Introducing InstaDEX- An overview

Kushagar Konark

28 Sep 2022

Bancor
Blockchain
crypto

The leading decentralized fundraising and incubation protocol on Tezos, Instaraise has been preparing itself to launch the much-awaited InstaDEX, marking its successful transition into a full-fledged end-to-end DeFi solutions provider on Tezos protocol.

Operating alongside the existing offerings of Instaraise, InstaDEX is a decentralized exchange that incorporates revolutionary features that are new to the Tezos ecosystem.

The features that make InstaDEX stand apart from its counterparts include

        Single Asset Liquidity Provisioning
–         Impermanent Loss Protection

These features are a step away from legacy AMM DEXs, which have been following the practice of liquidity provisioning in token pairs and absolutely zero protection against impermanent loss for liquidity providers.

By protecting the interests of investors, InstaDEX encourages more users to join the ecosystem as liquidity providers, supplying much-needed liquidity to small and mid-cap assets belonging to latest projects on Tezos.

In return, liquidity providers will be rewarded handsomely for their contributions to the growth of the Tezos ecosystem.

InstaDEX is the perfect stepping stone for innovative projects vetted by Instaraise for fundraising and incubation on the platform.

With InstaDEX, the offerings of Instaraise come full circle, from incubation, fundraising and community building to conclude with listing on a high-quality DEX.

Problems Solved by InstaDEX

Is there a need for one more AMM DEX on Tezos, a question asked quite often, and the answer to which lies in the existing problems that are being addressed by InstaDEX.

The most common issues faced by any participant in DeFi protocols are involuntary token exposure and impermanent loss.

In its current state, all AMM DEXs require liquidity providers to make paired deposits corresponding to the token-pairs supported by the liquidity pool. It forces investors to expose themselves to price movements of multiple tokens in a pool, leading them to lose their long positions on their favorite tokens.

Similarly, due to price movements and the pool composition, liquidity providers are at times faced with a situation where the value of the tokens withdrawn from the pool ends up being less than that of the current value of the actual deposit if held on, without contributing to the protocol.

While the situation tends to correct itself over time, any withdrawal made during that period ends up making those losses to liquidity providers permanent.  Both issues raise apprehension among users regarding participation as liquidity providers in DeFi ecosystems.

Both these prevailing problems are solved by InstaDEX with two features – Single Asset Liquidity Provisioning and Impermanent Loss Insurance.

What’s Single Asset Liquidity Provisioning?

Deviating from the practice established by first generation AMM DEXs, InstaDEX allows users to contribute a single asset to the liquidity pool. By doing so, liquidity providers can overcome involuntary token exposure and continue to earn yields from swap fees charged by the DEX.

Whenever a single asset contribution is made to the liquidity pool, InstaDEX will compensate the pool with an   equivalent deposit of corresponding token. Meanwhile, single asset liquidity providers also get an opportunity to participate in yield farming activities using LP tokens issued against their contribution to the pool.

The Single Asset Liquidity Provisioning on InstaDEX is applicable for both Network tokens ($INSTA) and Base tokens (tokens other than $INSTA). Anyone can create a pool of Network and Base token pairs, provided they supply the initial liquidity at a 1:1 ratio in terms of token value.

Once the pool is established, anyone can contribute base token or network token as liquidity in which case, the protocol will contribute an equivalent value of network token ($INSTA) from reserves. In turn, the LP tokens thus issued will be shared between the protocol and the user, each receiving 50% of the LP tokens.

While users can provide liquidity in network tokens, the number of tokens one can contribute is directly related to the amount of LP tokens held by the protocol following its matching contributions towards base token liquidity provisioning.

During the process, the LP tokens held by the protocol will be issued to the contributor in exchange for replenishing the network token reserves.

Impermanent Loss Insurance

Any user providing liquidity to a DeFi pool does so to earn returns for their contribution towards the DEX operation. However, the impermanent loss experienced at the time of withdrawal from the liquidity pool can be a downer.

At times, the extent of impermanent loss can stretch beyond the total deposited value and share of swap fee accumulated over time, which is a cause of concern for many investors.

The impermanent loss insurance on InstaDEX ensures that every liquidity provider always gets back the same value originally deposited into the liquidity pool at the time of withdrawal.

The IL coverage accrues at the rate of 1% per day, effective after a minimum duration of 30 days. The coverage ranges from 30% to 100%, depending on the number of days the user stays invested in the liquidity pool.

All contributions surpassing 100 days receive 100% coverage against impermanent loss. The IL Insurance coverage is funded by InstaDEX using the yields from co-investment of $INSTA in pools against single asset liquidity provisioning and in an event of shortfall, drawn from $INSTA reserves maintained by the platform.

Getting Technical

Technical Overview of InstaDEX Architecture

Liquidity providers maintain the liquidity pool by contributing supported pairs of base and network tokens. In an event of single asset liquidity provisioning, the protocol reserve will match the base token contribution with network tokens.

With a balance of network and base tokens maintained in the pool, users can swap one supported token with another while paying a swap fee.

A portion of swap fee generated by InstaDEX operations go towards paying rewards to liquidity providers while the remaining goes into the IL protection reserve used to provide IL Protection insurance coverage to liquidity providers.

If the IL protection fund is not enough to cover the losses, the shortfall will be covered by funds from $INSTA reserves to ensure all eligible liquidity provider’s interests are covered.

Single side liquidity provisioning, swap dynamics, impermanent loss, compensation eligibility and amount in an event of impermanent loss are all calculated using mathematical equations.

If you wish to dig deeper and decipher each equation, we suggest you refer to the InstaDEX lightpaper here.

While you are at it, we will continue preparing InstaDEX for its upcoming launch, the date of which will be revealed soon. Until then keep tracking our official announcement channels.