Decentralization brings unprecedented advantages to the monetary sector, introducing dependable protocols with asset self-management, fueling innovation and giving customers extra management. However like all new applied sciences, it should overcome some powerful hurdles if it desires to turn out to be mainstream, and few of them are greater than the problem of liquidity.
The dearth of liquidity in DeFi is a big downside as a result of decentralized protocols are fully depending on it, and never having it will probably trigger them to malfunction, leading to uncontrollable asset worth volatility, main slippages, and inefficient market forces.
The issue stems from the truth that decentralized change platforms and protocols must create their very own liquidity, which implies tapping into their person base. The accessible liquidity on a given DEX is due to this fact restricted by the variety of customers it has, as a result of it’s these people who find themselves incentivized to deposit tokens into the liquidity swimming pools. If a DEX platform doesn’t have enough liquidity, customers could have issue shopping for and promoting belongings on the costs they need, and in some circumstances their orders merely can’t be crammed. It’s a state of affairs that can’t proceed if DeFi is to be taken severely.
Fragmentation frustrations
A fast examine of DefiLlama reveals that liquidity does not actually need to be a problem for the business, as there may be at present over $99 billion price of worth locked up within the DeFi ecosystem. Nevertheless, the issue with DeFi is a fragmentation downside. As we speak there are dozens of various blockchains, all supporting DeFi purposes. Every of those blockchains is an unbiased 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 belongings between them may be very tough.
For instance, Ethereum is the biggest DeFi blockchain, however solely represents about half of the entire locked worth. Different fashionable DeFi chains, equivalent to Avalanche, Aptos, and Solana, have a a lot smaller share of the TVL in DeFi. The accessible liquidity is thus fragmented throughout many various chains, which means that every protocol solely has entry to a fraction of the accessible capital.
Due to this fragmentation, one of many greatest challenges for any revolutionary new protocol is producing the liquidity it must get off the bottom. A lot of their efforts are targeted on attracting the liquidity suppliers wanted to maintain the brand new protocol, decreasing the time spent on precise innovation. It’s a resource-intensive problem that creates a excessive barrier to entry for brand spanking new protocols.
Restore fragmentation
Throughout the DeFi business, the overwhelming majority of decentralized protocols are targeted on spot buying and selling and perpetuals. Different markets, equivalent to choices, have barely made a dent within the DeFi area.
To alter this, the Ithaca Protocol has created a non-custodial threat primitive that goals to develop the amount of on-chain choices to billions of {dollars}. Importantly, it says it can do that by fixing the issue of liquidity fragmentation. Finally, it hopes to scale the DeFi choices market to trillions of {dollars}, assembly the huge demand for structured payouts.
Ithaca’s resolution to the issue of liquidity fragmentation is a brand new matching engine that basically distills choices payouts into composable constructing blocks constructed with sensible contracts. On this means it helps atomic order matching with conditional order logic. It does this primarily based on rules equivalent to replication, portfolio dominance and collateral optimization.
The answer sounds complicated and it definitely is, however it is usually fairly ingenious. Ithaca circumvents the fragmented liquidity and lack of threat sharing mechanisms in DeFi choices with a permissionless infrastructure that enables liquidity to be pooled throughout chains, supporting extra environment friendly threat sharing throughout time and occasion horizons, and finally extra environment friendly markets. The key sauce is an algorithmic, auction-based market clearing framework that’s immune to Miner Extractable Worth or MEV manipulation. Moreover, the framework additionally helps the deployment of composable choices and structured product markets for just about any DeFi asset.
The Ithaca Matching Engine consists of quite a lot of transferring components. It implements frequent batch auctions at discrete intervals, successfully matching orders by auctions quite than conventional order books. It additionally introduces the idea of Threat Sharing Constructing Blocks or RSSBs, that are outlined as statically replicable derivatives which can be straight built-in into them to make sure that 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 match these costs in an optimum method, maximizing executed quantity and assembly customers’ finest execution necessities. Lastly, it additionally makes use of a “Portfolio Dominance” mechanism to make sure that matching is completed in a risk-free method, consolidating and matching orders to make sure that protocol belongings all the time exceed liabilities.
All the things is linked by sensible contracts that implement post-trade settlement, with collateral necessities taken care of by a brand new Collateral Optimization Engine. Axelar’s cross-chain gateway protocol fulfills the position of bridging belongings throughout a number of blockchains, aggregating liquidity. All of this takes place below the hood, inside the Ithaca app that enables skilled merchants to implement a spread of choices buying and selling methods, together with easy payouts and extra complicated, structured merchandise.
Jumpstarting DeFi choices
The Ithaca crew has excessive hopes for the protocol and says it desires to embed it at each stage of the lifecycle of threat sharing instruments. It’s definitely an bold venture, as Ithaca is constructing a very model new form of infrastructure that may reshape the DeFi derivatives markets. But when it pays off, it may very well be precisely what DeFi wants to unravel liquidity fragmentation as soon as and for all.