A DEX for retailers
Clipper is a decentralized exchange specifically designed to offer traders the opportunity Lowest cost per transaction (including fees, slippage and gas) on trades under $50,000.
The vast majority of DEXs are structured to prioritize high dollar trading volume over everything else. In practice, this model creates opportunities for bots and arbitrageurs to increase profits, often to the detriment of retailers. These exchanges are designed to serve everyone, but their emphasis on volume ensures that only big traders like whales, hedge funds, and market makers really enjoy their benefits. Clipper is the opposite of this approach.
Clipper’s design is at odds with that of most DEXs in a number of ways. Most importantly, Clipper uses a unique Automated Market Maker (AMM) mechanism called Formula Market Maker (FMM) and not the Constant Product Market Maker (CPMM) used by most DEXs. Clipper also implements various design tradeoffs that sacrifice price competitiveness at large retailers in favor of better pricing at smaller retailers. Because of these design differences, Clipper is able to offer users the best possible prices for small deals and superior LP yields with no temporary losses!
Formula Market Maker
As we know, computing resources on the Ethereum mainnet are extremely expensive (once gas fees for a single Uniswap transaction exceeded $50!). Because of this, the first generation of AMMs, as used in Uniswap, required the simplest possible pricing formula to keep computational resources (and thus gas fees) low. The simplest viable pricing formula was the CPMM model (x*y = k), so that’s what Uniswap used. While its simplicity is beautiful, it has one fatal flaw: it’s a terrible trading strategy for LPs because it loses money if prices move at all from their origin (resulting in so-called “fickle losses”). This explains why CPMM-based protocols charge traders a fee for each transaction, rather than charging LPs a percentage on profits. It also explains why CPMM-based DEXs publish LP fees but not actual LP profits; because their LP returns are typically negative.
Clipper’s FMM uses a more complex pricing formula than CPMM. Of course, this increased complexity requires more computing power. To avoid consuming more gas, Clipper relies on off-chain servers to process its formula and create deals for traders. The pool then verifies and validates the formula on-chain to prevent malicious quotes, requiring very little processing and therefore very little gas. This architecture allows for complex pricing formulas that are actually profitable for LPs while keeping gas costs low (if not lower than the CPMM).
Best prices for small shops
While it may seem counterintuitive, large pools of liquidity can be detrimental to retailers. Most DEXs want as much liquidity in their pools as possible because more liquidity = less slippage. At a certain point, however, small businesses no longer benefit significantly from increased liquidity; it just keeps reducing slippage on large trades. For example, the slippage on a $1,000 trade in a $100 million liquidity pool is practically the same as in a $1 billion liquidity pool (see for yourself). More liquidity can actually be counterproductive because the more liquidity there is in a pool, the higher the fees traders have to pay to keep the pool at that level of liquidity. Capital always expects a return; The more capital LPs provide to a pool, the more return they have to be paid. AMMs typically charge fees for each trade, primarily to cover the LPs’ cost of capital. Therefore, the TVL of a liquidity pool has a direct impact on trader fees. In general, smaller pools may incur lower fees but there is more slippage, while larger pools incur higher fees but less slippage.
One of the design compromises Clipper makes is retention smaller liquidity pools. Clipper maintains TVL levels in its pools that achieve an optimal balance between fees and slippage for small trades. As there is less capital in the Clipper pools, trading fees are low but still sufficient to generate decent LP returns and maintain liquidity levels. Smaller pools mean there is more slippage at Clipper, but for small trades the decrease in fees offsets the increased slippage. On the other hand, slippage on large trades outweighs the drop in trading fees, making Clipper a bad place for whales and arbitrageurs.
Uniquely structured liquidity pools
Clipper has two unique structures for providing liquidity and generating income: Core Pools and Coves.
core pools are multi-asset liquidity pools composed of core assets (usually ETH, WBTC, USDC, USDT, DAI, MATIC/OP). These are assets that make up 80% of the total trading volume in DeFi.
Core pools are maintained at the ideal size for small trades. Pools can be used for trading core assets (e.g. ETH → USDC) or for LP and earning income. Unlike most DEX liquidity pools, Clipper LPs earn income from a prorated portion of the overall pool, not just the assets they deposit. Upon deposit, LPs receive LP tokens called CLPRDRPL, which represent their fractional ownership of the underlying pool. CLPRDRPL tokens have no value other than that represented in the specified pool. In every chain there is a core pool. The benefit of using a unified pool is to consolidate liquidity rather than fragmenting it across multiple pools to target the same pairings. This increases capital efficiency and allows for higher returns with lower fees. Currently supported chains for core pools are Ethereum, Polygon, Optimism and Arbitrum.
Clipper Coves are an ecosystem of liquidity pools (each pool is a cove) that allow exchanges between different asset pairs. While traders in core pools can only trade between core assets, coves allow trading between any pairs of assets.
How coves work: Each cove is a two-asset pool consisting of a cove asset and CLPRDRPL tokens. Cove assets are all altcoins/tokens that are not a Clipper core asset, e.g. B. LINK, AAVE, BNT, etc. Traders can create new coves for any tokens they want. The CLPRDRPL tokens in Coves are mainly used in the backend as an “intermediary” that allows for very low trading costs when exchanging assets. This means traders never actually see these tokens when interacting with Coves unless they are providing liquidity.
Coves can be used to switch between different cove assets (e.g. LINK → BNT) or between core assets and cove assets and vice versa (e.g. USDC ← → BAL). They can also be used for LP and earn double returns i.e. from both the Cove Asset and the CLPRDRPL in the Cove. Currently supported chains for coves are Polygon, Optimism, and Arbitrum.
No permanent loss for LPs!
There is a big misconception that impermanent loss (IL) is an unavoidable characteristic of DEX liquidity pools. The misconception arose because most DEXs today use a CPMM, and CPMMs are inherently vulnerable to IL due to the way they balance liquidity pool assets. Tokens on CPMM-based DEXs are valued according to a constant function and IL is caused by arbitrageurs exploiting discrepancies between prices set by the CPMM and external market prices. While arbitrage activity keeps CPMM prices in line with the rest of the market, the profit that arbitrageurs make is siphoned off of LP stocks. Despite its name, a temporary loss is a real risk that can have lasting and detrimental effects on LP returns. LPs recognize this loss when the value of the assets they recovered when they withdraw their shares from the pool is less (at current market prices) than if they had simply held them.
By not using a CPMM, temporary losses can be avoided. Clipper’s FMM design uses, instead of a constant function, a price function that uses both external, to-the-second market prices from decentralized oracles, and token ratios in pools to balance assets. The price oracles ensure that Clipper’s prices update when external market prices change without the need for arbitrage trading. Clipper’s small liquidity pools also deter arbitrageurs, while Oracle’s update and bot-blocking technology stops them altogether.
Better yields than CPMM-DEXs
Clipper’s liquidity pools have been developed taking into account modern portfolio theory and are constructed to replicate the benchmark of a theoretical no-cost Daily Rebalancing Portfolio (DRP). With a DRP, LPs have diversified their exposure to a group of assets with different levels of risk, thereby minimizing their risk (also known as maximizing the Sharpe ratio). The DRP has a well-documented trait of making money on volatility and it clearly outperforms the CPMM (see link above for details). Below is a comparison of the different AMM types used in DEXs.
Unlike CPMM-based DEXs, Clipper does not incur any explicit fees or temporary losses. Rather, trade prices are chosen to bring the pool closer to the DRP, which merely adds value to the pool. This makes it difficult to compare Clipper’s LP sales figures to the sales figures used by most other DEXs. To ensure full transparency and keep LPs in the loop, Clipper reports comparable metrics and historical earnings in the Clipper data dashboard.
These metrics include:
- Earnings Yield: the sum of the positive difference between Clipper input and output on swaps, according to on-chain price oracles. This number reflects the total earnings of Clipper LPs over the specified period.
- Comparable APR: Return on sales that takes into account the transient loss avoided by Clipper’s FMM design. These APYs are directly comparable to the APYs reported by most other DEXs (like Uniswap and Sushi) which report inflated numbers that do not account for hidden costs.
- Prevented Temporary Loss: calculated by comparing the Clipper LPs profit or loss on a crypto basis (as opposed to USD basis) with the crypto-based loss of the CPMM mechanism used by Uniswap etc. This crypto-based loss can (and will) be calculated from . (Change based on) the difference in dollar values of assets at the beginning and end of the specified period.
Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers
Comments are closed.