Centralized Liquidity Protocol of Sui and Aptos Ecosystem: In-depth Analysis

An innovative decentralized exchange (DEX) and liquidity protocol based on the Move language has emerged in the Sui and Aptos ecosystems. This protocol employs an algorithm similar to Uniswap V3, constructing a centralized liquidity protocol along with a series of related functions, aimed at providing DeFi users with a superior trading experience and higher capital efficiency. At the same time, the protocol leverages the unique ecological characteristics of Sui to develop some composable features that differ from Uniswap.

The Service Targets of DEX

Although the on-chain cryptocurrency trading market is relatively small in scale, it is growing rapidly. A notable feature of this market is that most assets belong to the low liquidity, low market capitalization category, and a large number of new assets emerge every day, leading to strong demand for price discovery. In this market environment, how to better conduct price discovery to attract liquidity has become a key prerequisite for the prosperity of on-chain trading. Therefore, the primary target of DEX services should be liquidity providers (LP).

The demand for LP varies in different trading scenarios. We can roughly divide on-chain assets into two categories: mainstream assets (the top ten assets by trading volume on major public chains) and long-tail assets. There are differences in LP demand between these two categories of assets:

• Mainstream Asset LP: Pursuing higher fee income and hoping to reduce impermanent loss (Uniswap V3 is more suitable)
• Long-tail asset LP: Requires a more economical, controllable, and flexible market-making strategy (Uniswap V2 is more convenient, with lower liquidity management costs)

In the long run, the V3 model with higher capital efficiency is the trend of the times. However, due to the differences in the aforementioned demands, Uniswap V2 and V3 still coexist in practical applications. The market will inevitably give birth to new players that can balance both demands. In an emerging ecosystem like Sui, a certain protocol may become a more competitive candidate.

The first centralized liquidity protocol DEX in the Move ecosystem

This DEX has currently launched a complete product line including Swap, permissionless liquidity pools, and cross-chain bridges.

Concentrated Liquidity

This DEX uses a concentrated liquidity market-making algorithm similar to Uniswap V3. LPs can create multiple positions in the same pool by setting different price ranges to implement customized strategies and simulate various price curves. As new trades execute and cause price changes, the smart contract will consume all available liquidity within the current quoted price range until it reaches the next price Tick. At this point, the contract will immediately switch to the new Tick, activating any dormant liquidity within the new Tick interval. The interval of the Tick is associated with the trading fee level; the higher the fee, the smaller the interval of the Tick points.

By concentrating liquidity, LPs can earn more trading fees and achieve higher capital efficiency.

Permissionless Pool Creation

On this DEX, users can create liquidity pools without permission, and project parties can also launch new tokens directly on the platform. This helps attract more early-stage projects and quickly establishes pricing capabilities for long-tail assets.

Flexible trading fees

This DEX allows teams and users to select custom trading fee levels. The same token can have multiple pools with different fee levels, currently offering four levels: 0.01%, 0.05%, 0.25%, and 1%. This design encourages the market to autonomously seek the best liquidity allocation solutions, providing greater flexibility for LPs and trading users. Low-volatility assets (such as stablecoin trading pairs) may be concentrated in low-fee pools, while high-volatility or low-volume assets may be more concentrated in high-fee pools to hedge against risks.

Position Auto Management

Users can execute operations such as take-profit orders and limit orders based on range orders. When the price breaches the position, users typically need to exit their position assets promptly to avoid the spot price re-entering the price range. Users can also use third-party position managers integrated with the DEX for management, thereby reducing the difficulty of liquidity management and facilitating long-tail asset LP.

Composability

This DEX supports high composability. Other project teams can easily build exchange interfaces on their own front-end by integrating its SDK, quickly accessing the platform's Liquidity. For example, options projects within the ecosystem have achieved one-click hedging of long-tail assets by connecting to this DEX, while also enhancing the Liquidity and coverage of their own options.

Secure Cross-Chain Bridge

The cross-chain bridge created by this DEX based on a certain cross-chain protocol was launched in November last year, allowing users to safely and conveniently transfer assets across nearly 20 public chains.

Strongly correlated token economic model

This DEX adopts the economic model of xToken. By holding the platform tokens and x tokens, users can earn protocol revenue sharing, ensuring the alignment of community and protocol interests.

The DeFi Innovation Soil Brought by Centralized Liquidity Protocol

LP Automated Liquidity Management Protocol

Under centralized liquidity protocols, LPs usually choose to provide liquidity near the market price. However, when the market price exceeds the range of their strategy, LPs not only face impermanent loss but also lose the opportunity to earn LP fees. LPs need to actively redeploy their market-making strategies. To address this issue, automated liquidity management protocols have emerged, which can help LPs automatically execute their market-making strategies.

This type of protocol can also achieve:

1. Unilateral asset LP mining: LP can deploy initial liquidity in a skewed manner, for example, by only deploying the project party's tokens, and the protocol can help absorb the underlying assets (such as USDT or ETH) to balance the liquidity pool. As trading progresses, the project's native assets will gradually convert into underlying assets. This means that LP can achieve liquidity without selling their own tokens or needing to incentivize external capital.

2. Issue ERC20 LP tokens for LP providers: These LP tokens can not only be liquid but can also be re-collateralized, further enhancing the capital efficiency of LP assets.

new machine gun pool and leveraged mining

Under the centralized Liquidity market-making algorithm, capital advantages are amplified, allowing professional quantitative institutions and market-making teams to implement more granular customized strategies. The gun pool can acquire funds from protocol users or lending protocols, adopting proactive and robust strategies to generate returns, which holds immense value for large-scale users with investment needs.

New Derivative System

In a centralized liquidity system, while LP yields increase, they also face higher impermanent risks. In extreme market conditions, the liquidity set by LPs may be drained by arbitrageurs. How to construct derivatives that can hedge against LP market-making risks to alleviate the damage to LP interests caused by malicious project dumping is also a track worth paying attention to.

The composability advantages of centralized Liquidity algorithms reveal a lot of potential yet to be tapped in DeFi protocols. Especially after some recent significant events, the importance of DeFi has become increasingly prominent. The three DeFi products mentioned above are just the tip of the iceberg.

Summary

In a unique ecological track like Sui, certain emerging DEX projects may have the potential to become leaders. With the continuous innovation and development in the DeFi space, we look forward to seeing more innovative applications based on centralized Liquidity protocols emerge.