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The world of decentralized finance (DeFi) aims to provide decentralized, non-custodial financial instruments to replace traditional intermediaries in the financial system. By removing middlemen, DeFi aspires to reduce costs, increase transparency and accessibility, and return power to individual stakeholders.
While DeFi is well-formulated as a concept, in actuality there have been relatively few practical developments in this space in recent years, particularly compared to other aspects of the crypto world. Now, a new decentralized exchange (DEX) called SmarDex has emerged, with the potential to carry the DeFi space forward and render other DEXs obsolete. Below, we take a closer look at SmarDex and what sets it apart.
SmarDex: An Automated Market Maker That Can Generate Impermanent Gain
SmarDex is an open-source smart contract allowing users to exchange decentralized tokens without the use of a central authority. It is an example of an automated market maker, an autonomous trading mechanism encouraging users to provide liquidity to the market in exchange for a share of fees or tokens.
SmarDex addresses one of the biggest challenges facing the DeFi world: impermanent loss. Impermanent loss is a DeFi phenomenon referring to a change in the price of tokens compared to when a market participant deposited those tokens in the pool. Traditional DeFi protocols have allowed most users with funds to become market makers, thereby earning trading fees. But the risk of a change of price in tokens between when a user deposits them and later on when they withdraw them is significant. The greater the change in price of the tokens, the greater the risk of impermanent loss. Impermanent loss is called impermanent because, in theory, it can be undone if the price of the assets come back to where they started, but this is infrequent. Most DEXs therefore try to counteract it by trading fees and other rewards, but the risk remains to market makers in a DeFi system such as UniSwap.
How SmarDex Works
SmarDex manages the issue of impermanent loss by controlling liquidity using fictive reserve (FR). By using the traditional DEX model but changing the so-called k constant rule, SmarDex manages liquidity differently, aiming to maintain equilibrium over the long term while not only reducing impermanent loss, but potentially generating impermanent gains as well.
SmarDex’s liquidity pools, like those throughout the DeFi space, make it possible for users to supply liquidity by depositing tokens. Similar to other DeFi protocols, it also allows users to generate passive income by staking and farming. When users buy tokens from a pool at one price and sell them in a pool at a different price, it creates an imbalance between the pools, and the liquidity provider usually loses money. Fictive reserve uses two different liquidity reserves in this case.
SmarDex’s pools automatically calculate which token is rising in price in this case and sell less of it up front. By selling the rising token at a higher price later, liquidity providers can mitigate losses and potentially even see impermanent gains. But that’s not all of it: SmarDex also rewards Liquidity Providers with fees and rewards, offering users benefits they won’t find elsewhere.
In the case of SmarDex, the primary token is SDEX. It can be staked by users in order to earn passive income as a result of farming rewards and protocol fees. A fee of 0.05% on each SmarDex trade is allocated to liquidity pools (LPs) who have provided liquidity for the trading pair in question, while another 0.02% is converted into SDEX and distributed as rewards to all stakers according to weight.
SDEX’s total supply is 10 billion tokens, with half allocated to the initial liquidity pool that have already been bought by the public, 37.5% set aside for long-term farming yield and staking rewards over the next 10 years, and 12.5% has been distributed to early adopters through a boost period, to farming yield and related rewards (already ended)
On top of that, SDEX will become deflationary soon, as a part of the supply will be burned on every chain other than Ethereum, for each transaction.
SmarDex provides the first true revolution in the DeFi or DEX space in years. By mitigating or even reversing the issue of impermanent loss, SmarDex has the capacity to take over all other preexisting DEX’s.