planned timeline to the rollout of smart contracts onto the Alonzo testnet and mainnet:
The Maladex will be rolled out in 3 main phases:
- There will be a paper trading system on the Alonzo testnet
- Paper trading would give users access to:
- Faucet to seed the trading account with initial ADA amount (same for everyone)
- Allow to swap any crypto currency for any other available on testnet via synthetics and their inverse
- Track the paper trading performance against other traders via wallet leaderboard
- Paper trading would give users access to:
- Providing swap and liquidity mining at launch on the Alonzo mainnet
- Rolling out all other functionalities described in this document such as crypto indexes, futures, derivatives, synthetic (mirrored) instruments, and more
Funds requested from Daemon Capital to build the Maladex
With their current Fund5 proposal, Daemon capital is hoping to secure approximately $50k to help with the development of the Maladex.
- $10k graphics and front-end development
- $10k infrastructure (Kubernetes registry and controller, Kubernetes cluster of 5-7 droplets, CDN, etc.) for a year
- $20k software development (website code, smart contracts), new liquidity providing and farming models research and implementation
- $10k marketing (SEO, social media, review incentives)
Despite the fact that there are multiple DEXs in development in the Cardano ecosystem, the Maladex brings a few new unique tools to the space. Specifically, the Maladex hopes to become the first comprehensive AMM which also brings traditional financial tools to the crypto space (i.e., crypto indexes and crypto options trading). While many may be disconcerted with the fact that the Daemon Capital team has decided to remain anonymous, I am not. A financial system shouldn’t derive its trust from its brand, but rather from frequent and systematic audits of its publicly available code. In the future, I expect to see the Maladex undergo these very same audits to ensure that the platform is safe and secure.
If you’d like to know more information or have questions/comments regarding Maladex’s proposal, check out the link provided: https://cardano.ideascale.com/a/dtd/DEX-Cardano-Decentralized-Exchange/352819-48088#idea-tab-comments