Introduction

Horiza is a groundbreaking decentralized exchange (DEX) protocol operating on the Arbitrum blockchain. It combines the strengths of concentrated liquidity market makers (CLMM) algorithms, an active liquidity management (ALM) marketplace, and the ve(3,3) design to align stakeholders' incentives, as pioneered by Solidly. With its unique approach, Horiza aims to provide deep liquidity on the Arbitrum blockchain and create a decentralized market for token emissions.

Generally, most AMMs face two sets of challenges:

1. Technical challenges include improving liquidity deployment efficiency, reducing slippage and impermanent loss, and incentivizing fee-generating pairs.

2. Mechanism design limitations is chiefly the fact that most protocols tend to focus almost exclusively on incentivizing liquidity provision and not fee generation. Moreover, token holders don’t have a true value outside of governance. A more effective path forward, however, may be to align emissions to incentives.

Horiza sets itself apart by tackling both simultaneously, implementing the ve(3,3) model firstly introduced by Solidly and combining it with concentrated liquidity of Uniswap V3, thus taking the best of capital efficience and incentive structures.

In short, Horiza’s distinguishing features are:

• Concentrated liquidity by Uniswap v3;

• Active (automatic) position management;

• A custom-built ve(3,3) mechanism.

Let’s find out how Horiza works.

DEXs’ existing approaches

Uniswap

Launched in November 2018, Uniswap v1 introduced the concept of Automated Market Making (AMM). This model allowed for continuous, decentralized, and permissionless trading without the need for traditional buy/sell order matching. However, the first version only supported ETH-ERC20 pairs, adding difficulties and costs when swapping one ERC20 token for another.

Uniswap v2, launched in May 2020, resolved the "ETH bridging" issue by introducing ERC20-ERC20 pools. This allowed users to withdraw any amount of ERC20 tokens without having to go through ETH first, and thus without paying upfront. Among other improvements, a protocol charge fee was introduced at the code level to share 0.05% of the total 0.30% swap fees to UNI holders, which includes the Uniswap team itself. Although protocol fees would considerably strengthen Uniswap’s position by making it profitable and sustainable in the long-term, the switch needs to be turned on by governance vote, and this has yet to occur. Therefore, Uniswap continues to have an incentives mismatches, where LPs and liquidity provision are incentivized and rewarded, while the native token's holders are not, making UNI token pretty much useless (apart from a somewhat ineffective governance) and completely disconnected with the protocol’s main activity.

Uniswap v3, launched in May 2021, offered improved capital efficiency and accuracy, allowing Liquidity Providers (LPs) to earn higher returns. Crucially, v3 introduced the concept of concentrated liquidity, allowing LPs to concentrate their capital within preferred price ranges. This breakthrough transformed the way liquidity is deployed, moving away from the traditional approach of spreading liquidity across the entire range (0 to ∞), which often resulted in a significant portion of funds remaining idle due to the limited price movement of tokens. With concentrated liquidity, LPs can align their capital with the areas where most trading activities occur, ensuring optimal utilization and higher returns. A flexible fee system was also introduced, with three different fee levels depending on the type of asset pair​, which left more freedom to traders to choose which one to choose. While concentrated liquidity ushered in a new generation of DEXs (known as Concentrated Liquidity Market Makers), this also increased the complexity of position management, as liquidity providers now had to actively manage their positions to ensure optimal liquidity placement. However, this advancement also introduced a new layer of complexity in position management.

Curve, Olympus, and Solidly

While Uniswap was developing its technological solutions focusing on solving capital efficiency problems, other protocols were thinking about how to reconcile the interests of all market players for the common good, aligning incentives and creating a sustainable path for their DEXs. We are talking, of course, about the Olympus DAO, Curve, and Solidly.

Olympus DAO and the (3,3) model

Olympus DAO introduced the (3,3) game theory model to incentivize the desired positive behaviors and outcomes, primarily staking native tokens over selling them. In short, for two OHM holders who each have the option to stake, bond, or sell, the maximum benefit for all parties occurs when both stake their OHM and thus take them out of the circulating supply. The worst outcome is when both parties sell their OHM, both missing out on staking benefits, incur in a loss by selling at a presumed discount due to the universal sell pressure, and drive down the price of OHM for other holders. Finally, holding without staking is also unattractive due to token dilution caused by OHM expanding emission through incentivized bonding.

Curve and the vetokenomics

Curve Finance pioneered a new mechanism to incentivize the staking of the native token, thus contributing to the long-term incentive alignment and sustainability of the protocol, with a novel system of vote escrow. Liquidity providers who receive CRV tokens can lock them in a smart contract, gaining access to veCRV governance tokens in return. The longer they commit to this lock-up period, the greater their allocation of veCRV rewards – and the more veCRV at their disposal, the more reward boosts and influence over the governance decisions that affect the protocol’s functioning.

Solidly and the ve(3,3) architecture

Andre Cronje, the renowned developer, proposed the groundbreaking ve(3,3) design for his new AMM DEX Solidly, which optimizes primarily for the capital-efficient acquisition of TVL that creates high fees for veSOLID holders. The goal of the ve(3,3) design is to better align the emission of tokens to positive behaviors and incentivize fee generation over liquidity provision, addressing issues like such as fee distribution, liquidity mining, and bootstrapping. Solidly improves existing AMM and CLMM DEXs in the following ways:

• By combining the vote-escrow concept of Curve and the (3,3) model of Olympus, Solidly encourages users to lock the native token, effectively mitigating inflation caused by emissions of the native token as rewards and providing 100% dilution protection.

• In Solidly, LPs are rewarded with $SOLID emissions, determined weekly by veSOLID holders' votes. LPs can lock SOLID and earn veSOLID, which allows them to vote on emissions, earn trading fees, and vote in governance. To ensure incentives align with emissions, Solidly directs the majority of incentives (i.e., $SOLID emissions) to pools with the highest fees, allowing users to receive fees exclusively from the pools they vote for. This helps eliminate cases in which users can earn incentives through poorly performing pools, as sometimes encountered on Curve. In short, all stakeholders are incentivized to contribute to fee generation, prioritizing meaningful growth beyond TVL at the protocol level.

• Additionally, Solidly addresses impermanent loss concerns by partially or completely offsetting LPs through the directed emission of incentives to specific pools and LPs, colloquially known as "bribes" as some protocols offer them to voters for their votes to direct emissions to specific pools/gauges and thus farm liquidity.

• While Solidly deploys the same ve token approach of Curve, it makes the ve position transferable and tradable by tokenizing it into an NFT (ERC-721), thereby addressing the general capital inefficiency of ve assets.

• Finally, Unlike Uniswap and Curve, who share 0% or 50% of fees to UNI or veCRV holders, respectively, Solidly distributes 100% of the fees to its governance token, imbuing it with true utility and value.

Problems

Despite being true innovators in the DeFi space, Uniswap and the abovementioned other protocols all have limitations and faced some challenges. Let’s see the most pressing ones for Uniswap and Solidly.

Uniswap problems

Uniswap’s limitations notably affects its pricing power – or the ability to be the one DEX that defines the assets’ price while other DEXs react with arbitrage – long-term sustainability, and defensibility against competitors. These limitations are:

1. Malfunctioning in extreme market conditions. Uniswap V3’s concentrated liquidity model may not function optimally during periods of high market volatility. Since the positions’ range is usually limited (to maximize the fees earned), it’s easy for the assets’ prices to fall outside of the set range during high-volatility periods. This is a problem for traders who cannot find enough liquidity for their swaps, and for LPs who constantly need to open and close positions to adjust to price changes.

2. Active management. Related to point 1, Uniswap V3’s concentrated liquidity model requires LPs to manage their positions actively, as they must adjust their price ranges to optimize their returns. This is especially true in times of high volatility when LPs need to close and open positions repetitively. On top of being time-consuming, this can be extremely costly on some chains like Ethereum, especially when the network is congested.

3. Impermanent loss. Despite the potential for higher returns, concentrated liquidity also exposes LPs to risks associated with impermanent loss.

4. Liquidity bootstrapping. It’s hard for new projects to launch on Uniswap due to their token’s initial volatility and shallow liquidity, which in turn causes a high risk of slippage and impermanent loss for LPs. Uniswap v3 lacks an effective ‘bribe’ system as the one in ve(3,3) which allows new projects to offer bribes to LPs to partially offset the risk of impairment loss.

5. Lack of value for the native token. While being written in the code, the protocol charge fee hasn't been switched on yet, meaning that 100% of the fees go to LPs and not to UNI holders. In other words, UNI tokens, and consequently holders and the protocol itself, doesn’t capture any value from the trading activity on Uniswap, leaving governance (besides, not that effective) as UNI’s sole utility. This is a huge problem in terms of incentives alignment and long-term sustainability and defensibility of the protocol.

Solidly problems

While Solidly introduces a fresh approach in terms of mechanism design and incentive alignment, it also faces some challenges that perhaps come from being the first implementing this design:

1. Inefficient liquidity deployment. While Solidly designed many innovative ways to incentive liquidity provision to the most used and profiting pools, the DEX still relies on a traditional AMM algorithm, missing out the improvement of more sophisticated CLMM algorithms.

2. Solidly's initial distribution and emissions. The majority of Solidly's token supply was distributed early on, resulting in a concentration of control and limited incentives for long-term liquidity support and ecosystem development.

3. Lack of balanced incentives for voting power. Voting power could be acquired at effectively zero cost, allowing certain players to accrue high voting power without contributing to the overall goals of the protocol. This undermined the sustainable functioning of the protocol.

4. Exploitation of token whitelisting. Actors were able to game emissions by creating trading pairs with tokens fully owned by themselves and directing emissions to these pools. This manipulation compromised the integrity of the protocol.

5. Inadequate fees and broken bribing mechanisms. Fees provided to voters were set at a low rate, making it difficult for fees to overcome the allure of voting for emissions. Additionally, the bribing mechanism was flawed, allowing voters to change their vote at the last minute after streaming bribes.

Horiza’s Solutions

Horiza comes to the rescue by combining the advantages of both models - concentrated liquidity from Uniswap with active position management and ve(3,3) mechanism from Solidly. This enables Horiza to do the following:

• Like Uniswap V3, LPs are able to provide liquidity in concentrated ranges and increase the capital efficiency of their assets when compared to a constant product AMM, which is equivalent to a range that covers from 0 to infinity. This means LPs can maximize their yield while also reducing risks and leaving them the possibility to diversify investment across multiple DeFi protocols.

• Horiza takes Uniswap’s CLMM model to the next level by introducing automatic position rebalancing so that LPs no longer need to worry about managing their positions manually. This is a major improvement that brings considerable savings of time and gas fees, and reduces the impact of impermanent losses. If losses does occur, LPs will be offset by rewards in the form of emissions thanks to the ve(3,3) features described above.

• Thanks to concentrated liquidity, traders enjoy deeper liquidity when and where it’s needed most, resulting in substantial profit gains through reduced slippage.

• The ve(3,3) design enables protocols to incentivize liquidity provision through mechanisms such as bribery, where high rewards are offered to LPs for supplying liquidity to specific token pairs, or by directly supplying liquidity to their own pools using the protocol's treasury and earning emission in the form of rewards. Popularized by Solidly, bribers are protocols seeking to incentivize liquidity by subsidizing impermanent loss and encouraging LPs to provide initial liquidity.

• Ve-tokenomics offer the most capital-efficient way for protocols to bootstrap liquidity. Protocols can either offer incentives for vetokens holders to vote for their pools and drive emission of tokens there (bribes); or lock tokens directly, obtain vetokens and vote to direct emissions to their pools. Together, these two mechanisms create a flywheel where protocols can effectively offset the cost of bribes and even bootstrap liquidity profitably by earning emissions. This, in turn, allows to multiply the value of protocols’ incentives by 2-3x.

• The ve(3,3) model ultimately aligns the interests of all protocol participants. veToken holders are incentivized to vote for either the highest volume pools (the higher the volume, the more fees they'll earn) or the ones bribed by protocols seeking to boost their liquidity. Token holders benefit from a native token with true utility in the form of fees, voting power (choosing which pools/gauges to direct emissions to) and governance. Liquidity Providers are incentivized for providing liquidity to fee generating pools, and not just random liquidity, with token emissions which can be locked for the incentives seen earlier for token holders. Traders benefit from low slippage thanks to the deep liquidity of large pools, low impermanent loss risk thanks to the offset of emissions and bribes, as well as optimized fees ensured by the best-in-market CLMM model. Finally, protocols gain access to a highly efficient, interest-aligned liquidity layer where it’s easier and cheaper to farm initial liquidity.

While other DEXs exist that combine ve(3,3) design with concentrated liquidity algorithm, Horiza takes a unique approach when it comes to the technology stack.

• Thena protocol, for instance, started by making a fork of Solidly, then integrated Algebra for concentrated liquidity and finally added Gamma for automatic position rebalancing.

• Ramses, as another example, followed a similar path to Horiza in the sense that built a custom version of ve(3,3) architecture and added it to concentrated liquidity AMM, but hasn’t perfected it with an automatic position rebalancing function which can significantly improve positions’ yields and overall user experience.

Horiza implemented the following approach, which we think is more effective: we started with a Uniswap v3 fork and then integrate automatic position rebalancing, finally write our own integration for ve(3,3). Writing a custom integration of the ve(3,3) model will enable greeted customization and flexibility in combining winning features of different designs, and overcome some of the problematics faced by Solidly. More details on Horiza’s architecture and design will be explained in following articles.

Roadmap

Q2 2023

• Fork Uniswap V3 for Arbitrum blockchain

Q3 2023

• Incentivized testnet

• Integrate automatic positions management

• Integrate custom ve(3,3) mechanism

• NFT sale to create the initial liquidity. The NFT owners are entitled to a share of the protocol’s revenue.

Conclusion

In the current landscape, none of our peers offer a comparable suite of highly efficient solutions on the Arbitrum blockchain, and potentially on other chains as well. Horiza sets itself apart by seamlessly blending the technical efficiency of Uniswap V3's concentrated liquidity and active position management enhanced through automation, with the mechanism design efficiency of the ve(3,3) architecture. This unique combination results in a DEX that not only provides the deepest liquidity in the ecosystem but also ensures fair rewards for all participants within the protocol, thus paving the way for long-term sustainability.

Our cutting-edge DeFi solution is specifically designed for protocols that face challenges in sourcing and maintaining liquidity. The integration of automatic liquidity rebalancing ensures optimal asset distribution, mitigates risks, and maximizes returns, thereby freeing protocols from the need to constantly adjust positions. The ve-tokenomics framework introduces a distinctive reward structure that attracts liquidity providers, while the concentrated liquidity model guarantees deep liquidity with minimal slippage. This makes our platform an ideal choice for protocols seeking stability, growth, and for liquidity providers searching for hassle-free ways to earn substantial yields.

We are actively working on presenting detailed documentation that delves into Horiza architecture and tokenomics, offering comprehensive insights into every exciting component of our project. In the meantime, we invite you to experience the power of Horiza firsthand by visiting our application, providing liquidity, and engaging in a few swaps.

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