Decentralization brings untold advantages to the monetary trade, introducing trustless protocols with self-custody of belongings, serving to to foster innovation and provides customers extra management. However like all new applied sciences, it should overcome some difficult hurdles if it is to go mainstream, and few are larger than the problem of liquidity.
The dearth of liquidity in DeFi is a big drawback as a result of decentralized protocols are completely reliant on it, and if they do not have it, it may possibly forestall them from functioning correctly, leading to uncontrollable asset value volatility, excessive slippage and inefficient market making.
The difficulty stems from the truth that decentralized trade platforms and protocols must create their very own liquidity, which includes tapping their person base. So the accessible liquidity on any given DEX is restricted by what number of customers it has, because it’s these people who find themselves incentivized to deposit tokens in its liquidity swimming pools. If a DEX platform does not have ample liquidity, customers can wrestle to purchase and promote belongings on the costs they want, and in some case their orders could go unfulfilled. It is a state of affairs that can’t persist if DeFi is to be taken critically.
Fragmentation Frustrations
A fast verify on DefiLlama exhibits that liquidity should not actually be an issue for the trade, as there’s presently greater than $99 billion price of worth locked within the DeFi ecosystem. Nonetheless, DeFi’s drawback is one in every of fragmentation. Today, there are dozens of various blockchains that every one help DeFi functions. Every of those blockchains is an unbiased community. They every have their very own consensus algorithms, hashing methods and transaction processing speeds, with totally different block sizes and so forth. This makes them incompatible with one another, which means the switch of crypto belongings throughout them may be very tough.
For example, Ethereum is the most important DeFi blockchain however it solely accounts for roughly half of the whole worth locked. Different standard DeFi chains, akin to Avalanche, Aptos and Solana, have a a lot smaller share of the TVL in DeFi. So the accessible liquidity is fragmented throughout many alternative chains, which means every protocol can solely entry a fraction of the accessible capital.
Due to this fragmentation, one of many greatest challenges for any modern new protocol is to bootstrap the liquidity it must get off the bottom. A lot of their effort is concentrated on attracting the liquidity suppliers essential to maintain the brand new protocol, which implies much less time will be spent on the precise innovation. It is a resource-intensive problem that creates a excessive barrier to entry for brand spanking new protocols.
Fixing Fragmentation
Throughout the DeFi trade, the overwhelming majority of decentralized protocols are centered on spot buying and selling and perpetuals. Various markets, akin to choices, have barely made a dent within the DeFi area.
Seeking to change this, Ithaca Protocol has created a non-custodial threat primitive that goals to develop on-chain choices quantity into the billions of {dollars}. Importantly, it says it’s going to accomplish that by fixing the problem of liquidity fragmentation. Finally, it hopes to scale the DeFi choices market to trillions of {dollars}, assembly the big demand for structured payoffs.
Ithaca’s resolution to the issue of liquidity fragmentation is a novel matching engine that basically distills choice payoffs into composable constructing blocks constructed with sensible contracts. On this approach, it’s going to help atomic order matching with conditional order logic. It does this primarily based on ideas akin to replication, portfolio dominance and collateral optimization.
Its resolution sounds complicated and certainly it most positively is, however it’s additionally fairly ingenious. Ithaca will get across the fragmented liquidity and the absence of risk-sharing mechanics in DeFi choices with a permissionless infrastructure that permits liquidity to be aggregated throughout chains, supporting extra environment friendly threat sharing throughout time and occasion horizons, and in the end, extra environment friendly markets. Its secret sauce is an algorithmic, auction-based market clearing framework that is resistant towards Miner Extractable Worth or MEV manipulation. As well as, the framework additionally helps the deployment of composable choices and structured product markets for nearly any DeFi asset.
The Ithaca Matching Engine consists of quite a lot of shifting components. It implements Frequent Batch Auctions at discrete intervals, successfully matching orders via auctions slightly than conventional order books. It additionally introduces the idea of Danger Sharing Constructing Blocks or RSSBs, that are outlined as statically replicable derivatives which might be instantly built-in inside it to make sure orders are matched on the atomic degree.
Combined Integer Linear Programming Optimization permits the matching engine to seek for clearing costs and related units of constant orders that fulfill these costs in an optimum approach that maximizes the executed quantity and satisfies customers’ greatest execution necessities. Lastly, it additionally employs a “Portfolio Dominance” mechanism to make sure matching is completed in a riskless approach, by consolidating orders and matching them to make sure the protocol belongings all the time exceed liabilities.
The whole lot is tied collectively by sensible contracts that implement post-trade settlement, with collateral necessities taken care of by a novel Collateral Optimization Engine. Axelar’s cross-chain gateway protocol performs the position of bridging belongings throughout a number of blockchains, aggregating liquidity. All of this takes place below the hood, inside the Ithaca app that permits skilled merchants to implement a variety of choices buying and selling methods, together with easy payoffs and extra complicated, structured merchandise.
Jumpstarting DeFi Choices
Ithaca’s crew has excessive hopes for its protocol, saying it desires to embed it at each stage of the lifecycle of risk-sharing devices. It is an bold venture to make sure, as a result of Ithaca is constructing what is admittedly a completely new sort of infrastructure that may reimagine DeFi’s derivatives markets. But when it pays off, it might effectively be simply what DeFi wants to unravel its liquidity fragmentation as soon as and for all.