Insta DEX: Single Token Liquidity Provision And A Solution For Impermanent Loss

by | Feb 18, 2022 | Adoption, DeFi, Latest

With seven Decentralized Exchanges (DEX) live on Tezos at this moment, an eighth DEX would need to bring some serious innovation to the table to be able to seize a piece of the DeFi pie. Insta DEX might be able to do just that.

Insta DEX (By the Instaraise team)  aims to solve one of the most important reasons for users to be hesitant to provide liquidity: impermanent loss.

Disclaimer: DeFi is high risk and the following article contains no financial advice. It is recommended that thorough research is undertaken on any DeFi/blockchain applications, utilizing multiple sources, before participating with any blockchain projects, or tokens in this space. Read our full disclaimer here.

Insta DEX

With seven Decentralized Exchanges (DEX) live on Tezos at this moment, an eighth DEX would need to bring some serious innovation to the table to be able to seize a piece of the DeFi pie.

Insta DEX might be able to do just that. Insta DEX (By the Instaraise team) aims to solve one of the most important reasons for users to be hesitant to provide liquidity: impermanent loss.

Providing liquidity means that users submit tokens to a pool that is needed for a DEX to have functional trading pairs. For every trading pair, a liquidity pool is needed.

For the XTZ – INSTA pair for example, a pool is created where users can submit XTZ and INSTA tokens and earn a percentage of the trading fees that traders pay while making trades. 

While traders make trades in the pool, the ratio of the toke amounts changes because supply and demand changes the value of the tokens.

Due to certain dynamics, the total value of the tokens a user owns in a liquidity pool can become less compared to if the owner would have not submitted them in the liquidity pool. This is impermanent loss and is explained quite well in this article.

The value that is earned in the share of the trading fees does not always fully compensate for the loss in value of the tokens in the liquidity pool. 

Because liquidity is crucial for a healthy trading pair, other incentives besides earning trading fees are created for users to provide liquidity.

Very commonly, users can use their liquidity pool tokens (LP tokens) in a yield farm to earn certain tokens. By full launch, the Instaraise team will open up yield farms for providers of liquidity to several Liquidity Pools.

Insta DEX adds a different approach. Inspired by Bancor Protocol on Ethereum, Insta DEX is designed so that a liquidity provider always gets back the same value originally deposited ( plus trading fees and rewards ) through a novel concept called Impermanent Loss Insurance.

“Impermanent Loss Insurance accrues over time, by 1% each day, until 100% protection is achieved after 100 days in the pool.

There is a 30-day cliff, which means that if a liquidity provider decides to withdraw their position before 30 days passes, they incur the same IL loss experienced in a normal, unprotected AMM.

If an LP holds their liquidity in the pool for 100 days or more, they receive 100% compensation for any loss incurred in the first 100 days, or anytime thereafter.

If there are not sufficient tokens in the pool to fully pay out IL compensation in the staked token, part of the insurance may be paid out in an equivalent value of INSTA.

Read the lightpaper here.” 

Single asset liquidity provisioning

Another unique feature is Single asset liquidity provision. For traditional liquidity provision, users need to add both tokens of a liquidity pool to be able to provide liquidity.

This has to be done in a 50-50 value ratio. This means that providing liquidity is only interesting if users hold both assets. If not, users need to buy tokens they would otherwise not have bought to be able to provide liquidity. 

Insta DEX allows users to provide tokens for just one side of the pair. This way, as a Liquidity Provider, the user remains 100% exposed to the token they submitted, while earning yield from fees (paid in the token staked).

Testnet

Soon.. Keep an eye on the Instaraise Twitter channel for quizzes and giveaways before testnet launch.

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