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Algebra Integral: The Uniswap V4 Inspired DEX Solutions Provider

February 14, 2024

In conclusion

The thematic description of the year 2018 in crypto can be referred to as the “Hayden year” — in reference to the brain behind the mathematical formula (x * y = k) that gave birth to AMMs and on-chain decentralized exchanges (DEXs), beginning with Uniswap. Hayden Adams’ breakthrough was a 0 to 1 moment for DeFi. 

However, after a series of innovative iterations on the constant market function model, particularly as of July last year, we found ourselves at a juncture where the entire community was immersed in a philosophical debate regarding Uniswap's adoption of the BSL licensing model for the third and fourth versions of the leading Automated Market Maker (AMM).

How we got to this point is very important, and as such, we recommend speed-reading through our previous article, where we’ve explained the evolution of Uniswap from the first version of the protocol to the most recent, Uniswap v4. 

Done? Okay cool. 

One of the suggested reasons behind the adoption of this time-locked licensing model (BSL) by Uniswap was to prevent a second SushiSwap event from occurring – You know, the historic ‘Fork, incentivize, and steal market-share’ vampire attack that happened a few years ago. However, given that the protocol already has a token (UNI), the argument is fully focused on Uniswap presumably wanting to maintain its gigantic market share. How sway, Hayden! How sway!

Despite Uniswap's approach to open-sourcing UniV4, the strategy has somewhat failed to stop or slow down innovation by other protocols. Several have emerged with interesting approaches to implementing UniV4 features, including singleton, flash accounting, Hooks, etc. 

However, what's on today's plate is an alternative to UniV4 that we truly believe takes the cake in terms of approach, with features that outshine UniV4. But just in case you want to be the judge of that and not just take our word for it, strap in; let us show you all the reasons why we think these guys are Uniswap’s Killmonger

Algebra as a DEX solutions provider 

Worthy contender! Show thyself!

What is Algebra? Another mathematical “dydx, x*y=k” brain-damaging protocol that constantly reminds me that I skipped maths class? 

Well, not exactly. Algebra is not a protocol per se. Rather, the adequate way to describe them is as a DEX Engine providing DEXes with codebases of two kinds: 

- V3 (concentrated liquidity & dynamic fees)  

- V4 (modular architecture with core code + plugins/hooks) a la Uniswap. 

If Algebra is not considered a protocol, at least in the traditional sense of what we think a protocol is, then how does it operate? The team (Algebra Labs) employs a Business-to-Business (B2B) software-as-a-service (SaaS) model, enabling protocols or Automated Market Makers (AMMs) to incorporate its unique DEX engine and utilize the service. Picture Algebra as a provider of AMM solutions, empowering developers to leverage a flexible set of features that cater to the interests of those integrating the engine and, by extension, their users.

There are two components to Algebra and that’s Algebra V3 and Algebra V4. Algebra V3 was one of the first protocols to elevate the concentrated liquidity concept by combining it with its two unique features; Dynamic fees and In-built farming. Algebra v3 acts as a precursor to Algebra v4, so it is only fitting that we first delve into the functionalities of Algebra v3. 

Algebra v3 (Dynamic fees & in-built farming) 

Uniswap v3 was developed to address inherent issues present in the first two iterations of the Automated Market Maker (AMM), such as the negative or flat profit curve for Liquidity Providers caused by impermanent loss. In contrast, Algebra v3 serves as an enhancement, specifically targeting the blind spots associated with Uniswap’s V3 AMM.

One of the solutions introduced in UniV3 was the concentrated liquidity feature, allowing liquidity providers to deploy liquidity at specific price points to increase capital efficiency and take advantage of fees in specific ranges. This feature puts the liquidity provider in the driver’s seat, controlling their positions and how much fees they collect from the pool, reducing the chances of impermanent losses. 

Another feature of Uniswap v3 is the adoption of fee tiers for different types of pools: Stable pools with 0.05%, Normal pools with 0.3%, and Exotic pools set at 1%, to create and maintain a balance of interests between all segments of users —- regular traders, arbitrageurs, and liquidity providers. 

However, the new features came with their own unique issues. For example, the disparity in fee tiers doesn’t create a real balance as it affects the dispersal of liquidity across all pool types (people will go where the money is) and the fact that asset behaviors are not one-way and can be dynamic. 

Algebra introduced two unique methods to solve these problems: Dynamic fees and In-built farming. 

  • Dynamic fee mechanism: This is one of their standout features, as it augments the power of concentrated liquidity. Rather than having three separate fixed fee pools, Algebra has one dynamic pool that calculates fees depending on factors such as volatility and pool volume, amongst others. This model essentially makes the LPs life easier. They don’t need to hop from pool to pool and can precisely choose their liquidity range to minimize slippage and impermanent loss. Simply a superior user experience. 
  • Built-in farming: LPs receive an ERC-721 LP token after creating a liquidity position, enabling participation in 'campaigns' through a farming contract. Rewards are calculated based on the duration your LP position remains in range and distributed throughout the farming period. It is now available as a plugin in Integral-based DEXs.

Algebra was the first team to properly iterate upon concentrated liquidity after it was introduced by Uniswap V3 with its dynamic fees and in-built farming. They, however, didn't halt progress at these two features. The team acknowledged the necessity for a more flexible and efficient system in the way Automated Market Makers (AMMs) operate, recognizing that Decentralized Exchanges (DEXs) can swiftly become obsolete amid the rapidly evolving DeFi space. This conceptual framework led to the inception of Algebra Integral.

Algebra Integral (v4) – Modularity 

Remember when we mentioned earlier that Algebra serves the purpose of easily integrable AMM solutions for DEXs? The Algebra Integral version is all of that on steroids. It is a much more advanced solution that introduces the concept of custom plugins or hooks to DEXs. 

Algebra integral builds on Algebra v3 as a concentrated liquidity engine with a modular approach to its architecture, splitting the essential components into two parts: 

  • The core codebase, which is basically the foundational level of the engine that adheres to the fundamentals of AMM functionality.
  • Plugins/hooks – Independent smart contracts connecting the liquidity pools of a DEX. By DEX here, we mean external DEXs that integrate the Algebra engine. 

The latter, plugins, stands out as the most crucial and intriguing component of Algebra Integral due to its impact on the flexibility of the design. Developers can leverage these plugins to incorporate extra layers of functionality, with the ability to delete, update, or replace the plugins either collaboratively as a team or through a governance procedure, such as a Decentralized Autonomous Organization (DAO).

Under this framework, both the built-in farming and dynamic fee mechanism operate as plugins that can be adapted by the DEXs to offer unique functionality to their users according to their needs. 

Think of it this way. You buy an online game and can either choose to play the game in its default mode or leverage additional power-ups designed to give you an advantage over your opponents to get an edge. 

The exciting part is that the modular architecture design of Algebra v4 doesn’t just offer readily built plugins but also allows developers to create their own custom plugins. 

Some of the ready-to-use plugins are: 

  • Volatility-based fee plugins to boost incentives for LPs by up to 20% on average
  • In-built on-chain farming 
  • Limit order plugin
  • TWAP Oracle for historical data

These plugins open the door to new features when added to the DEX, offering a plethora of benefits to developers that integrate the engine. Some of these benefits are:

  • Improved gas efficiency, allowing DEXs to save 7-22% in gas costs, and up to 80% in some cases, when compared to Uniswap v3
  • Unlocking new revenue streams for DEXs
  • Chain-specific optimization for DEXs 

There are also some plugins that you can look forward to using in the near future. They include: 

  • Perpetuals
  • AI 
  • Liquidity locking 
  • Staking-based fee discounts 

How does Algebra Integral edge Uniswap v3/v4

Algebra Integral currently holds a distinct advantage over Uniswap v4, primarily due to the time-lock BSL licensing method employed by the latter, which inhibits protocols from forking it. Consequently, Decentralized Exchanges (DEXs) are compelled to explore alternative options, and Algebra Integral emerges as a promising choice with some additional advantages. 

One such advantage is that while UniV4 aggregates liquidity to one contract, referred to as the Singleton approach, it bears risks as a compromise can be catastrophic. However, on the other hand, Algebra Integral keeps pools separate. This separation mitigates the risks associated with a compromise, as a failure in one pool does not have a catastrophic impact on the entire system.

Another point of difference between both competitors is that, unlike Uniswap V4, the Algebra Integral engine is ready to be integrated and used on other EVM chains – Uniswap, on the other hand, doesn’t have clear-cut plans for v4 to be available on other EVM chains. 

Lastly, the main difference between the Uniswap v4 hooks and Algebra Integral plugins is in the implementation of these plugins. Algebra’s approach allows hooks to be changed on top of the pool and, in doing so, makes updates of pools seamless, as multiple plugins can be created on top or updated.  

Fees and tokenomics 

As previously mentioned, Algebra operates as a Business-to-Business (B2B) product, providing decentralized exchanges with a codebase. The pricing model involves a one-time integration fee and a percentage of the fees earned by the decentralized Exchanges utilizing Algebra as their underlying infrastructure.

The $ALGB token serves as the native token of the protocol and is an ERC20 token on the Polygon network.

The tokenomics of the protocol is structured to be deflationary, incorporating a buyback and burn mechanism. Algebra protocol accrues fees from all DEXs integrated with the v3 codebase powered by Algebra. The fee amount is variable, contingent on the tokenomics of each DEX, and is collected on a weekly basis. The fee collection process is as follows:

  • The protocol collects fees from all integrated DEXs.
  • 30% of the collected fees are allocated to operational needs.
  • The remaining 70% is dedicated to the buyback of $ALGB tokens, subsequently followed by burning them, contributing to the deflationary nature of the token.

But this is not all, 

The team recently announced that they’ve started working on new tokenomics. The reasoning is that they want tokenomics more suited for a B2B protocol rather than a regular DEX.

On top of the tokenomics change, Algebra is set to become multi-chain in 2024.  This plan involves the Integral expansion with more DEXes (including a possible Sushi integration), the launch of a Plugin Marketplace for DeFi builders, and an Algebra Liquidity Layer. 

Exciting times ahead, anon. 

Concluding thoughts

Algebra’s design has seen relative success, with some of the most used DEXs across EVM chains being powered by the DEX Engine, such as THENA, Quickswap, Camelot, Spiritswap, Synthswap, Swapsicle, and much more. 

With such an impressive catalog already on display, one can only imagine what the future holds for the absolute gigabrains at Algebra. 

The demand for DEXs will never decrease, but the demand for superior DEXs will always keep increasing. In an industry as cutthroat and competitive as DeFi, if you aren’t at the bleeding edge of newer developments, you will get left behind in an instant. 

At the end of the day, it comes down to building a product that provides the best possible on-chain experience to users, and then the users will decide if it's good enough or not. So far, Algebra has checked all the boxes and will likely continue to do so in the future. 

So keep an eye on these chads. We expect to see great things. 

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