Hi all! Recently we announced a big spoiler about how spot markets at Tsunami Exchange will work, analyzing the inner workings and delving into the formulas.
Today we offer you an article explainer to read, in which you can learn the general principles of spot markets and understand why they are more efficient than any existing spot markets on Waves without introducing technical concepts. Enjoy reading it! 💙
A brief overview
So, what is spot trading? Spot trading implies buying and selling assets where, in contrast to futures trading, there is an exchange of real assets such as cryptocurrencies, forex, stocks, etc. Spot trading can only use assets that are actually owned by the user - without additional leverage or margin.
Centralized spot trading exchanges monitor the safety of users' assets, while on decentralized exchanges, smart contracts play the role of checkers.
Spot traders gain profits in the market by buying assets and expecting their prices to rise. Spot traders can also short the market by selling assets and repurchasing them when the price falls.
The Waves network has different mechanisms for spot trading, but the most popular method of trading has been the use of AMMs (automated market makers), which provide users with seamless trading without the need for an order book.
Having boomed in the spot trading market, AMMs boast ease of use and provide liquidity to pools of two or more tokens, creating balanced trading pairs. But the market does not stand still, the prices of assets in pools change every second, leading to volatile losses for liquidity providers. That's the reason behind the idea of spot markets on Tsunami Exchange - we make them because we can make them better.
Where do intermittent losses come from?
One of the main causes of intermittent losses of liquidity providers is arbitrage. Without arbitrage traders, the AMM simply could not exist. These guys restore the balance between the real (market) price of an asset and the price of the same asset in the AMM liquidity pool. By restoring the equilibrium, the arbitrator profits in the form of the asset price difference, which is paid by the liquidity providers.
Uniswap offered a revolutionary solution to the problem of intermittent losses, which consists of providers choosing certain price ranges to provide liquidity. However, despite all the coolness of the approach, providers have to actively monitor market changes and adjust liquidity allocation. This method has a lot of advantages, but is overridden by one big disadvantage: time.
Oracles on guard against impermanent losses
At Tsunami, we've been thinking for a long time about what alternative ways to bring prices to market prices might exist besides arbitrage. This is where oracles, which are used to trade perpetual futures, have come to our aid.
If you attended our recent AMA or read it recap, you know that our team is working to create real-time oracles that can broadcast market prices of assets with minimal delay. By transmitting current market prices to liquidity pools, oracles provide an automatic concentration of liquidity around the market price of an asset without forcing the user to actively manage the liquidity provided.
Such a mechanism and improved pricing efficiency will allow Tsunami spot markets to provide profits for traders and liquidity providers, offering more competitive trading fees, attracting significant trading volume and providing a profitable APY for liquidity providers and TSN stakeholders.
Providing liquidity in a single token also plays a significant role. With this capability, Tsunami gains a notable advantage over current Waves ecosystem models, zeroing in on impermanent supplier losses.
Swap process in simple words
The exchange process in Tsunami Spot is quite complicated, but let's try to understand it without going into technical details.
If, on the contrary, you want to go deeper into the mechanics of the process, check out the article at link.
So, the main difference of spot trading is that here the liquidity pools are the vaults of a single provided asset, and the true price of the asset is determined by an oracle that transmits prices from the real markets.
The swap process is as follows:
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To exchange some amount of asset A for asset B, the swap router first determines the markets A and B;
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Then it exchanges an amount of asset A for an equivalent amount of US dollars, and then exchanges an amount of US dollars for asset B.
It would seem, why make so many steps? But this very exchange mechanism allows you to increase the efficiency of spot trading, providing you with the best fees and the minimum price impact.
Incentives for using Tsunami Spot
In order to maintain a fair price for an asset, Tsunami Spot will have a built-in incentive to balance the price:
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When too much of an asset is bought, the price of the asset will be higher, so it will be profitable to sell;
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When you sell too much of an asset, its price will go down, so it will be profitable to buy it.
Instead of the usual fixed fee, Tsunami Spot will use a dynamic fees model which will be an additional incentive to rebalance the AMM and the vault, while providing arbitrage opportunities for traders:
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In the event of a positive imbalance (i.e., a shortage of an asset in the vault), traders will be charged an additional trading tax, providing an incentive to bring liquidity into the vault;
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In the event of a negative imbalance (i.e., a surplus of asset in the vault), traders will be refunded a fee in part or in whole.
A system of dynamic fees, together with a low asset price impact, provides additional incentives to maintain system health and minimize imbalances in the vault, while allowing for a relatively low base fee.
Comparison of trading capabilities between Waves ecosystem protocols
So, as we can see, despite using only liquid assets for trading, Tsunami Spot leads in all positions, providing users with a truly superior trading experience.
Benefits and limitations
The Tsunami Spot model offers significant advantages to traders and liquidity providers, including:
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One-way liquidity provision (in one token);
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Elimination of impermanent losses;
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Very high capital efficiency (10-15 times higher compared to the classical SWAP model k=y*x);
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Lower swap fees.
However, this model also has certain limitations and risks:
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Only highly liquid assets can be traded, as oracle prices should not be easily manipulated;
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Liquidity providers may not be able to fully close their positions due to temporary vault imbalances.
For the last point, there will be a solution called a burn/exchange mechanism. How does it work?
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The user triggers an LP-token exchange of the vault with a negative surplus;
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The smart contract exchanges the LP tokens with a negative surplus into the underlying asset with a positive surplus at the rate * LP;
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In doing so, the LP tokens will be burned and the providers will be able to exit their positions at any time.
In conclusion
When working on a balanced product, developers are often faced with the question of what the user needs at the moment. At the peak of the Waves ecosystem relaunch, users need fast and high-quality deposits and withdrawals, arbitrage capabilities, and minimal fees for exchanging/buying/selling tokens. PepeTeam is successfully implementing the first, and Tsunami Exchange is successfully providing the second and third.
Spot, derivatives, staking - Tsunami combines all of the major opportunities for active and passive income, providing a one-stop solution for traders in the Waves ecosystem.
Thank you for reading,
Your Tsunami Team 🌊