Generally, DEXs have two types of target audiences:
- 1.Traders who want to swap tokens at better prices.
- 2.Liquidity providers / yield farmers who seek better risk-weighted return.
Every exchange wants to offer better prices for traders, this applies to Centralized Exchanges as well. In this sense, market-making mechanisms must create better liquidity depth — even if it is with the same amount of liquidity. This means they must achieve high capital efficiency.
At the same time, DEXs need to offer good incentives to attract as much liquidity as possible. The variety of tokens that are offered by a DEX is also one of the key factors used to attract more traders. The more token pairs a DEX can cover, the higher its users' stickiness. Swap trades and liquidity are interdependent and positively correlated: once one increases, so will the other.
- 1.Trading fees commissions
- 2.Reward tokens distributions
If a DEX wants to offer higher trading fee APR to the liquidity providers, it must tunes its mechanism to be highly capital-efficient. This means that one dollar's worth of liquidity needs to create more than a dollar's worth of trading volume. In turn, even with the same proportion of trading fee commissions, the DEX's liquidity providers would receive better return than from other DEXs.
On the other hand, reward tokens distributions are controlled by DEXs or their stakeholders. Some DEXs, like Uniswap, don't provide reward tokens, but most others let their communities vote and decide on reward tokens distributions and the listing of token pairs.
Apart from DEXs, there are other tools to motivate liquidity providers to chip in:
- 1.Auto-compounding vaults
- 2.Leveraged yield farming supported by borrowing pools
- 3.Hedging tools and solutions to lower impermanent loss and/or real loss
- 4.Stop-loss / stop-gain features
- 5.Vaults with strategies to provide better return with less risk
Moreover, no liquidity provider or yield farmer can monitor the market around the clock, so automated monitoring is needed to safeguard their assets.
- 1.Adopt a market making mechanism that has higher capital efficiency.
- 2.Provide better return for liquidity providers.
- 3.Minimize impermanent loss/real loss for liquidity providers.
- 4.Automate operations to minimize manual effort of liquidity providers.
- 5.Better reward mechanism to attract more projects to list their tokens.
- 1.Adopt the Concentrated Liquidity Market Making model to provide higher capital efficiency.
- 2.Solve the pain points of Concentrated Liquidity through automation and customized strategies.
- 3.Provide leveraging tools to maximize return.
- 4.Provide hedging mechanisms to minimize risks.
- 5.Design user-friendly UI to minimize learning curve of tools.