Paradigm Shift of AMM: In-depth Interpretation of iZiSwap's Discrete Liquidity Model

Since the launch of zkSync Era, a fierce liquidity battle has been waged on the network.

Edited by iZUMi Finance

Preface

Since the zkSync Era went live on March 24, a fierce battle for liquidity has been waged on the network. The decentralized trading platform iZiSwap has developed rapidly. Within one month of its launch, its single-day transaction volume has exceeded 15 million US dollars, and its total lock-up volume (TVL) has exceeded 40 million US dollars. The situation of super head competitors.

The trend of iZiSwap becoming the head application of the zkSync Era network is obvious. Due to its unique discrete liquidity (Discretized Liquidity AMM, DL-AMM) characteristics, iZiSwap also has the conditions to become the first in terms of trading volume. This achievement fully demonstrates the advantages of the discrete liquidity model, making it a head start in the highly competitive decentralized financial market. Not only that, but the success of iZiSwap further proves the potential of zkSync in expanding Ethereum and optimizing decentralized financial services.

History of iZiSwap and the Discrete Liquidity Model

iZiSwap is the continuation of the automatic market maker (AMM) DEX represented by Uniswap. Uniswap V2 has achieved great success with its simple interface and user-friendly functions, but the low utilization rate of DEX funds represented by the constant product function AMM has become a significant shortcoming of the V2 paradigm of the DEX platform.

In 2021, Uniswap released the V3 version and launched the Concentrated Liquidity (Concentrated Liquidity) model, which greatly improved the utilization rate of funds. On the basis of Uniswap V3, iZiSwap introduces a new discrete liquidity design, which greatly develops the potential of Uniswap V3's centralized liquidity model. This innovative design not only improves the efficiency of liquidity supply, but also greatly enriches the user's trading experience, making iZiSwap stand out from the competition of decentralized trading platforms.

In-depth analysis of the capital utilization advantages of the discrete liquidity model

1. Discrete price space

In the design of iZiSwap, the price space is discretized into a series of points pi, which means that the price has no other values except these discrete points. The formula for this method can be expressed as:

Among them, iZiSwap uses p0=1, d = 0.0001. The starting point of this design is based on the following considerations:

First, prices in reality are discrete. When people describe prices, such as "1 USDC = p ETH", they are more used to p having a minimum increment interval, rather than infinite subdivisions. This habitual way of thinking is subtly integrated into the model design by iZiSwap.

Second, using an index increment of d=0.0001 is sufficient in most cases to accommodate traders' price sensitivities. Especially for traders, they are more accustomed to using percentages to describe their returns. Therefore, the design of this choice not only conforms to the habits of traders, but also meets the precision requirements of transactions.

Finally, the introduction of discrete prices facilitates the implementation of Limit Orders. By discretizing prices, traders can more easily set their limit orders and thus more precisely control their trading behavior.

To sum up, iZiSwap's discrete price design undoubtedly enhances the practicability of its model and the user's trading experience, further consolidating its competitive position in the decentralized trading platform.

2. Discrete Liquidity

In iZiSwap's design framework, liquidity as an Automated Market Maker (AMM) is added in a unique and innovative way, which is only added at pre-defined discrete price points fluidity. This design approach greatly improves the efficiency and accuracy of the model, and significantly improves the trading experience. The formula is as follows

The transaction principle conforms to the constant sum formula (CSF, x+y=k), which is the first time that CSF is reasonably introduced into the AMM model and brings high-quality features.

In iZiSwap's trading model, the constant sum formula (CSF, x+y=k) is adopted as its core trading principle. Notably, this is the first time that CSF principles have been legitimately introduced into an Automated Market Maker (AMM) model. In the previous AMM model, this principle was not fully adopted, but the designers of iZiSwap keenly captured the superiority of this principle and successfully integrated it into their model.

By introducing CSF principles, iZiSwap's model brings a series of high-quality features. First, the trading process is fairer, reducing the possibility of market manipulation. Second, this principle makes the outcome of transactions more predictable and improves the transparency of the market. Finally, the CSF principle also simplifies the calculation process of transactions and improves the efficiency of the system.

On the bilateral asset stock relationship diagram, this transaction behavior is manifested as a broken line (see figure (a) below).

The starting points for this design include the following:

1. The transaction is at a fixed discrete point, which can strictly meet the zero slippage, which improves the accuracy and efficiency of the transaction.
2. When adding a liquidity range, the integral summation brought about by changing from continuous price to discrete price can be replaced by proportional summation, which can also be efficiently completed in O(1) time, greatly improving the efficiency of the system .
3. The positioning of the same liquidity range of a single segment during the transaction process, the calculation of handling fees, etc. can also be maintained in O(1) time using a mechanism similar to UniswapV3, which ensures the rapid response of the system.
4. During the transaction, AMM liquidity is fully compatible with Limit Order. This design can handle the liquidity of the two in a unified way, realizing the perfect integration of the two trading methods (see figure (b)).

Most importantly, iZiSwap's innovative design concepts such as discrete price space, discrete liquidity, and CSF trading principles have been adopted by successful decentralized exchanges (DEXs) such as Trader Joe's, and have gradually taken over in the mainstream market. important position. This not only verifies the advanced design idea of iZiSwap, but also further promotes the development of the entire blockchain trading market. We look forward to more innovations and breakthroughs brought by iZiSwap and other Dex with the same design concept in the future.

3. Limit order function

In the current decentralized exchange environment, limit orders do not completely rely on on-chain escrow funds, but use a semi-centralized repeater processing method. Although such a processing method can provide a certain degree of efficiency, it brings a risk of centralized security of funds. In this context, iZiSwap provides an innovative solution for fully on-chain fund custody, aiming to provide users with a safer and more efficient trading environment.

The biggest challenge of integrating limit orders into Dex is that it needs to complete the transaction at a price point in O(1) time. This is possible under the traditional matching engine, but it faces great difficulties in the on-chain environment. In order to solve this problem, iZiSwap has designed a sophisticated limit order management method.

First of all, iZiSwap adopts the method of single-point aggregation limit order. During the trading process, all limit orders on a single point are treated as a whole. This method can greatly improve the efficiency of the transaction and ensure that the transaction is completed within O(1) time.

Second, whenever the price crosses a price point, the filled order volume is transferred to a separate storage space called legacy. This design enables the system to clearly distinguish the sequence of orders, thereby ensuring the correctness of transactions.

Finally, the user needs to claim the transaction assets by himself. This is a necessary restriction as it ensures that users have full control over their assets and avoids security issues that may arise due to automatic asset transfers.

Such a design brings a series of good properties. First of all, because the limit order on a single point as a whole can complete the transaction in O(1) time, which greatly improves the efficiency of the transaction. Secondly, when the price passes through the target price (time point A) and then falls back (or crosses) the target price (time point B), the limit order after time point B will not be recorded as a transaction status, This guarantees the correctness of the transaction. Finally, when the price is at the target price, the part of the transaction will be obtained by the user who initiated the claim operation first, which ensures fairness in the sense of first-come-first-served.

In general, iZiSwap's innovative limit order management method has brought significant improvements in terms of security, efficiency, and fairness, providing users with a better trading environment.

With the limit order function, iZiSwap's choice of user interface (UI) design becomes more flexible and diverse. This means that users can choose different trading methods according to their needs and habits. Especially those users who are accustomed to centralized exchanges, they can get close to or even the same user experience on iZiSwap.

In addition, this flexible UI design not only makes the transaction process smoother, but also greatly improves the user's transaction efficiency. Whether you are a novice or an experienced trader, you can quickly find the functions you need on the iZiSwap interface for convenient and efficient transactions.

More importantly, with the implementation of the Ethereum improvement proposal EIP-4844, the gas fee (transaction fee) has been further reduced. This improvement proposal optimizes the transaction processing mechanism of the Ethereum network, so that the gas fee required for each transaction is greatly reduced. This makes users no longer need to worry about additional cost loss when placing and canceling orders.

In general, iZiSwap's limit order function, combined with its flexible UI design and the optimization of the Ethereum network, provides users with a convenient and economical trading environment. Whether you are a novice just getting started or an experienced veteran, you can find a trading method that meets your needs on iZiSwap.

4. Flexible liquidity mining model

The default liquidity mining reward scheme of Uniswap V3 is mainly to subsidize active liquidity providers. However, this strategy may cause some problems in practical application, especially for users who do not know much about centralized liquidity.

These users, in order to pursue liquidity rewards, may place a large amount of liquidity on the trading market. Doing so would boost their incentive income, but it would also have implications for market stability. Because in this case, small fluctuations in the market may also cause a large amount of uncompensated losses. This loss not only directly affects the interests of liquidity providers, but also indirectly undermines the stability of the market.

Additionally, this phenomenon can negatively impact the experience of other liquidity providers. This is because a large amount of liquidity is concentrated in the market, which greatly reduces the influence of other liquidity providers in the market, thereby reducing their sense of experience.

This problem is particularly evident in Pancake V3, a fork product of Uniswap V3. Pancake V3 did not make effective improvements on this issue, but directly copied Uniswap V3's liquidity mining reward scheme. This approach obviously cannot solve the problem, but may aggravate the seriousness of the problem. This also makes people question its innovation and originality. I hope that in the future development, PancakeV3 can have its own uniqueness, not just imitate and copy other products.

To this end, iZiSwap has designed a more flexible liquidity mining reward scheme,

1. Fixed Range fixed price interval mode

This model can distribute liquidity mining incentive tokens within a specific price range, such as [0.95, 1.05], to keep the price of stablecoins or anchor assets stable.

Each block in the (0.95p,1.05p) price range will receive 10 reward tokens from the stablecoin and pegged asset issuer. iZiSwap will evaluate the total effective liquidity in the (0.95p, 1.05p) price range, and linearly distribute incentives according to the holding ratio of each LP. These incentives attract liquidity into this price range, allowing for minimal slippage.

2. The full range of One Side non-stable tokens "unilateral non-impermanent loss mining model"

This model allows liquidity mining within the current price range to obtain incentive tokens to compensate for impermanent losses caused by price changes within the corresponding time interval.

Similar to the traditional xy=k model, LP can also put half the value of USDC and half the value of project tokens into this mining model to start liquidity mining with one click.

However, in order to avoid the "two pool dilemma" caused by the traditional xy=k model (that is, LP holders put all USDC as potential buy orders and project tokens as potential sell orders, and put them into the liquidity pool of the trading pair, resulting in LP holding Someone who automatically sells their project tokens when the price rises is passive and suffers impermanent losses. At the same time, it also passively increases the selling pressure of project tokens to prevent the price from rising, resulting in a "lose-lose" situation.

iZiSwap created a new One Side "unilateral non-impermanent loss" model based on Uniswap V3, putting LP holders' USDC into (Pa, Pc), which is just lower than the current price Pc, and LP's project Tokens are put into pledge mining and enter the trading pool (that is, Pc and above are potential sellers), thus forming a "strong buy and strong sell" model, which is more conducive to the increase in the price of project tokens.

3. Dynamic Range "Dynamic Range" model, incentivizing non-stable tokens to provide dynamic liquidity around the current price range

In the Dynamic Range model, users participate in liquidity mining by setting liquidity within the value range of the current price (Pc) (0.25Pc, 4Pc). The width of the price range can also be set by the project party, such as (0.5Pc, 2Pc), which will also provide more concentrated liquidity. After the user provides liquidity to the currency pair at a set price range through iZiSwap, the LP provider will automatically participate in mining and start receiving rewards from liquidity mining.

In addition, LP providers will also receive iZiSwap transaction fee income, because the value range set by liquidity providers includes the current token price. The combination of these two incomes will significantly increase the expected return of liquidity providers.

Discussion and conclusion

First of all, regarding the improvement of gas fee. The complexity of the iZiSwap model does surpass the traditional model, which also means that in certain operations, such as placing and withdrawing limit orders, the gas fee has increased. However, iZiSwap ensures that there is almost no gas fee gap between swap and V2 in a small range through a unique gas optimization strategy. Moreover, with the upcoming EIP-4844 upgrade, it is expected that the gas fee will be further reduced, which will greatly reduce transaction costs. This trade-off reflects iZiSwap's balance between pursuing efficiency and cost control.

Second, on the issue of user experience. In operations such as placing and withdrawing limit orders, each operation requires a signature to send the transaction, which has a certain gap with centralized exchanges in terms of user experience. However, iZiSwap, through cooperation with Unipass and others, adopts the session key transfer authorization mechanism, and through the relay network, realizes the silky feeling of a single click on the user perception level. This not only greatly improves the user experience, but also ensures the security and efficiency of transactions.

To sum up, iZiSwap not only dares to accept trade-offs when facing challenges, but also successfully finds the best balance between efficiency, cost and user experience through innovation and cooperation. This not only demonstrates the advanced nature of iZiSwap, but also fully proves its leading position in the DeFi field.

Reference content

iZiSwap: Building Decentralized Exchange with Discretized Concentrated Liquidity and Limit Order

DefiCall : zkSync Also