Lack of liquidity represents the main barrier that decentralized exchanges (DEXs) must overcome. In this article, we will discuss how NuDEX is going to present a solution by launching its reward system for all those who provide liquidity to the exchange.
DEXs face limitations because they do not have a central management to operate their liquidity systems, which helps to decrease slippage and maintain trading stability. This paper analyzes the current liquidity management techniques used by major DEX platforms before explaining how NuDEX implements its novel system design.
Major DEX platforms have implemented several effective solutions to address their liquidity-related problems.
Curve Finance implements different liquidity pools that provide stable prices during stablecoin transactions between users. The focus on assets of equivalent value allows Curve to operate with reduced slippage, thus attracting traders who need to handle high-volume stablecoin transactions.
The dYdX platform links off-chain order book technology with on-chain settlement protocols to create its operating model. The system improves liquidity through its centralized fast matching feature while utilizing blockchain-based settlements that operate without trust requirements.
By operating through automated market makers, Uniswap allows its users to handle liquidity creation instead of relying on conventional market makers. Anyone can participate in providing liquidity under this method by contributing to pools and earn fees according to the size of their contribution to the pool.
Innovative approaches to liquidity management in the DeFi space are spreading because they offer numerous mechanisms that cater to particular market requirements. NuDEX implements special liquidity features that provide increased efficiency for trading along with better user engagement.
Summing up, it sounds that simple; users earn rewards, reduce the risks of losing value of their assets, and support the growth of the crypto ecosystem.
Rewards and Earnings: They receive incentives in native tokens or transaction fees, for providing liquidity.
Lower risk of impermanent loss: With NuDEX you will contribute with a single token, which reduces this risk.
Access to DeFi opportunities: Participating in liquidity pools allows users to be part of decentralized ecosystems like NuDEX and take advantage of new opportunities.
Greater market stability: Users with their contribution contribute to improving market depth, reducing slippage and attracting more activity.
These advantages are a win/win for both users and NuDEX, both parties benefit from providing liquidity to the system, both in terms of security and earnings.
Now we will explain in more detail the opportunities that you will find in NuDEX’s Earn mechanisms.
NuDEX will incorporate in the launch of its liquidity rewards system, the provision of liquidity with a single token (which allows us to have a lower risk of impermanent loss), and this will be a solution to the challenges faced by both users and decentralized exchanges (NuDEX). This approach addresses the liquidity fragmentation and high slippage issues that often plague DEXs, while improving the traditional model of centralized exchanges (CEXs), which rely heavily on professional market makers.
The core of NuDEX’s Earn mechanism (pay attention to this!)
is going to revolve around incentivizing users to place orders on the order book, thus ensuring deep liquidity and efficient price discovery. This system is going to allow users to provide liquidity using a single token, simplifying the process and lowering the barriers to entry for liquidity providers. (Many will remember that when DeFi was first implemented, 2 tokens had to be provided as a liquidity pair, this committed us to having greater risk in the price stability of the 2 tokens, we had to be very confident in our DYOR to know that one of the 2 tokens was not going to suffer a bloody dump)
Capital efficiency will be improved: The dynamic reward system encourages a more efficient use of capital by incentivizing orders that contribute more to market depth and price discovery.
Greater user participation will be obtained: By making the provision of liquidity more accessible, NuDEX will be able to attract a wider range of participants, potentially leading to more robust and stable markets.
We will now explain the key components of the Earn mechanism so that you can get the most out of it once it is launched:
Order Book: Users will place limit orders at specific price levels, contributing to market depth.
Reward Calculation: A sophisticated algorithm will calculate rewards based on the price, quantity, and duration of orders (these mathematical formulas are detailed in our WP, we will discuss them below so that you have the most fundamental aspects in mind).
Dynamic Adjustment: The system will dynamically adjust rewards in response to changing market conditions, ensuring optimal liquidity provision (this is where we can make the most of market opportunities).
We will now discuss the key aspects of the mathematical framework that will support the Earn mechanisms on NuDEX, these aspects are designed to incentivize behaviors that benefit the overall liquidity of the exchange.
Here we look at several key variables:
Normalized Distance: Measures the distance of an order from the current market price.
Normalized Volume: Considers order size relative to market depth.
Acceptance Probability: Estimates the probability of an order being executed based on its price and quantity.
The reward allocation formula takes these factors into account, along with a boost factor based on user activity and a collection weight based on trading volume. This ensures that rewards will be distributed fairly and maximizes the positive impact on market liquidity.
Dynamic Reward Adjustment
Rewards will be dynamically adjusted based on market conditions (e.g. trading volume, number of bids). For example, when trading volume increases, the user activity reward factor increases to incentivize more users to place bids.
Time-Weighted Rewards
The longer an offer remains active, the higher the reward. This encourages users to provide liquidity over the long term.
Collection Weight
Collections with higher trading volumes in 1 day receive higher weights, which attracts more liquidity to high-volume collections.
But that’s not all, in a future article we will explain the possibilities, solutions and types of liquidity pools that we can use in NuDEX, and that is that NuDEX’s innovative market making mechanism integrates three advanced liquidity solutions: Hybrid Liquidity Pool (HLP), Dynamic Weighted Liquidity Pool (DWLP) and Traditional CEX Order Book Market Making (MM).
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