Overview
Decentralized exchanges (DEXs) have transformed cryptocurrency trading by removing intermediaries and providing liquidity and price discovery through Automated Market Maker (AMM) models. However, traditional AMM models like Uniswap’s constant product model face challenges in highly volatile markets, including insufficient liquidity during price volatility, low capital efficiency and liquidity lockup during market volatility.
Oxiswap’s Dynamic Constant Product Model (Dynamic K Model) addresses these problems by introducing a dynamic liquidity management mechanism that ensures LPs can exit liquidity pools at any time while optimizing liquidity for volatile assets.
Model Introduction
The Dynamic Constant Product Model (Dynamic K Model) is an extension of the traditional AMM model, where the K (liquidity constant) adjusts dynamically based on market volatility. This model allows for better liquidity management in volatile markets and provides liquidity providers with the flexibility to exit liquidity pools without significant penalties or delays.
The model ensures efficient liquidity provisioning and allows LPs to exit liquidity pools at any time through several key components:
Dynamic k-Value Adjustment
Constant Product Foundation: The model starts with the basic formula x · y = k, where x and y represent the quantities of two tokens in the pool, and k is the liquidity constant. Unlike traditional models, here k is dynamic and adjusts based on market conditions.
Volatility Monitoring: The system continuously monitors market volatility using on-chain data or external oracles (such as Chainlink). Volatility ρ is calculated based on price movements over time. When volatility increases, the system adjusts liquidity accordingly.
Dynamic k-Value Adjustment: The formula for adjusting k based on volatility is:
k(t) = k0 · (1 + α · ρ )
k0: The base liquidity constant.
α : An adjustable coefficient that determines how much market volatility impacts k.
ρ: A volatility indicator based on recent price fluctuations.
When volatility increases, k expands, providing deeper liquidity to absorb price shocks. When volatility decreases, k contracts, improving capital efficiency.
Liquidity Exit Mechanism
No Lockup Periods: Unlike some AMM models that impose restrictions on when liquidity can be withdrawn, Oxiswap ensures that LPs can exit liquidity pools at any time. The dynamic k mechanism adjusts liquidity depth in real-time, ensuring that the system maintains balance even during liquidity exits under volatile conditions.
Proportional Share Distribution: LPs receive their proportional share of the pool’s assets based on their contribution, regardless of the withdrawal timing. The system dynamically adjusts k to maintain pool balance during withdrawals.
Withdrawal Price Protection: When LPs exit during periods of high volatility, the dynamic k value adjusts to prevent sudden liquidity depletion for remaining participants. This protects the liquidity pool’s stability and prevents market disruption from mass withdrawals.
Dynamic Fee Adjustment: During periods of high market volatility, trading fees automatically increase. This increased fee structure rewards LPs who continue to provide liquidity during volatile periods, encouraging them to stay while still allowing them to exit anytime.
Additional Reward Mechanism: LPs who provide liquidity during high-volatility periods receive rewards in Oxiswap’s native tokens. The longer LPs remain in high-risk pools, the more rewards they accrue, further incentivizing them to stay engaged during volatile market conditions.
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