Token Trading: Market-making with Optional Ranges (MOR)
ICPSwap will adopt the mechanism of "Market-making with Optional Ranges" combined with the low and stable fees and high performance of the Internet Computer. Also, ICPSwap favors liquidity providers the features of Limit-order Trading and "Automatic Withdrawal and Addition of Liquidity".
The market-making mechanism and the trading algorithm are in reference to Uniswap V3, while other functional innovations come into force through the low and stable fees and high performance of the Internet Computer.
Market-making with Optional Ranges was employed because it is currently the most concentrated and active market-making protocol and can significantly improve capital utilization. Due to the mediocre performance of the Ethereum network, it is difficult for Uniswap V3 to provide a limit-order trading function and "automatic withdrawal and addition of liquidity" settings for liquidity providers, as centralized exchanges do. Based on the low and stable fees alongside the high performance of the Internet Computer, ICPSwap can combine the above features to provide users, projects, and LPs with a more user-friendly DeFi trading experience.
If the market price of a trading pair is within a price range, each liquidity provider in that range is allocated transaction fees based on its provided liquidity percentage respectively. By DFINITY's technical ability to run smart contracts at an Internet speed, ICPSwap can quickly calculate the transaction-fee revenue earned by each individual liquidity provider. If the liquidity pool can generate a certain token, such as ICS, the number of tokens mined can also be calculated in a real-time manner.
Compared to Uniswap V3, ICPSwap can execute limit-order trading through the optional-range liquidity mechanism with an automotive liquidity withdrawal function to offer the users almost the same wonderful experience as in centralized exchanges.
For example, suppose that Grace has 500 ICS that she plans to sell out for 50 ICP to take profit when the ICS price surmounts 0.1 ICS/ICP, then:
a. She may submit the limit order with the selling price and amount directly in ICPSwap.
b. Her 500 ICS consequently enters the liquidity pool once she has submitted the limit order successfully.
c. She will exchange 500 ICS for 50 ICP once the liquidity pool price tops the selling price.
a. The 500 ICS flows into the liquidity pool of ICS/ICP.
b. As per the MOR Algorithm, the system constructs the appropriate range orders on discrete prices in the ICS/ICP liquidity pool.
c. Set the triggering condition of automatic liquidity withdrawal as all her ICS are all sold for ICP.
d. Specifically, after the price of the ICS token liquidity pool goes beyond the selling price preset and the system verifies the conversion of her 500 ICS to ICP, the system performs the automated liquidity withdrawal operation.
e. Grace secures 50 ICP. Grace has hereto executed a take-profit order by selling her ICS via the limit-order execution mechanism of ICPSwap.
Each initial liquidity provider can set the liquidity pool trading fee at its will. The initial liquidity provider selects the trading fee gradient (0.05%, 0.1, 0.15% ... 1%) when creating liquidity, with each fee gradient corresponding to a single liquidity pool. Liquidity providers need to establish or choose the most appropriate liquidity pool with the correspondent trading fee, according to such asset-related factors as the price volatility, market trading volume, and trading activities, and take its risk appetite of the impermanent loss into account.
If a user considers that the trading fee of a liquidity pool is unreasonable and against the market demand, the user can create another liquidity pool himself/herself and set another trading fee he/she considers reasonable. In this way, liquidity market makers can choose a more reasonable pool to add liquidity to considering the fee revenue from market-making, asset-exposure analysis, and volume analysis. Users can also select a liquidity pool that better matches their needs based on a trade-off between liquidity adequacy and trading fee.
Regardless of the liquidity pool fee gradient, 80% of the trading fee is rewarded to the liquidity provider, and the remaining 20% ends up being repurchased and burnt in the Repurchase-and-Burn Pool.
Revenue from Liquidity Mining
After adding liquidity, users will receive a reward with some ICS tokens and the corresponding 80% handling fee share. ICPSwap will launch more revenue streams later.