XFai Has A Solution To Illiquid Defi Markets
“Liquidity” is a term that’s tossed around a lot in the context of DeFi, usually by projects promising to deepen, increase, or otherwise boost it. Illiquid markets, after all, are the scourge of DeFi traders, leaving them susceptible to slippage and thus reduced profits.
While low liquidity can blight even the most popular DeFi trading pairs, it is particularly pronounced with low cap cryptos: tokens whose minor market capitalization means shallow pools where slippage is all but inevitable. Fine if you’re swapping $100 of tokens, but if you’re a whale, it’s impossible to take up a position without moving the market.
XFai is a new project that’s focused on solving the problem of illiquid DEX pools, specifically those of low cap tokens that have traditionally struggled to achieve optimum liquidity levels. XFai defines small cap tokens as being any asset whose market capitalization is below $400 million – which currently applies to all but the top 170 crypto assets. Most of DeFi, in other words.
XFai is advancing a system for rewarding LPs of low cap tokens, thereby making it profitable to hold these assets and to provide liquidity for them. The solution XFai proposes entails a proprietary technology known as DLO: DEX Liquidity Oracle.
The Downlow on the DLO
Oracles provide pricing information on DeFi assets, including that derived from external sources such as alternative blockchains and from traditional markets. They are a critical part of decentralized finance, supporting the trading of synths and non-native assets e.g. BTC on Ethereum. The DLO that XFai has devised can be thought of as an oracle on steroids: all the capabilities of an ordinary pricing oracle but with superpowers.
In addition to providing price feeds and triggering third party contracts, XFai’s DLO will actively manage token liquidity on DEXs such as Uniswap. The idea is that holders of small cap tokens can lock these into the XFai smart contract, which in turn deploys them on Uniswap in a manner that will optimize price-to-order matching. Large trades will be prioritized, directing deeper liquidity to those who need it most.
In return for providing liquidity to small cap tokens, lenders can earn rewards. What’s more, they only need to supply single-sided liquidity i.e. pooling one asset, thereby reducing impermanent loss. XFai’s proprietary oracle will read APIs across multiple order books from centralized exchanges. Then, using a synthetic curve, the DLO focuses the order book volume on where the price action is being conducted.
There’s a lot more to XFai’s DEX Liquidity Oracle but it boils down to this: by obtaining more up-to-date pricing information from CEXs than other oracles, it can direct liquidity to where it’s needed on Uniswap, when it’s needed. The result is deeper liquidity and less slippage.
What Makes XFai Different
One of the drawbacks to many emerging DeFi projects is that their proposed solution entails migrating users – and thus liquidity – to their own native platform. This results in fragmentation, further reducing liquidity across the DeFi landscape. Moreover, the introduction of additional platforms and protocols, while potentially advantageous from a tech perspective, adds further layers of complexity, and serves to scatter DeFi users.
What makes XFai different is that it’s designed to work with rather than compete against existing DEXs. It can be applied to AMMs such as Uniswap and used to optimize their liquidity rather than further eroding it. As such, there is reason to believe that XFai’s DLO solution – if proven effective – will be integrated into DEXs, where it will work to deliver a better deal for all: LPs, traders, and low cap projects, whose token will be able to enjoy liquidity once synonymous with big caps.
Disclaimer: This article is educational and does not represent financial advice. Please consult your financial advisor before purchasing any digital assets.
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