Switcheo’s 2023 roadmap focuses on liquidity and we’re proud to release multi-pool routing for AMM order books, another first in the DeFi space.
This feature deepens liquidity and reduces slippage for spot markets, enhancing the spot trading experience while improving the price of SWTH.
Short summary: Carbon is an AMM supported order book
Carbon uses an Automated Market Maker (AMM) powered order book that is highly dependent on liquidity as it directly impacts traders’ ability to buy or sell assets in the market at a good price.
In an AMM model, liquidity is provided by liquidity providers who deposit their assets into liquidity pools, which are then used to facilitate trading between different assets.
Low liquidity in a market means that large trades can lead to greater price falls, reducing the profitability of the trades. If traders are not attractive to trade in the carbon market, the volume and fees incurred will decrease.
Multi-pool routing helps consolidate liquidity to reduce slippage.
What is multi-pool routing?
Multi-pool routing is a mechanism used by Decentralized Exchanges (DEXs) operating on the Automated Market Maker (AMM) model, such as B. Uniswap to use all relevant pools to offer traders the best prices.
Put simply, in a multi-pool DEX there are multiple pools of liquidity, each containing different pairs of assets with a common asset that you wish to buy/sell, and the multi-pool routing will help you get the best price. Without this option, you will have to manually split your trade across multiple pools.
For example, Carbon has ETH/USD, ETH/SWTH, and SWTH/USD LP. If I want to sell ETH in USD, I have to go through two markets to get the best USD return:
- Sell ETH to USD
- Sell ETH to SWTH and then sell SWTH to USD
If I sell all of my ETH into just one of the markets, I will suffer greater slippage compared to spreading my trade across both pools, but this is done manually and is not time efficient.
Multi-pool routing helps do this for you automatically. So when you sell ETH in USD on the ETH/USD market, that already includes the liquidity of both ETH/SWTH and SWTH/USD, giving you the best ETH/USD rates.
Why is multi-pool routing important?
Higher liquidity for spot markets
On Demex, Carbon’s front-end UI, ETH/USD LP only has $30,000 AMM liquidity with no manual limit orders set by traders or bots. The majority of AMM liquidity is around $154,000 in ETH/SWTH LP.
With multi-pool routing, the ETH/USD market will combine both liquidity to have $184,000 in AMM liquidity on top of any limit order liquidity, which should result in far more liquidity.
More volume in USD markets
Multi-pool routing helps create more USD markets, making pricing easier than non-USD markets. The USD markets will also have higher liquidity and volume, providing a better overall spot trading experience.
This is because most traders trade USD markets. This becomes clear when looking at the ETH/USD market with a liquidity of $26,000 and a volume of $6.3,000 and the SWTH/ETH market with a higher liquidity of $431,000 but a lower volume of $2.5,000 considered.
It also means that markets like KUJI/SWTH can be converted to KUJI/USD markets, making manual arbitrage much easier for traders.
Other USC markets
USC is Carbon’s overcollateralized stablecoin.
Similar to above, if the liquidity for SWTH-USC and SWTH-USD is high enough and close to 0 spreads, USC markets could be created instead of USD markets, especially for more exotic pairs.
This can help gradually increase the utility and adoption of USC, and as more USC are minted, SWTH holders will earn more interest, increasing the intrinsic value of SWTH, Carbon’s governance token.
Discourage mercenary farm and landfill from SWTH
Multi-pool routing also allows us to focus liquidity rewards and incentives on SWTH liquidity pools rather than non-SWTH liquidity pools.
In other words, Carbon can afford to stop incentivizing non-SWTH liquidity like cGLP/USC or wstETH/ETH that don’t require SWTH but deserve SWTH rewards.
Liquidity providers must purchase SWTH to provide liquidity to SWTH LPs. This means they will likely do some research on SWTH before making a purchase. If they like what they see, they will be more confident in holding SWTH than the average unaffiliated farm and dumper and less likely to sell SWTH.
This can help prevent mercenary capital from farming SWTH rewards, which will likely sell SWTH since they don’t own SWTH and have no loyalty.
This also helps foster a more loyal following of SWTH holders who are aligned with SWTH’s vision and price and are more willing to promote SWTH
However, LSD markets may find it more difficult to attract liquidity as LSD/SWTH and non-LSD/SWTH such as B. stATOM-SWTH and ATOM-SWTH LP are required to ensure liquidity on a stATOM-ATOM market.
However, having liquidity from limit orders is more capital efficient for LSD markets than AMMs due to the fixed and ever increasing LSD redemption rate.
Easier integration with DEX aggregators
Since multi-pool routing is essentially aggregating multiple pools of liquidity, it makes it easier for DEX aggregators like TFM to also integrate with Carbons DEX as some of the heavy lifting of aggregation is already done for them.
Diploma
With support for Routing multiple poolsUsing the order book fair matching system, multiple liquidity pools with the same token pair (with different parameters) can participate in the order book at the same time.
Stay tuned for more mechanisms at Carbon that will improve liquidity!
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