Decentralized Finance (DeFi) has truly come into its own in the past year, with its proponents arguing that it will become a new breed of financial system, one that is borderless, trustless, and free from the dominion of gatekeepers.
But one element remains essential for determining the success of any DeFi project: Liquidity.
Liquidity, the measure of how easy it is to complete a transaction without large price adjustments, is the fuel of any market, be it a decentralized exchange (DEX) or the Deutsche Boerse. In crypto, the availability of consistent liquidity enables exchanges to attract users, token issuers to find investors, and traders to earn profits.
Since crypto exchanges cannot attract the high trading volumes that generate liquidity on traditional exchanges, they must find other solutions. This is where liquidity providers come in.
This role is the same whether they are human or automated: liquidity providers, or market makers, put up capital to ensure buyers can secure the assets they seek, and sellers can dispose of those they seek to part with.
However, many of the current crypto liquidity solutions have inherent limitations.
Automated Market Makers (AMMs), driven by simple algorithms, tend to charge fixed fees by default and are prone to impermanent loss.
Liquidity mining protocols, through which providers are incentivized through crypto rewards to commit their capital, allow liquidity buyers more control over the parameters. Still, some of them force market makers to accept relatively high risks for relatively low rewards. Some protocols also have loopholes that enable market-manipulation.
Swarm, Autonio’s liquidity mining protocol, is designed to address these issues. It aims to balance the aims of liquidity buyers and sellers to ensure a low-risk, high-return environment, and it draws upon machine learning and other functionality to minimize market tampering. .
Swarm’s central aim is the provision of consistent, robust liquidity on order book-based exchanges (centralized and decentralized).
With Swarm, order book-based exchanges can provide levels of liquidity comparable to exchanges powered by AMMs, without their limitations.
Defeating Market Manipulation by Design
Swarm is set up to resist market machinations, a long-standing concern in crypto. While tampering with widely traded cryptocurrencies like Bitcoin and Ethereum would require the complicity of large-scale investors with media influence and deep pockets, manipulation of smaller crypto assets is a recurrent problem in the industry.
Simple price manipulation, for instance, is all too common. A group of traders acting in concert buys heavily into a given asset, for the sole purpose of inflating the price and attracting outside buyers. Once the price has hit lofty levels, the manipulators sell their positions and leave the unwitting investors they have drawn in to bear the losses.
Since Autonio understands that a market is only as healthy as the source of its liquidity, Swarm has also been carefully designed to reduce the risk of both market manipulation and control.
First, there is Swarm’s method for determining rewards.
Many protocols compensate liquidity providers merely for maintaining a pre-set uptime percentage during a given period. Unfortunately, such arrangements give providers scope to deploy liquidity only when it most benefits them and leaves markets vulnerable to swings in liquidity. Because Swarm determines rewards by looking at a range of metrics over an ongoing period, market makers are incentivized for maintaining healthy and consistent levels of liquidity, not for trying to game the system.
Swarm also reduces the risk of monopolization by crowdsourcing liquidity from a diverse audience with uncorrelated behaviors and interests.
Finally, the protocol deploys machine learning to spot unusual trading patterns, which also makes it easy to detect--and address--various forms of market tampering, from price manipulation to wash trading, a tactic where traders artificially inflate volumes by buying and selling an asset amongst themselves.
How Swarm Furthers the Goals of DeFi
Cryptocurrencies were created as a means to encourage inclusivity in the global financial system by offering accessible financial solutions to the unbanked and the disadvantaged. Over time, they were also meant to replace traditional banks as the world’s liquidity providers.
By providing crowdsourced liquidity to a range of exchanges through a decentralized platform, Swarm hands power back to investors. Since anyone can provide and source liquidity, there is little incentive for collusion and no opportunity for central control.
Blockchain was also meant to underpin an unstoppable move to decentralization, but the tendency to centralize control remains an ever-present risk. Crypto mining is concentrated in China, for instance, while liquidity on many order book-based exchanges is sourced from central entities with large capital reserves.
By replacing conventional compensation systems with a risk-reward trade-off curve, Swarm’s marketplace-centered approach to rewards encourages campaign participation by smaller liquidity providers.
Swarm uses Autonio’s Maker, to crowdsource liquidity from anyone who wants to participate.
Liquidity buyers have full control of the parameters when setting up a mining campaign on Swarm, including the pair, reward, maximum spread and the campaign’s duration. Liquidity sellers (market makers), meanwhile, are incentivised to commit their capital to the campaign based on the rewards on offer
How Swarm Benefits Crypto Projects
Crypto token traders want to buy and sell assets with a minimum of slippage, the divergence between desired and realized prices. Token issuers want healthy and active markets for their offerings. Exchanges, meanwhile, compete based on the ability of their users to complete transactions quickly and efficiently.
By providing consistent, crowdsourced liquidity, Swarm can fulfil the needs of all three.Swarm also leaves room for the integration of intelligent market making.
The protocol monitors and verifies various transactions and records order book snapshots. This allows for the integration of Artificial Intelligence agents, which can improve matching efficiency by determining buying and selling prices based on comparisons with other venues. This maximizes the profits made by market makers and improves the efficiency of their market making strategies.
Swarm: The Next Generation of Liquidity Mining
Today’s DeFi market is full of projects and exchanges that rise and fall based on the availability of robust and consistent liquidity from healthy sources.
Through intelligent design, crowdsourcing and a marketplace-based approach to incentives, Swarm mitigates the risk of price manipulation while aligning the objectives of liquidity buyers and sellers. It is perfectly situated to take a pioneering role in the liquidity mining space, helping to secure a bright future for a new generation of crypto projects.