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🌟 What is DODO V3?

TL;DR#

DODO V3 is a vault maintained jointly by LPs (Liquidity Providers) and SPs (Strategy Providers), with LPs providing funds to the pool and SPs offering strategies. Both LPs and SPs share the fee income.

For SPs, DODO V3 is:

  • A leveraged market making pool
  • A mixed asset pool with high capital utilization
  • A pool that saves 90% gas cost and support arbitrary market-making strategies

For LPs, DODO V3 is:

  • A pool without impermanent loss
  • A pool with real yield

Strategy makes difference#

With the transition of on-chain liquidity models from AMM to concentrated liquidity models (such as UniV3), LPs have a much larger strategy space. Where to concentrate liquidity, when to adjust the concentration position, and choosing the fee rate are all part of a strategy.

We have found that there is a huge performance difference between different strategies. Most strategies perform poorly, while a few can bring high income for LPs. In other words, a lot of funds are using poorly performing strategies. There is a strategy-fund mismatch in the market. We need a market that matches liquidity providers (LPs) and strategy providers (SPs).

Strategy management platforms built on UniV3 often impose many restrictions on strategy, such as only being able to adjust the fee parameters or requiring strategies to be written as smart contracts. However, DODO V3 imposes no limitations on liquidity strategies, allowing you to run them as black boxes off-chain. You can adjust parameters such as depth, price, fee rate, etc. at any time.

However, to prevent malicious behavior from causing losses to the LPs, SPs are required to provide collateral. If a strategy performs poorly (e.g., resulting in IL - Impermanent Loss), the collateral will be deducted first. When the collateral is insufficient, the strategy will be removed and free all the fund it controlled. So from the perspective of a strategy provider, DODO V3 is a leveraged market making tool.

SP can choose how much assets to manage, but in order to avoid unlimited occupation of LP funds, SP needs to provide a guaranteed interest rate to LP. As the utilization rate of LP funds by SP increases, the guaranteed interest rate will also gradually increase. This will bring about healthy competition among SPs, and strategies with stronger profitability will receive more funding support.

A pool designed for pro#

DODO V3 has made a big improvement in the performance of the pool.

Multi-token pool#

In traditional AMM pools, makers need to provide quotes between two tokens, which becomes cumbersome when providing liquidity for multiple trading pairs. In DODO V3, a single pool can accommodate many different tokens, and any two of these tokens can be exchanged with each other. This helps save maker funds. For example, if a market maker wants to provide liquidity for the DODO-ETH, ETH-USDC, and DODO-USDC trading pairs, in UniV3 they would need to deposit funds separately into three different pools. But in DODO V3, they can reuse ETH USDC and DODO tokens and achieve the same level of liquidity with less money.

What's even more amazing is that market makers can only provide USDC as collateral, while other assets are provided by LP. Market makers no longer need to manage complex spot inventory.

Decouple bid and ask liquidity#

We have found that most profitable market-making strategies have some form of hedging mechanism to varying degrees. Hedging strategies eliminate IL (impermanent loss) and achieve stable profits by hedging on other platforms. For example, when buying an ETH on AMM, they simultaneously sell an ETH on another platform. If the buying price of ETH is too high, there will be no profit in selling ETH anywhere else, making this transaction “toxic”. The operators of hedging strategies usually feel very troubled because AMM often generates “toxic” transactions that they cannot hedge against. For example, when a taker makes a purchase, it consumes the liquidity of the maker's ask liquidity. The AMM automatically increase the maker's bid price. But the new bid price may exceed maker's expectation, which is “toxic”. Therefore, to help strategy providers, DODO V3 decouples the bid and ask liquidity and eliminates the “toxic” transactions.

Save over 90% gas compared to UniV3.#

Rebalance is the most important action in market-making strategies, usually referring to resetting liquidity after price movements. In UniV3, this is reflected as removing and re-adding liquidity. The better the liquidity, the more frequent rebalancing should be done. DODO V3 has carefully designed smart contracts for rebalancing operations, reducing gas consumption by over 90% compared to uniV3. This significantly reduces the cost of executing market-making strategies and makes some strategies that cannot run on UniV3 profitable.