Centralized Liquidity Protocols in the Sui and Aptos Ecosystems: An Analysis of Cetus

Cetus is a decentralized exchange and liquidity protocol based on the Move ecosystem, built using a centralized liquidity protocol and related functions similar to Uniswap V3's algorithm, aiming to provide users with a high-quality trading experience and greater capital efficiency. At the same time, Cetus also leverages the unique ecological characteristics of Sui to develop some composable features that differ from Uniswap.

Target Audience of Decentralized Exchanges

Although the on-chain crypto trading market is relatively small in scale, its growth rate is very fast. A notable feature of this market is that most assets are of low liquidity and low market capitalization, and a large number of new assets appear every day, resulting in a strong demand for price discovery. In this market environment, how to better conduct price discovery and attract liquidity is key to promoting the prosperity of on-chain trading. Therefore, the primary target for decentralized exchanges should be liquidity providers (LP).

The demand for LP varies in different trading scenarios. We can categorize on-chain assets into two types: mainstream assets (the top ten assets by trading volume on major public chains) and long-tail assets, which have different LP demands.

• Mainstream Asset LP: Pursuing higher fee income and less impermanent loss (more suitable for Uniswap V3)
• Long Tail Asset LP: Requires a more economical, controllable, and flexible market capitalization strategy (Uniswap V2 is more convenient, and liquidity management costs are lower)

In the long run, the capital-efficient V3 is the future trend, but due to the differences in demand, Uniswap V2 and V3 still coexist in data. However, the market will inevitably give rise to new projects that can meet both of these demands. In an emerging ecosystem like Sui, Cetus is likely to become a stronger competitor.

Cetus: The first centralized liquidity protocol decentralized exchange in the Move ecosystem

Cetus has currently developed a complete product line that includes token swapping, permissionless Liquidity pools, and cross-chain bridges.

concentrated liquidity

Cetus adopts a concentrated liquidity market-making algorithm similar to Uniswap V3. LPs can create multiple positions within the same pool by setting different price ranges to implement customized strategies. As the price changes with transactions, the smart contract will consume the available liquidity within the current quoted price range until it reaches the next price Tick. At this point, the contract will immediately switch to the new Tick, activating the dormant liquidity within the new Tick interval. The intervals of the Ticks are associated with the trading fee levels; the higher the fee, the smaller the interval between Tick points.

By concentrating liquidity, LPs can earn more trading fees and improve capital efficiency.

Permissionless Pool Creation

On Cetus, users can freely create liquidity pools, and project parties can launch new tokens on the platform without permission. This feature helps attract more early projects and quickly establishes pricing power for long-tail assets.

Flexible trading fees

Cetus allows the setting of custom trading fee tiers, and multiple pools with different fee tiers can be set for the same token. Currently, four levels of trading fees are supported: 0.01%, 0.05%, 0.25%, and 1%. This design encourages the market to find the most suitable liquidity allocation scheme on its own, providing greater flexibility for LPs and trading users.

Position Auto Management

Users can implement profit-taking orders and limit orders based on range orders. When the price exceeds the set range, users typically need to exit their positions in a timely manner to avoid losses. Users can also manage their positions using a third-party position manager integrated with Cetus, reducing the difficulty of liquidity management and facilitating long-tail asset LP.

Composability

Cetus supports high composability, allowing other project teams to easily establish exchange interfaces in their own front ends by integrating the Cetus SDK, providing quick access to Cetus's Liquidity. For example, the options project Typus within the ecosystem has achieved one-click hedging for long-tail assets by connecting to Cetus, while also enhancing the Liquidity and coverage of its own options.

Secure Cross-Chain Bridge

The cross-chain bridge created by Cetus based on Wormhole went live last November, allowing users to safely and conveniently transfer assets across nearly 20 public chains.

Strongly correlated token economic model

Cetus adopts the economic model of xToken. By holding CETUS tokens and xCETUS, users can earn protocol revenue sharing, ensuring alignment of interests between the community and the protocol.

Cetus Team: Has mature experience in developing centralized liquidity market-making algorithms

The launch of Uniswap v3 is a revolution in the DeFi architecture, with its core being the Concentrated Liquidity Market Making algorithm (CLMM), which maximizes the capital efficiency of LPs. Although Uniswap established a commercial source code license in March 2021 to prevent code from being forked, the license expired in April. On EVM chains, competitors like Pancake and Quickswap have already launched V3 alternatives. However, on non-EVM high-speed chains, there are fewer competitors in the CLMM space. In the future, competition among CLMM-type DEXs will increasingly shift towards operational aspects, and the lightly operated Uniswap may gradually be at a disadvantage.

Behind Cetus is a Dex team with mature development and operational experience, whose Aptos version has been deployed and is running stably. With guaranteed products, strong BD capabilities within the ecosystem, and continuous narrative capabilities in operations, the Cetus team is expected to achieve a leading position in CLMM infrastructure on Sui.

The Innovation Space of Concentrated Liquidity Protocols in DeFi

LP Automated Liquidity Management Protocol

Under centralized Liquidity protocol, LPs usually provide liquidity near market prices. However, when the market price exceeds the strategy range, LPs not only face impermanent loss but also cannot continue to earn LP fees. Automated liquidity management protocols have emerged to help LPs automatically execute market-making strategies. Leading projects like Arrakis Finance have already reached a TVL of 440 million USD.

This type of protocol can also achieve:

1. Unilateral asset LP mining: LP can deploy initial liquidity in a skewed manner, for example, by only deploying the project party's tokens. The protocol can help absorb base assets such as USDT or ETH, balancing the liquidity pool. As trading progresses, the project's native assets will gradually convert to base assets, which means LP can achieve liquidity without selling their own tokens or needing external capital incentives.

2. Issuance of ERC20 LP tokens for LP providers: These LP tokens are not only liquid but can also be re-collateralized, further enhancing the capital efficiency of LP assets.

new machine gun pool and leveraged mining

Under the CLMM algorithm, the capital advantage is amplified, allowing professional quantitative institutions and market-making teams to implement more customized strategies. The gun pool can obtain funds from protocol users or lending protocols, adopting an active and robust strategy to generate returns, which holds significant value for large-scale users with investment needs.

New Derivative System

Under the CLMM system, while LP yields are improving, they also face higher impermanent risk. In extreme market conditions, the liquidity set by LP within a certain range may be drained by arbitrageurs. How to construct derivatives that can hedge LP market-making risks to alleviate the damage to LP interests caused by malicious project dumping is a track worth关注.

The composability advantages based on the CLMM algorithm allow for many potential Defi protocols to be developed. Especially after some major events, the importance of Defi has become increasingly prominent. The three Defi products mentioned above are just the tip of the iceberg.

Summary

The Cetus team demonstrates mature product delivery capabilities, strong business development capabilities across ecosystems, and operational capabilities. They have a profound and unique understanding of decentralized exchanges as a product and sector. We believe that Cetus has great potential to become a leading project within a unique ecosystem like Sui.