The current cryptocurrency market sees frequent hotspots, leading to high demand for on-chain transactions. L1/L2 solutions are emerging rapidly, competing for liquidity and attention. The fluctuating trends in the AI and MEME sectors within different ecosystems are prime examples of this. However, compared to these sectors, the DeFi landscape seems somewhat lagging.

The lack of paradigm innovation has caused the once-pivotal DeFi sector to gradually stagnate in user growth and experience. With numerous chains in operation, liquidity fragmentation persists, and the on-chain DeFi experience has yet to form a seamless cross-chain aggregation trading experience. Traders face challenges such as MEV and poor quotes, leading to concerns about transaction costs. Meanwhile, liquidity providers find themselves trapped in a vicious cycle of losing money as they offer more liquidity.

Poor user experience and inadequate returns naturally lead to sluggish demand. Similar to any economic problem, sluggish demand often stems from issues on the supply side—in this case, liquidity provision. There is an urgent need for a better market-making mechanism to improve the efficiency of capital on the liquidity supply side. Only then can traders receive better quotes and a more liquid environment, while liquidity providers can earn more profits.

Some projects have recognized this critical stubborn problem, with Aqua leading the way in “DeFi supply-side reform.” By introducing private liquidity providers and credit-based trading mechanisms on top of cross-chain aggregation trading, Aqua has pioneered a new paradigm of collaboration between liquidity providers and market makers. This initiative revitalizes the market-making space and efficiency while ensuring the safety of LP funds and increasing their returns.

However, it is challenging for ordinary users to perceive and understand these optimizations, even though they benefit from them. It is precisely because of Aqua’s inconspicuous product features that in this article, we will use a popular science approach to highlight the shortcomings of the current DeFi market, uncover how Aqua fills this gap, and analyze the value and potential of Aqua.

AMM, a lingering illness

What exactly is the problem with DeFi now?

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

The automated market maker (AMM) mechanism, as the cornerstone of DeFi, may be the key culprit.

The AMM mechanism is widely adopted and plays a crucial role in providing decentralization, permissionless access, and continuous liquidity; however, success does not mean an absence of flaws:

When traders transact with AMM pools, it is easy to incur high slippage when liquidity is low or trading volume suddenly increases. Additionally, trading orders are often public, and trades can wait in the pool for execution, during which time they may be front-running or exploited through other means, leading to the MEV problem and increased transaction costs;

For LPs (Liquid Providers) providing liquidity, the efficiency of earning money is low, as funds are statically allocated across the entire price curve under the AMM mechanism, resulting in poor utilization efficiency;

At the same time, their probability of loss is high, largely stemming from the impermanent loss, a chronic issue caused by AMM.

When the asset prices in AMM pools fluctuate significantly, impermanent loss occurs, resulting in LPs receiving less money back than if they had done nothing.

A study by the University of Orleans in France earlier showed that impermanent loss in other AMMs such as Uniswap is permanent, meaning that even in the most optimistic scenarios, it would still reduce the profits that could have been obtained through 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 a quote for a specific trade from the market maker, and then choose to accept or reject the quote, which is the “request for quote (RFQ)” model mentioned earlier.

What are the intuitive benefits of using PMM and quotation request mode?

• No MEV: The fixed quotation provided by the market maker is directly concluded with the trader. The quotation is not based on the status and settlement on the chain. The price has been set off the chain. There is therefore no uncertainty and slippage in quotes, thus reducing the chance of MEV.
• Better offer: When a trader requests a quote from a market maker, the market maker provides a fixed price that is not affected by subsequent market fluctuations. Unlike price movements in the AMM model, which are determined by trade size and pool asset ratio, RFQ provides traders with price certainty.
• Solve the stubborn problem of impermanent loss: PMM dynamically adjusts the buying and selling prices it provides by using external market data and internal strategies rather than relying on fixed formulas. This means PMM can manage inventory risk more effectively and protect against potential losses due to market fluctuations.

Compared to traditional AMM models, what Aqua wants to do is to achieve better pricing by directly connecting buyers and sellers with more efficient use of funds and smaller spreads.

This big idea looks good, but how to implement it specifically?

How to maximize the market-making efficiency of PMM while ensuring the interests of LP, so that this model can run more smoothly?

Programmable liquidity layer, tailored solution

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

But don’t rush to understand the perplexing concept of “programmable liquidity.” Let’s start from the most primitive needs of DeFi participants.

If you are a liquidity provider or a market maker, what do you most expect?

Obviously, LPs expect the assets deposited into the liquidity pool to be maximally utilized, while PMMs always hope to have more funds available for market-making.

Within these two desires lies the possibility of cooperation.

Aqua has pioneered a “credit-based” design, where market makers can use leverage to lend out the funds provided by LPs in the pool, based on a certain credit limit, thereby expanding their market-making range and capital utilization efficiency.

If you still don’t understand, imagine the most common example in real life—bank deposits and loans.

You deposit funds with a bank, and someone needs funds; the bank will inevitably require this person to provide some collateral as a basis and grant him a certain credit limit, thus lending out the money you deposited to help him get things done.

Aqua’s design is similar, essentially allowing market makers to leverage up to lend out the LP’s funds for market-making as much as possible, to improve the capital utilization efficiency of DeFi.

It is also worth mentioning that market makers do not need to consider where their collateral assets are stored; the amount of collateral assets serves as the basis for determining the credit limit. With the same set of collateral assets, they can access liquidity pools on all supported chains and use the assets in the pool for market-making, expanding the market-making space.

What if market makers borrow money and then run away without repaying?

Please note that here, “lending out” does not mean that LP’s money is actually borrowed and run away with.

LPs do not need to worry about the safety of their funds in the liquidity pool. The “lent out” funds by PMMs for market-making do not involve actual fund transfers. Instead, the funds are still held in Aqua’s smart contract. The “lending out” and “repayment” are replaced by the positions held by the borrowed long and short positions. Settlement or liquidation is conducted according to the closing conditions, and the funds deposited by LPs themselves are not affected.

So essentially, Aqua is using borrowed positions to represent temporary disposal rights over LP assets, in order to maximize the utilization of LP funds for market-making.

The benefits of doing this are obvious.

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

After this mechanism: There is no need to care about where the market maker’s assets are deployed on which chain, breaking through the size of market maker’s capital reserves, and leveraging leverage to leverage multiple times the crypto assets than their own funds, maximizing market-making efficiency.

It is precisely because of this design that you should understand the meaning of the term “programmable liquidity layer”:

• Dynamic adjustment and customization: Allow market makers to “program” or customize their liquidity usage strategies to maximize profits and efficiency.
• Implementation of complex strategies: By using PMM and credit-based trading, Aqua can implement more complex trading and liquidity strategies that are difficult or impossible to implement in traditional DeFi platforms. The management and execution of this complexity can be considered “programmed” liquidity, as it involves the application of algorithms and logic to achieve the desired market operation results.
• Adaptive and reactive liquidity: On the Aqua platform, liquidity can be adaptively adjusted according to changes in market demand and conditions. This adaptive adjustment of liquidity is similar to event-driven programming in programming, where the system reacts and adjusts behavior based on external events, such as market price changes.

Still don’t understand? Let’s take a look at the following example, which is closer to real trading:

1. Traders: Alice wants to use ETH to purchase USDT on the Aqua platform. She may submit requests from various DEXs, transaction aggregators and other front-ends;
2. Liquidity Providers: Bob has some extra USDT and he wants to earn interest. Therefore, he deposits USDT into the Aqua platform to provide liquidity and may perform certain loans on his own funds to obtain higher returns.
3. Credit Users: Carol is a market maker, she wants to be able to price the market and trade, but she doesn’t want to have all her funds locked up in one asset and chain. So, she mortgaged certain assets on Aqua and used her credit line to operate. This means that Carol can borrow the USDT provided by Bob (through the Aqua platform) to provide liquidity and pricing to Alice.
4. In the end, Alice’s successful purchase of USDT was due to the joint efforts of LPs and market makers.

Each party in this example gets its own value:

Alice (the trader) gets fast, low-cost trading services, better quotes, and doesn’t have to worry about slippage and MEV;

Bob (liquidity provider) earns more interest by lending funds, and his funds are easier to use without having to worry about the safety of his funds;

Carol (the market maker) uses borrowed funds to provide services to Alice, while also having the opportunity to profit from market dynamics.

Aqua ensures the smoothness of transactions and the satisfaction of all parties by integrating different participants and providing mechanisms.

At this point, the stubborn problems in the traditional DeFi AMM model have been cured.

Cross-chain transaction aggregation, a natural fit

The above prescription requires at least cross-chain transactions, liquidity aggregation, multi-chain assets and market maker resources.

It is not easy to mediate between multiple parties. Why can Aqua do this?

In fact, even before the launch of the Aqua product, the team had accumulated professional experience in liquidity aggregation through projects like Native and NativeX.

You can think of the former as an API that can be integrated by different projects to provide cross-chain aggregation trading functionality;

The latter is a standalone cross-chain transaction aggregation product that has been successfully launched and operated for 10 months, achieving good data in trading volume, and supporting cross-chain transactions on ETH/BSC/Polygon/Arbitrum/Aavalanche/Zeta/mantle.

Public data shows that NativeX is already at the forefront in the field of cross-chain aggregation. It has integrated more liquidity and accumulated more market maker resources, and can receive more than 70% of DeFi’s order flow.

Therefore, becoming Aqua is more like a natural choice.

Since there are liquidity and market maker resources, we might as well maximize the use of resources at both ends, allowing LPs to maximize capital efficiency and returns, allowing users to get better quotes, and allowing market makers to have a larger market-making stage.

In addition, Aqua also has an experienced team and financial support in the industry.

The CEO holds a master’s degree in data science from New York University, has more than 8 years of experience in leading a data science team, and has extensive experience in machine learning, data mining and project management.

The consultant was the chief technology officer of Altonomy, a cryptocurrency trading company, and the CEO of Tokka Labs, a cryptocurrency trading company.

The CTO is a full-stack engineer who has been in the industry for a long time and is familiar with EVM smart contracts.

At the same time, Nomad led a $2 million seed round in 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 ordinary users, what are the current highlights of Aqua?

First of all, the project token has not been released yet, making it an Alpha project worthy of attention in the DeFi field for optimizing liquidity.

Aqua is in the same vein as Native-related products. It has self-consistent business expansion logic, a strong team and financial support, and there are no overlapping competing products in the DeFi field. It can cover popular field assets on multiple chains and is worthy of early attention.

In addition, the type of business determines that Aqua is more likely to form the golden shovel effect.

The more liquidity that can be aggregated, the more L1/L2 that cooperate, and the easier it is to become a golden shovel —- the higher the probability that different projects will “empty investment funds to users who have used Aqua”.

Currently, Aqua’s internal beta has begun. Interested users can start using Aqua’s products on zkLink and start earning points, waiting for subsequent benefits.

Promising future

As mentioned at the beginning, this bull market has seen frequent explosions, making it easier for you to feel the frequent emergence of hotspots and surprises in different ecosystems.

This harbours potential opportunities for DeFi - when attention and funds are limited, standalone DeFi products cannot capture market share; it’s through cross-ecosystem aggregation of assets and transactions that one can better seize the market.

If NativeX is the key driver for cross-ecosystem aggregation, then Aqua is the vital lubricant for connecting all parties:

By integrating fragmented liquidity from the supply side, Aqua enables better market-making efficiency and capital utilization for market makers and LPs, ultimately benefiting traders on the demand side.

Even though cross-chain aggregation trading remains a relatively niche track, products that promote mutual benefits always have their unique narrative space.

Product designs that silently contribute behind the scenes may not be readily apparent, but you must recognize the future potential of their development.

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