Decentralization brings untold advantages to the monetary business, introducing trustless protocols with self-custody of property, serving to to foster innovation and provides customers extra management. However like all new applied sciences, it should overcome some difficult hurdles if it is to go mainstream, and few are larger than the problem of liquidity.
The dearth of liquidity in DeFi is a big drawback as a result of decentralized protocols are solely reliant on it, and if they do not have it, it could actually forestall them from functioning correctly, leading to uncontrollable asset worth volatility, excessive slippage and inefficient market making.
The problem stems from the truth that decentralized trade platforms and protocols must create their very own liquidity, which entails tapping their consumer base. So the obtainable liquidity on any given DEX is restricted by what number of customers it has, because it’s these people who find themselves incentivized to deposit tokens in its liquidity swimming pools. If a DEX platform would not have adequate liquidity, customers can wrestle to purchase and promote property on the costs they need, and in some case their orders may go unfulfilled. It is a state of affairs that can’t persist if DeFi is to be taken significantly.
Fragmentation Frustrations
A fast examine on DefiLlama reveals that liquidity should not actually be an issue for the business, as there’s presently greater than $99 billion value of worth locked within the DeFi ecosystem. Nonetheless, DeFi’s drawback is certainly one of fragmentation. As of late, there are dozens of various blockchains that every one help DeFi functions. Every of those blockchains is an impartial community. They every have their very own consensus algorithms, hashing strategies and transaction processing speeds, with completely different block sizes and so forth. This makes them incompatible with one another, which means the switch of crypto property throughout them may be very tough.
For example, Ethereum is the largest DeFi blockchain however it solely accounts for roughly half of the overall worth locked. Different widespread DeFi chains, comparable to Avalanche, Aptos and Solana, have a a lot smaller share of the TVL in DeFi. So the obtainable liquidity is fragmented throughout many various chains, which means every protocol can solely entry a fraction of the obtainable capital.
Due to this fragmentation, one of many largest challenges for any progressive new protocol is to bootstrap the liquidity it must get off the bottom. A lot of their effort is concentrated on attracting the liquidity suppliers essential to maintain the brand new protocol, which suggests much less time might be spent on the precise innovation. It is a resource-intensive problem that creates a excessive barrier to entry for brand new protocols.
Fixing Fragmentation
Inside the DeFi business, the overwhelming majority of decentralized protocols are centered on spot buying and selling and perpetuals. Various markets, comparable to choices, have barely made a dent within the DeFi house.
Trying to change this, Ithaca Protocol has created a non-custodial threat primitive that goals to develop on-chain choices quantity into the billions of {dollars}. Importantly, it says it can achieve this by fixing the problem of liquidity fragmentation. In the end, it hopes to scale the DeFi choices market to trillions of {dollars}, assembly the big demand for structured payoffs.
Ithaca’s resolution to the issue of liquidity fragmentation is a novel matching engine that primarily distills possibility payoffs into composable constructing blocks constructed with good contracts. On this manner, it can help atomic order matching with conditional order logic. It does this primarily based on ideas comparable to replication, portfolio dominance and collateral optimization.
Its resolution sounds advanced and certainly it most positively is, however it’s additionally fairly ingenious. Ithaca will get across the fragmented liquidity and the absence of risk-sharing mechanics in DeFi choices with a permissionless infrastructure that allows liquidity to be aggregated throughout chains, supporting extra environment friendly threat sharing throughout time and occasion horizons, and finally, extra environment friendly markets. Its secret sauce is an algorithmic, auction-based market clearing framework that is resistant towards Miner Extractable Worth or MEV manipulation. As well as, the framework additionally helps the deployment of composable choices and structured product markets for nearly any DeFi asset.
The Ithaca Matching Engine consists of quite a few shifting components. It implements Frequent Batch Auctions at discrete intervals, successfully matching orders by means of auctions reasonably than conventional order books. It additionally introduces the idea of Danger Sharing Constructing Blocks or RSSBs, that are outlined as statically replicable derivatives which might be straight built-in inside it to make sure orders are matched on the atomic stage.
Blended Integer Linear Programming Optimization permits the matching engine to seek for clearing costs and related units of constant orders that fulfill these costs in an optimum manner that maximizes the executed quantity and satisfies customers’ finest execution necessities. Lastly, it additionally employs a “Portfolio Dominance” mechanism to make sure matching is completed in a riskless manner, by consolidating orders and matching them to make sure the protocol property all the time exceed liabilities.
The whole lot is tied collectively by good contracts that implement post-trade settlement, with collateral necessities taken care of by a novel Collateral Optimization Engine. Axelar’s cross-chain gateway protocol performs the position of bridging property throughout a number of blockchains, aggregating liquidity. All of this takes place below the hood, throughout the Ithaca app that allows skilled merchants to implement a spread of choices buying and selling methods, together with easy payoffs and extra advanced, structured merchandise.
Jumpstarting DeFi Choices
Ithaca’s group has excessive hopes for its protocol, saying it needs to embed it at each stage of the lifecycle of risk-sharing devices. It is an formidable venture to make sure, as a result of Ithaca is constructing what is actually a completely new sort of infrastructure that can reimagine DeFi’s derivatives markets. But when it pays off, it might nicely be simply what DeFi wants to unravel its liquidity fragmentation as soon as and for all.
