Decentralized exchanges (DEX) have experienced stellar growth (100x) over the last year growing from less than $1B per month in trading volume in early 2020 to more than $100B per month in trading volume in 2021. They have proven to be a formidable alternative to centralized exchanges (CEX) and will have another massive 50x+ growth opportunity in the next 3–4 years when the crypto market reaches its peak in the next cycle.
Led by Uniswap, Automated Market Makers (AMMs) — or more accurately, Constant Function Market Makers (CFMM) — currently dominate the DEX market. The success of AMMs, plus their “permissionless” feature, attract projects to choose them over CEXs to list their project’s tokens. Many projects even conduct an Initial DEX Offering (IDO) on an AMM. At the same time, AMMs also attract investors, who are eager to generate high returns for their capital by capturing trading fees, which are typically captured by the exchange in a CEX scenario, by providing liquidity on the AMM.
Pain Points in Providing Liquidity for AMMs
The biggest pain point for projects listing their tokens on an AMM is the process for bootstrapping liquidity and increasing liquidity in their token pools. Projects have the option to add liquidity by themselves, but this option requires lots of capital due to the pool design of most AMMs. Most AMMs, for example Uniswap, use a 50:50 pool design for each trading pair (e.g. <token, capital>) of a project token, along with a capital token such as stablecoin (DAI, USDC, USDT), WETH, WBTC. Hence AMM liquidity providers (LPs) need to acquire equal value of both the project’s tokens and pair capital first before they can add liquidity to an AMM. For example, to provide $10M worth of its project tokens on Uniswap, a project needs to provide $10M worth of capital as well for each pair (xxx/BTC, XXX/USDT, Etc.). The unfortunate reality is that most projects don’t have the capital nor do they want to allocate capital to provide liquidity.
On the other hand, investors have lots of capital but don’t hold project tokens. To provide liquidity to an AMM and generate high returns, investors need to acquire project tokens first and then add equal value of the pair capital token. For example, say an investor holds $10M of ETH and would like to provide liquidity. In order to do so, they will need to acquire $10M of the pair project token first. The downsides for investors are the friction of converting assets to tokens in order to provide the liquidity in the first place, the capital inefficiency with regards to locking the capital, and most importantly, the risk of impermanent loss (IL), especially holding project tokens that investors may not want to hold for long.
It seems projects and investors have what the other side needs, e.g. projects have tokens but need capital while investors have capital but need tokens. And their goals don’t conflict with each other, e.g. investors care about AMM trading fees and APY while projects care about the depth of their liquidity pools. Can they collaborate with each other so they can establish a win-win partnership to achieve their separate, non-conflicting goals easily? It is less obvious, but YES!
Today, we are super excited to introduce Double, a decentralized, permissionless, and trustless protocol that is designed to enable projects and investors to form a win-win collaborative partnership for providing liquidity. Double will enable an investor to double its return on invested capital, while providing a boost in liquidity to the projects’ AMM token pools.
As demonstrated in the illustrative example below, with Double, investors only need to supply the capital side of the liquidity pool pair, but can still capture all of the trading fees, effectively doubling their return on invested capital. Double is a WIN for investors. While projects give up the ability to capture trading fees, they did not care about them in the first place — and they shouldn’t care about them, as projects whose business models rely on garnering revenues from AMM fees are not sustainable. With Double, projects are able to boost the liquidity for their token pools without having to find suppliers of capital, the capital they don’t have in the first place. Double is a WIN for projects.
This win-win partnership can be established because fundamentally, projects can afford to offer incentives to attract investors to supply the capital side of the liquidity pool pair. Such incentives come from projects lending their tokens, which are unused and are not generating any return, to investors effectively for FREE.
Liquidity is one of the critical factors for the success of token-based projects, but unfortunately it is a big problem for most projects at the moment. Double solves projects’ liquidity challenge by providing an elegant solution that is superior to existing solutions:
- No token inflation — yield farming that uses token inflation to incentivize liquidity is not sustainable and detrimental to the token’s price;
- No discounted token sale — protocol owned liquidity sounds trendy as a narrative but effectively it is a discounted token sale (only a few projects can pull this off) to raise capital and lock the raised fund in AMM liquidity pools;
- Permissionless — no need to buy/rent/bribe governance tokens (which will pump the price of those governance tokens) to get the permission and/or liquidity; an effort which only mature projects that don’t need more liquidity can afford.
This is the power of:
New Wine in Old Bottles
Projects and investors collaborating to provide liquidity is not a new concept. Such practice is popular not only in the traditional equity markets, but also in the crypto markets. There are many professional Market Makers (MMs) that are currently working with many projects to provide liquidity in centralized crypto exchanges. Of course, this type of partnership is centralized between trusted parties and enforced by commercial agreements. You may have guessed, projects will lend their project tokens to MMs and MMs will provide the capital during the collaboration!
AMMs not only disrupt CEXs, but also the CEX ecosystem players like professional MMs. In addition to supplying capital, market making requires sophisticated skills, extensive knowledge and solid technology which create huge barriers to entry. By design, AMMs eliminate those huge barriers and enable any investor, either small or large, retail or institution, to become liquidity providers and earn high returns on its capital. AMMs democratize professional market making!
However, the commercial partnership between projects and MMs, which is critical to the success and profitability of MMs, is NOT available to hundreds of thousands of LPs right now. Obviously, forming collaboration agreements between projects and investors using centralized commercial agreements won’t scale here. Double solves the scalability challenge by leveraging smart contract technology to enforce the trust and agreement required for collaboration. By doing so, Double democratizes the commercial partnership that is still exclusive to MMs!
Double is designed to significantly reduce IL risk for investors, in addition to doubling the return on invested capital. The result is that Double turns most LP pools, which have negative risk-adjusted APY, into attractive investable pools with positive risk-adjusted APY. The profound impact is that more capital, which is risk averse and not interested in the yield farming game, can be deployed to AMM LP pools. This non-mercenary capital will inevitably take the whole AMM ecosystem to the next level and take more market share from CEXs! This is again the power of:
As more and more professional MMs are expanding to DeFi and AMMs, even though they lose an exclusive benefit they had before, they will benefit tremendously by working with Double since Double’s permissionless and trustless design eliminates lots of operational overhead and friction for MMs, a WIN for professional MMs!
In AMMs, it is the LPs that capture most of the trading fees whereas in CEXs, the exchange platforms capture the trading fees. Fees captured by all LPs form the LP economy. The trading volume in the last 12 months is roughly about $1T and with 0.3% in trading fee assumption, the current size of the LP economy is about $3B per year.
The total crypto trading market will grow at least 10x in the next crypto cycle, just like it had at least 10x growth since the last crypto cycle. The LP economy will naturally grow at least 10x along the growth of the overall crypto trading market. Despite the stellar growth, AMMs market share in crypto trading is only less than 10%. The LP economy has another 3x-5x growth opportunity on top of the 10x growth of the overall market by taking market share from CEXs. Overall, AMMs have another 30x-50x growth opportunity to reach $90B-$150B per year in the next 3–4 years.
To take market share away from CEXs, the depth of the AMM liquidity pools will play a critical role since to match the user experience of low slippage provided by CEXs, more liquidity is needed. By bridging the benefits of collaboration between token and capital, which is exclusive to professional MMs and CEXs right now, to every AMM LP, Double will absolutely take AMM liquidity to the next level, lead the charge of the whole AMM ecosystem to displace CEXs, eventually rendering them obsolete, and drive the rapid growth of the massive LP economy, a WIN for AMMs!
Double — the ONE and ONLY LP Community
As a product, Double is a DeFi primitive that is leading to a paradigm shift in decentralized finance and is an upstream protocol in the AMM value chain. It is NOT an AMM and its goal is to partner with every AMM out there, either existing ones or future ones. By design, Double is a multi-chain product — a smart contract that anyone can integrate with — and will support every chain, including Ethereum or other L1 chains, L2 chains, side chains, parachains, etc.
Double is also a community for LPs and its long-term vision to become the ONE and ONLY LP community. It wants to become THE community where tokens find capital and capital find tokens no matter for which AMM on which chain! And more importantly Double is an incentive aligned community among all its members.
Inclusive is the ethos of Double because only one unified, collaborative, and incentive aligned community can succeed in the daunting task of fully decentralizing crypto trading. If you believe in such a mission, join Double. And let’s