Deep Dive into Aqua: Leading the Reform of DeFi Supply Side

Forward the Original Title‘深入 Aqua：资本效率与收益最大化兼得， DeFi 供给侧改革的引领者’

In the current crypto market, hotspots emerge frequently, and there is a high demand for on-chain transactions. L1/L2 solutions are competing fiercely, vying for liquidity and attention. The AI and MEME sectors within different ecosystems are constantly rising and falling, providing the best examples of this. However, compared to these, the DeFi track seems to be falling behind.

The lack of paradigm innovation has caused this once-pillar of the crypto world to gradually stagnate in terms of user growth and experience. With many chains operating simultaneously, liquidity fragmentation becomes a significant issue. On-chain DeFi has yet to form a “one-Hub, traverse all chains” cross-chain aggregation trading experience. On-chain traders are deeply troubled by MEV and poor quotes, fearing transaction costs. LPs find themselves trapped in a vicious cycle where providing liquidity leads to losses.

Poor experience and low returns naturally lead to subdued demand. As with any economic issue, subdued demand often stems from problems on the supply side— the lifeblood of DeFi lies in liquidity supply. We urgently need a better market-making mechanism to enable more efficient use of capital on the liquidity supply side. This fundamental improvement can provide traders with better quotes and a more liquid environment, allowing LPs to earn more.

Some projects have already identified this critical pain point, with Aqua being a pioneer in “DeFi supply-side reform.” Building upon cross-chain aggregation trading, Aqua introduces private market makers and a credit-based trading mechanism. This innovation creates a new paradigm of collaboration between liquidity providers and market makers, effectively revitalizing the market-making space and efficiency while ensuring the safety of LP funds and increasing their returns.

However, ordinary users may find it difficult to perceive and understand these optimizations on the supply side, even though they benefit from them. It is precisely because of Aqua’s inconspicuous product characteristics that in this edition, we will use popular science methods to point out the current shortcomings in the DeFi market, uncover how this product fills the gap, and analyze the value and potential of Aqua.

Amm, A Chronic Illness That Has Not Been Cured

Currently, what are the problems in DeFi?

Why do traders often fail to get better quotes and lower transaction costs? Why do LPs always end up losing money when providing liquidity?

The key to the problem may lie in the Automated Market Maker (AMM) mechanism, which is the cornerstone of DeFi.

The AMM mechanism has been widely adopted and plays an important role in providing decentralized, permissionless, and continuous liquidity. However, having merits does not mean there are no flaws:

When traders interact with AMM pools, they may encounter high slippage when liquidity is low or when trading volumes suddenly increase. Additionally, trading orders are typically public, and trades can wait in the pool to be executed, during which they may be front-run or exploited through other means, leading to increased transaction costs due to the MEV problem.

For LPs providing liquidity, the efficiency of making money is too low. Under the AMM mechanism, funds are statically allocated across the entire price curve, resulting in inefficient utilization.

At the same time, the high probability of LPs losing money is largely due to the persistent issue of impermanent loss inherent in AMM mechanisms.

When the prices of assets in AMM pools fluctuate significantly, impermanent loss occurs, and the money LPs ultimately withdraw may even be less than if they had done nothing.

A previous study from the University of Orleans in France showed that impermanent loss in other AMMs such as Uniswap is always permanent, and even in the most optimistic scenarios, it would reduce the profits that could have been obtained with equivalent strategies.

So what are we missing in the DeFi world?

Better liquidity supply and integration mechanism than pure AMM, allowing traders to obtain better quotes and lower transaction costs, allowing LPs to utilize funds more efficiently and earn more.

Once you understand this, it’s easy to understand the idea behind Aqua.

simply put, Aqua is trying to use private market makers (PMM) and quote request models to solve the symptoms of AMM.

The so-called private market maker model means that users request quotes from certain market maker entities instead of providing quotes through AMM’s contract program design, and dynamically adjust pricing and fund allocation based on market conditions.

In this model, traders can directly request specific trade quotes from market makers and then choose to accept or reject the quote, which is referred to as the “Request for Quote (RFQ)” model.

What are the intuitive benefits of using the PMM and quote request model?

• No MEV: The fixed quotes provided by market makers directly transact with traders and are settled off-chain. Therefore, quotes are not based on on-chain states and settlements, reducing the chances of MEV opportunities.
• Better quotes: When traders request quotes from market makers, the market maker provides a fixed price unaffected by subsequent market fluctuations. This differs from the price changes in the AMM model (determined by trade size and pool asset ratio), providing traders with price certainty.
• Addressing impermanent loss: PMMs dynamically adjust their buy and sell prices using external market data and internal strategies, rather than relying on fixed formulas. This means PMMs can more effectively manage inventory risk and prevent potential losses caused by market fluctuations.

Compared to the traditional AMM model, Aqua aims to achieve better pricing by directly connecting buyers and sellers, resulting in higher capital efficiency and lower spreads.

This overarching idea sounds promising, but how exactly is it executed?

How can we maximize the market-making efficiency of PMMs while ensuring LP interests, enabling this model to run more smoothly?

Programmable Liquidity Layer, Targeted Solutions

The specific answer from Aqua is to provide a “programmable liquidity layer,” forming a new paradigm of cooperation between LPs and PMMs.

Let’s not rush to understand the perplexing concept of “programmable liquidity” just yet. Instead, let’s start with the most fundamental needs of DeFi participants.

If you’re a liquidity provider or a market maker, what do you desire most?

Clearly, LPs want their assets deposited into liquidity pools to be maximally utilized, while PMMs always hope to have more funds available for market making.

Within these two desires lies the potential for cooperation.

Aqua has pioneered a groundbreaking “credit-based” design, where market makers can leverage their collateral assets to borrow LP funds from the pool based on a certain credit limit. This allows them to expand their market-making scope and increase capital utilization efficiency.

If you’re still having trouble understanding, consider the most common example in real life: banking deposits and loans.

You deposit funds into a bank, and someone else needs funds. The bank will require this person to provide some collateral as a basis and grant them a certain credit limit, allowing them to borrow the money you’ve deposited to help them with their needs.

Aqua’s design follows a similar principle. Essentially, market makers leverage LP funds to the maximum extent possible to improve DeFi’s capital utilization efficiency.

What’s worth mentioning is that market makers don’t need to consider which chain their collateral assets are on; the amount of collateral assets determines their credit limit. With the same set of collateral assets, they can access liquidity pools on all supported chains, using assets from the pools for market making, thereby expanding their market-making scope.

What if the market maker borrows money and doesn’t return it?

Note that here, “borrowing” doesn’t mean that LP funds are actually borrowed and then absconded with. LPs need not worry about the safety of their funds in the liquidity pool. The “borrowed” funds by PMMs for market making do not involve actual fund transfers; the funds remain in Aqua’s smart contracts. The “borrowing” and “repayment” are replaced by the positions held by long and short positions, settled or liquidated according to closure conditions. The funds deposited by LPs themselves are not affected.

Essentially, Aqua uses borrowed positions instead of actual fund transfers to represent temporary disposal rights over LP assets, maximizing the use of LP funds for market making.

The benefits of this approach are obvious.

Before this mechanism: cross-chain liquidity fragmentation, market makers could only use as much capital as they had, and because assets were not deployed on different chains, cross-chain market-making was not possible, resulting in low market-making scope and capital utilization efficiency.

After this mechanism: Market makers are not limited by where their assets are deployed on which chain, breaking through the size of the market maker’s capital reserve. By properly utilizing leverage multiples, they can leverage multiple times the amount of crypto assets compared to their own funds, maximizing market-making efficiency.

Indeed, because of this design, you should now understand the significance of the term “programmable liquidity layer”:

• Dynamic adjustments and customization: Allowing market makers to “program” or customize their liquidity usage strategies to maximize profits and efficiency.
• Implementation of complex strategies: By using PMMs and credit-based trading, Aqua can implement more complex trading and liquidity strategies that are difficult or impossible to achieve on traditional DeFi platforms. Managing and executing this complexity can be considered “programming” liquidity because it involves the application of algorithms and logic to achieve the expected market operation results.
• Adaptive and reactive liquidity: On the Aqua platform, liquidity can adaptively adjust according to changes in market demand and conditions. This adaptive liquidity adjustment is similar to event-driven programming in programming, where the system responds and adjusts its behavior based on external events (such as market price changes).

Still not clear? Let’s look at the following example, which is closer to real trading situations.

1. Traders (Alice): Alice wants to purchase USDT using ETH on the Aqua platform. She may submit her demand through various front ends such as DEXs or trading aggregators.
2. Liquidity Providers (Bob): Bob has some extra USDT and wants to earn interest. Therefore, he deposits USDT into the Aqua platform to provide liquidity. He may also leverage his funds to earn higher returns.
3. Credit Users (Carol): Carol is a market maker who wants to price the market and conduct trades but does not want to lock all her funds in one asset and on one chain. So, she collateralizes certain assets on Aqua and operates using a credit limit. This means Carol can borrow USDT provided by Bob (through the Aqua platform) to provide liquidity and pricing for Alice.
4. In the end, Alice successfully purchases USDT, thanks to the collaborative efforts of LPs and market makers.

In this example, each party has obtained their value:

Alice (Trader) receives fast and low-cost trading services, with better quotes and without worrying about slippage and MEV issues.

Bob (Liquidity Provider) earns more interest by lending out funds, making his funds more easily utilized without worrying about the safety of his funds.

Carol (Market Maker) provides services to Alice using borrowed funds and also has the opportunity to profit from market dynamics.

Aqua ensures smooth transactions and satisfaction for all parties by integrating different participants and providing mechanisms.

Thus, the chronic issues in the traditional DeFi AMM model have been effectively addressed.

Cross-Chain Trading Aggregation, the Perfect Solution.

The above prescription requires at least tackling cross-chain trading, liquidity aggregation, multi-chain assets, and market maker resources. Mediating among multiple parties is not easy, so why can Aqua do this? In fact, even before the launch of the Aqua product, the product team had accumulated professional experience in the liquidity aggregation business through Native and NativeX.

You can think of the former as an API that different projects can integrate to provide cross-chain aggregation trading functionality.

The latter is a standalone cross-chain trading aggregation product that has been successfully launched and operational for 10 months. It has achieved good trading volume data and can support cross-chain trading on ETH, BSC, Polygon, Arbitrum, Avalanche, Zeta, and Mantle.

Public data indicates that NativeX is at the forefront of the cross-chain aggregation field, integrating a significant amount of liquidity and accumulating numerous market-maker resources, capturing over 70% of the order flow in DeFi.

As a result, launching Aqua appears to be a natural choice. With existing liquidity and market maker resources, it makes sense to maximize the utilization of resources on both ends. This approach aims to maximize capital efficiency and returns for LPs, provide users with better quotes, and offer market makers a larger market-making stage.

Additionally, Aqua boasts a team with rich industry experience and financial support. The CEO holds a Master’s degree in Data Science from New York University and has over 8 years of experience leading data science teams, with expertise in machine learning, data mining, and project management. The advisor has previously served as the Chief Technology Officer of cryptocurrency trading company Altonomy and the CEO of cryptocurrency trading company Tokka Labs.

The CTO is an experienced full-stack engineer with extensive experience in EVM-based smart contracts.

At the same time, Nomad led a $2 million seed round for Native. Nomad Capital received investment from Binance in March 2023 and invested in its first project, Native, the following month. In December 2023, Native received another round of strategic investment from Nomad Capital. For general users, what are the points worth looking forward to with Aqua? Firstly, the project token has not yet been released, making it a noteworthy Alpha project in the DeFi space focused on optimizing liquidity. Aqua inherits the lineage of Native-related products, with coherent logic in business expansion, strong support from the team and funding, and no overlapping competitors in the DeFi space, capable of covering hot asset areas across multiple chains, making it worth early attention.

In addition, the nature of its business determines that Aqua is more likely to form a “golden shovel” effect. The more liquidity it can aggregate and the more L1/L2 collaborations it engages in, the easier it becomes to achieve this effect. Furthermore, the probability of different projects “airdropping tokens to users who have used Aqua” increases. Currently, Aqua’s internal testing has begun, and interested users can start using Aqua’s products on zkLink to earn points and await further benefits.

The Future Holds Promise.

As mentioned at the beginning, this round of bull market has frequent hot spots, and it is easier for you to feel that hot spots are blooming frequently. There are always surprises in tokens in different ecosystems.

This actually contains potential opportunities for DeFi —- when attention funds are limited, DeFi products that work alone cannot capture market share. Only by integrating assets and transactions in different ecosystems can we better seize the market.

If NativeX is the key driver of vertical and horizontal cooperation, then Aqua is an important lubricant connecting all parties:

Integrating fragmented liquidity from the supply side allows market makers and LPs to cooperate with each other to achieve better market-making efficiency and capital utilization efficiency, which ultimately benefits traders on the demand side.

Even though cross-chain aggregation transactions are still a relative niche field, products that allow everyone to win together always have their own unique narrative space.

It’s not easy for you to notice the product design that silently contributes behind the scenes, but you can’t ignore the future potential of development.

Disclaimer：

1. This article is reprinted from [TechFlow]. Forward the Original Title‘深入 Aqua：资本效率与收益最大化兼得， DeFi 供给侧改革的引领者’. All copyrights belong to the original author [TechFlow]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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