Revolutionizing Market Making: Elixir's innovative decentralization approach

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Are you interested in becoming a Market Maker?

Do you wish to capitalize on the high returns that are currently concentrated in the hands of a select few companies?

Discover the innovative architecture of the Elixir Protocol, designed to decentralize this highly sought-after yet inaccessible activity.

Elixir's mission is to disrupt this oligopoly and champion the principles of Web3 within the DeFi ecosystem.

Discover Elixir Protocol's features with this brief table of contents :

  • I. What you should know about Market Making

  • II. Elixir ; decentralize the market making

  • II.1 Elixir as a lego protocol

  • II.2 Elixir as an infrastructure protocol

  • III. $ELXR : the token that balances the protocol

  • IV. My POV to improve $ELXR utility

  • V. Conclusion

I. What you should know about Market Making

What is the Market Making ?

Market making in TradFi is the practice of providing liquidity to financial markets by buying or selling securities, like stocks or bonds, to ensure that the markets are efficient, liquid, accessible to investors and maintains price stability by absorbing liquidity

Market makers continuously monitor market conditions, adjust their inventory and pricing, and take on the risk of holding securities. In return, they profit with the spread by buying low and selling high, and earn fees for each trade

Who are the market maker ? Those are among the world leaders :
1 - Citadel Securities ; daily trading value of over $30 billion
2 - Susquehanna International Group ; annual trading value of over $1 trillion
3 - Jane Street ; daily trading value of over $13 billion

As of 2021, Citadel Securities was responsible for approximately 25% of all US equity trading volume, and had a market share of over 50% in some options markets

Does Citadel Securities suffered from the Covid crise ? Absolutely not...
According to Bloomberg, Citadel Security revenue surge $6,7 billion in 2020, $7 billion in 2021 and would have earned a $16 billion profit in 2022 … Stratospheric !

We see a real centralization of this activity on this market, which inevitably leads to a centralization of revenues and therefore of wealth
This activity is indispensable for the market, but this near-oligopoly can lead to abuse of power as we have seen with GameStop and RobinHood in 2021

Market making in DEFi :
The AMM by name, removes the intermediary (MM) and allows free trading via a liquidity pool
Does the problem is magically solved ? No, MM are still here because AMMs need a deep liquidity to be efficient

So, Market Maker in DEFi are both :

  • 1 - Liquidity providers

  • 2 - Arbitragers

1 - Liquidity providers

Decentralized applications like Uniswap function semi-automatically, as they rely on immutable smart contracts deployed on the blockchain, but still require liquidity providers

However, liquidity provision is not suitable for everyone. As I discussed in my previous article, providing liquidity can be unprofitable for many. This is why the market is predominantly driven by firms with technical expertise and the ability to run sophisticated algorithms.

New projects require a significant amount of tokens to initiate market liquidity and enable trading of their tokens. Any project aiming to launch a token must have active market making to meet the volume and liquidity requirements of exchanges. In return for supplying substantial liquidities, these firms often purchase the project's token supply at a low valuation fundraising round

This occurs in DEX and is even more prevalent in CEX, which account for the vast majority of genuine daily trading volume. Besides having liquidity on DEXes, projects need access to deeper liquidity on centralized exchanges to enable efficient large-scale trading.

Thus, CEX market makers commit to providing active liquidity to order books for at least 90% of the contract's duration, receiving between 2-5% of the project's total token supply in return.

As such, market making remains an essential component of the crypto ecosystem but can be costly for new projects. It also recentralizes the market making activity

2 - Arbitragers

This report highlights how AMMs give the opportunities to arbitragers to profit : LPs sell the risky asset when the price increases, and buy the risky asset as the price drops; enabling arbitrageurs to exploit discrepancies between DEXes and CEXes. In a sense, arbitrageurs monetize the fact that the CFMM doesn’t know current asset prices

AMM's native functionality causes prices to diverge rapidly during large trades, providing profitable arbitrage opportunities between CEXes and DEXes. However, arbitrage requires complex skills and remains the domain of larger players.

As a result, market makers have emerged as prominent actors in the crypto space, holding a significant portion of the total token supply for various projects, often unbeknownst to retail investors.

Who are the market maker ? The easiest way to find MM is with Nansen mover lp%2Csmart lp mover lp%2Csmart lp

Arkham also provide great data and dashboard on market maker

We still remember Alemada farming on Stargate and dump all their $STG rewards on the community. More recently, A16z was LPing on SolidLizard and dumping all the rewards as well

Not only large firms are concerned, whales are also. Sifu is one of the well-famous whale know for being early of protocol to farm and dump (here and here to find his two wallets)

These are profitable strategies but only accessible for few informed people and penalize protocols’ token valuation

DEFi face to several problem ;

  • Centralized MM have the power on the rules set up with the protocols ; they can decide the liquidity they want to provide, the volume and the spread

  • Lack of real commitment by the MM ; as they may reduce or close positions when faced with increased flow toxicity, particularly in AMMs, potentially leading to significant losses.

  • Lack of transparency ; recently Arbitrum fondation used 10M of their to token did a market making loan with “sophisticated actors”. Decentralization with centralized entity’s behavior

II. Elixir ; decentralize the market making

Elixir is that it can be seen as both a lego protocol and an infrastructure protocol and this is surely what gives the most value to the protocols

The project is built on 6 pillars :

  • Transparency on market making activities

  • Composable thanks to native exchange integration

  • Aligned incentive between users and protocols

  • Decentralize the market making activity

  • Permissionless protocol

  • Drive by the community by decentralizing the governance

II.1 Elixir as a lego protocol

Elixir Protocol can be use on top on order book already existing in CEXes to increase liquidity and therefore the efficiency of the trade

The architecture of the protocol has been detailed in the Elixir team’s scheme bellow :

I added detail by doing it a little bit simpler to my point of view :

Elixir architecture
Elixir architecture

We will do it in a simple way. Documentation is available to DYOR deeper

Validators and Nodes Auditors are the key participants of the protocol

Validators use data from the Elixir’s aggregator to offer strategies on market making. Elixir will have strategies based on Avellaneda & Stoikov's algorithm and Entropy strategy , which will facilitate the execution of efficient tactics, such as avoid the inventory risk during strong directional trend and the bypass of toxic flow. The Validator architecture operates on a DPoS consensus, requiring 66% validation. As a strategy becomes more efficient, validators attract more $ELXR from user delegations, increasing rewards for both validators and users.This creates a natural incentive system.

Validators' strategies are verified by Auditor Nodes and, if necessary, by the Controller. With the data from the aggregator, the auditor’ role is to ensure that validator inputs are honest and accurate. If not, they initiate a dispute with the Controller. Staking $ELXR is also required to become an Auditor

The Controller is smart-contract that uses the Provable to securely compute the correct outputs for a given set of input data, and return a corresponding authenticity proof. This SC has the crucial task to manage staking, rewards, bond pools, and slashing (penalties)

At a cursory glance, you understand that Elixir DPOS is somehow similar to Ethereum DPOS ; is validators is not honest, his staking will be sequestered

This how the how the protocol is use to deliver strategies on CEX market making, but also applicable for DEX following these scheme :

Decentralized CLOB infrastructure on-chain can natively integrate Elixir into their backend to unlock their retail liquidity for making markets on their exchange.

Elixir can seamlessly connect to most on-chain CLOBs without requiring native integration

That is why Elixir can be define as a lego protocol and unlock enormous scalability potential in a short amount of time

II.2 Elixir as an infrastructure protocol

Elixir's dual functionality allows the protocol to serve as infrastructure; projects can use it to introduce tokens to the market or to rent liquidity

1) Onboard projects : Bonds

Launching a token can be challenging for new projects that prefer not to rely on professional market makers, as users act in a dispersed manner, leading to fragmented liquidity

Elixir brings a solution :

Bonds with Elixir Protocol
Bonds with Elixir Protocol

Elixir Protocol aims to serve as a gateway for new projects to launch their tokens. Project XYZ establishes preferences and uses Elixir's liquidity to deploy the token on chosen CEX(es) and pair(s). Users earn $XYZ rewards for providing liquidity and have a 7-days unboarding period.

This idea have already been explore by the Rocket Pool of Trader Joe in 2022 but stops working since. With Rocket Joe, you could provide liquidity in project who wanted to deployed their token on DEX (TJ DEX first). You received extra LP rewards and had to wait until the end of the cooldown period to receive LP + LP’ rewards. The concept was promising, but following adjustments to launch parameters based on community feedback, Trader Joe ultimately decided to discontinue Rocket Joe

What we learnt with Rocket Joe :

  • Locking period for early supporters was not fair, because Rocket Joe’s LPers couldn’t enjoy the XXX% APR at the beginning of the launch as the liquidity was locked

  • RJ LPers were the exit liquidity ; the token pumped the 1-2 first days then dropped below the starting price ; LPing was not profitable most of the time

  • IL was painful

I hope that Elixir will take into consideration the previous attempts and will offer a solution that balance interest of Projects, CEXes and users

2) Onboard users : Renting liquidity

Let’s imagine a project already launch a token in a DEX but want to use CEXes to improve the liquidity of their token

They can use Elixir as an infrastructure to onboard users in a liquidity raising campaign

Renting Liquidity
Renting Liquidity

The liquidity raising campaign benefits both projects and users, as the interests of both parties must align for the liquidity loan to be successful.

Initially, projects establish parameters according to their requirements. Then, users can onboard as per their preference, selecting the pool that interests them the most

Elixir serves as a bridge between CEX & users. By doing so, Elixir acts as an intermediary between off-chain & on-chain data as well. Users DO NOT HAVE to interact with CEX. They simply connect their wallet on Elixir's frontend and exchange accounts via an API connection ; so users maintain full custody of their assets

Elixir's technical architecture ensures that rewards are only paid out while liquidity is actively being provisioned via their centralized exchange account

As a protocol ;

  • If you want to rent liquidity without any professional MM (PPM) ? Use Elixir

  • If you want to deploy your token on the market without have the fear to give large part of your supply to PMM or CEXes ? Use Elixir

  • If you want to delegate liquidity management and be focus on others aspects of your project ? Use Elixir

As a users ;

  • If you want to offer MM strategies and leverage the liquidity used ? Use Elixir

  • If you want to be part of MM ton enjoy great APR but don’t have time / skills ? Use Elixir

  • If you want to use CEX services by keeping your full custody of your assets ? Use Elixir

That is the power of Elixir.

Their vision is ambitious.

III. $ELXR : the token that balances the protocol

In this kind of project, have a native token is indispensable

How to create a token which aims to :

  • Create effective governance mechanisms

  • Enable ELXR as a core securing element for the Elixir Protocol

  • Make the platform completely decentralized and permissionless

Here is their idea :

$ELXR utilities
$ELXR utilities

In one hand, $ELXR will be used as a guarantee of responsibility. In the other hand, $ELXR will decentralize the protocol with several utilities

A the moment, only few documentations are available regarding the token’ utilities. The Elixir’s team will bring more detail on it further

IV. My POV to improve $EXLR utility

Below, an overview of the all what you will be able to do with Elixir, a topic we have covered in detail previously :

Users can choose from a variety of investment options and earn both real yield and $ELXR rewards.

However, if the protocol doesn't implement an advanced tokenomic, the $ELXR boost rewards may face a significant sell pressure.

To address this, I have reworked the ELXR tokenomic by incorporating cutting-edge tokenomic concepts such as the Tapioca & Timeless call option rewards model and the fair fee distribution and escrow GMX model.

These are just a few of the innovative ideas that can be implemented to enhance the $ELXR tokenomic :

First, let’s introduce ELT : Elixir Liquidity Token.As GLP works, ELT is minted by providing liquidity to the protocol. This liquidity will be used for the 3 strategies available on Elixir to achieve better capital efficiency, based on demand

On one hand, ELT holders earn APR by providing liquidity. On the other hand, ELXR holders also receive a share of the rewards and participate in the governance of the protocol

The real yield is paid to :

  • Validators : earn yield with leverage by using ELT pool liquidity

  • Node Auditors : earn yield with leverage as well

  • $ELT holders : receive yield from Validators strategies + bonding and/or campaign with WL projects

  • $ELXR holders : same as $ELT holders

The boost yield is paid to :

  • Validators : earn esELXR if they have a honest behavior

  • Node Auditors : earn esELXR to verify Validators proposal

  • $ELT holders : earn oELXR as an incentive

  • $ELXR holders : earn oELXR as an incentive

esELXR is the escrow token that Validators & N.A hold in the vesting vault and can be claimed following a 1 year vesting period

oELXR is a call option to buy $ELXR at a discount price following the AML model (such a Tapioca DAO use). $ELT and $ELXR (and further veELXR) holders receive oELXR and earn profit by exercising the option.The discount price could be adjust following to the governance vote

This model conduces to a reduction of the selling pressure of $ELXR while allowing the protocol to build its owned liquidity. The liquidity can be utilized to expand the ELXR/xxxx pool size, allow Elixir Protocol to have its own pools on various DEXes and CEXes and generate perpetual growth through fee.Alternatively, the liquidity can also be used as bribes, or whatever else the ELXR (or veELXR) voters would think is good

Although I have presented some potential solutions, there is ample room for improvement and rethinking with regards to the impact of governance on fee distribution. A veELXR model or a LP locking model to initiate the liquidity in the first ELXR/xxxx pool can also be implemented

V. Conclusion

Elixir Protocol who has closed a 2,1M seed round, has ambitious plans to disrupt the market and decentralize the MM industry, and its architecture allows for numerous possibilities of improvement and modification.

This model has the potential to attract users and DEFi strategists where the real yield can be huge.

While there is no precise data on MM activities, it is estimated that the market already exceeds $1 billion in daily volume.

The Elixir’s success mainly depends on the team's ability to complete such a complex and innovative project, while having the audacity and wisdom to build strong partnerships to delegate some functionalities and deliver a finished and effective project

We’re all waiting for the testnet 2 now 🔥

I hope the article was useful for you anon. See you 👀

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