TL;DR HOT, the MEV-aware, intent-centric AMM built on Valantis, is live now. Arrakis developed HOT to empower LPs and make onchain markets more sustainable. HOT breaks new ground in MEV recapture and the AMM design space and its launch marks a step forward for the DeFi ecosystem.
Key Takeaways:
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HOT AMM, the MEV-aware DEX built by Arrakis and Valantis, has launched.
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HOT adopts an intent-centric model and it minimizes MEV extraction to make LPs more profitable.
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LPs can add capital to pools to capture non-toxic volumes and fees now.
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This milestone is the first step on Arrakis’ mission to build the first Decentralized Vertically-Integrated Market Maker to fix onchain markets.
Arrakis is on a mission to make DeFi fairer and more sustainable. As the ecosystem has grown, extractive actors we refer to as Centralized Vertically-Integrated Market Makers have started to monopolize onchain markets. They operate across the MEV supply chain to extract profits from retail users and the advent of intents is accelerating their dominance.
Our solution to the CVMM problem is to build the first Decentralized Vertically-Integrated Market Maker. We need to take on the big players to make onchain markets fairer and that means we need a trustless alternative to CVMMs.
To that end, we’re pleased to announce that the HOT AMM has officially launched. Developed by Arrakis, HOT is an MEV-aware AMM built on the Valantis Protocol. HOT takes an intent-centric approach to minimize MEV extraction and its goal is to offer LPs protection and better returns when they provide onchain liquidity.
If onchain markets are to thrive, DeFi must address the CVMM problem. The Arrakis DVMM is the answer to this problem and HOT sits at its core. We detail how the solution creates a more favorable environment for retail users below.
Fixing the CVMM Problem
HOT stands for “Hybrid Order Type” and the name refers to the system’s dual trading architecture. HOT processes two types of trade: normal swaps and flash swaps.
Normal swaps offer a similar experience to traditional AMMs, where swappers permissionlessly trade against a pool. As HOT uses a dynamic fee model, where fees increase over time until a solver provides a price update, spreads are low and LPs are protected from arbitrage.
Flash swaps are one of HOT’s key innovations. They use a Request-for-Quote (RFQ) system with signed quotes. With flash swaps, solvers receive guaranteed quotes as signed intents from a Liquidity Manager called the Arrakis Quoting Service. Signed quotes give solvers the right to unlock liquidity at a guaranteed price and they also ensure the AMM gets up-to-date spot prices. As a result, LPs enjoy non-toxic volume and fees and swappers enjoy all the UX benefits intents offer.
HOT implemented flash swaps in response to the rising popularity of intent-based systems. Intents offer swappers CEX-like trading experiences by asking solvers to fulfill users’ requests and this has helped intent-based systems grow; they now account for 30% of DeFi volumes. But the boom has a cost: Private market makers run by CVMMs like Wintermute capture as much as 50% of intent-driven flow and this leaves LPs exposed to arbitrage-laden toxic flow.
We believe that intents are here to stay, but DeFi needs a better alternative. Today, HOT is emerging as an intent-based solution that offers the UX benefits swappers deserve while guaranteeing better returns for LPs. And it’s open to everyone now.
I’m ready for a more sustainable onchain experience.
The First Modular DEX
HOT is the product of months of research into next-generation AMM designs and MEV recapture, conducted by Arrakis and Valantis Labs.
HOT is built on Valantis and it represents one module in the system. Valantis uses a modular framework known as Sovereign Pools to build next-generation DEXs, allowing novel features and customizations that were not possible with first-generation AMMs. As the first modular DEX, Valantis sits at DeFi’s bleeding edge and HOT’s launch marks a leap forward for the ecosystem.
While MEV extraction keeps growing, MEV recapture is set to shape DeFi’s future. HOT will be part of this story because it’s designed to minimize MEV and empower LPs.
I want to look under the hood.
Making LPing More Sustainable
LPs get burned on traditional AMMs because arbitrageurs eat into their profits. Arbitrageurs act fast to rebalance prices across pools, which creates a cost to LPing known as Loss-Versus-Rebalancing (LVR).
HOT takes two approaches to make LPing more sustainable: LVR reduction and LVR mitigation.
With signed quotes, HOT directly reduces LVR by offering guaranteed prices for liquidity. The Arrakis Quoting Service uses an offchain component to establish a fair price for each trade, which minimizes losses for LPs. This service also offers solvers favorable quotes whenever the pool needs rebalancing to reduce LVR. With this system, solvers unlock the liquidity at the quoted price, the quotes minimize losses for LPs, and LPs get more healthy volume.
HOT also mitigates LVR with a dynamic fee model. Fees increase until a new swap and solver update resets prices. This means prices have less time to deviate from the market price and profiting from arbitrage is harder because fees increase with time. Where arbitrageurs aim to profit from volatility, dynamic fees prevent arbitrage by putting a higher price on volatility than a traditional AMM with a static fee.
The Liquidity Manager contract provides information to keep prices updated and fees increase as arbitrage becomes more likely. Arrakis Quoting Service currently accounts for a pair’s volatility and sets the fee to eliminate arbitrage opportunities.
Onchain and Offchain Price Expression
MEV extraction is brokered offchain and HOT responds to that by combining onchain and offchain price expression. The Liquidity Manager contract provides offchain price information to enable dynamic fees onchain while LPs are exposed to offchain quoting strategies that can be measured against onchain sources.
HOT connects LPs to solvers through the RFQ system and offchain strategies inform the pricing of signed quotes. As a result, solvers get fair price quotes that closely match onchain prices and LPs receive non-toxic flow.
The rise of intent-based systems dominated by private market makers has left LPs exposed to arbitrage and toxic flow. HOT’s architecture uses LVR reduction and mitigation to recapture the non-toxic flow.
Bringing MEV Awareness to the Onchain Future
The CVMM problem threatens DeFi’s future and intents are helping big players extract profits from users. LPs are particularly hard hit and we need to protect them to make onchain markets more sustainable. Arrakis plans to do this by building a decentralized alternative to CVMMs and HOT is the first solution on our path to vertically integrate into the MEV supply chain.
HOT is a forward-looking solution that answers to one of DeFi’s biggest challenges. Part of the first modular DEX, HOT combines intents and MEV awareness to build a better onchain future. HOT creates a more favorable environment for LPs and the end goal is to establish healthier markets.
Until today, HOT was live in stealth mode. Yet it has already facilitated $10 million in ETH/USDC volume and recently accounted for as much as 11% of the pair’s daily volume on CoW Swap. As the system’s design is extremely capital efficient, we can reasonably expect HOT’s market share of intent-driven volumes to grow in the future. To dive deeper into the solution, check out our docs. To learn more about how Arrakis plans to power onchain liquidity with the first DVMM, head to our website. To try out HOT for yourself, head below to explore the UI.