Perfect Swap: A Next-Gen Liquidity Layer For Arbitrum

January 4, 2024

In conclusion

Since the advent of Uniswap's constant market-making product, DeFi has been akin to affixing multiple stickers on a figurative percolating bucket full of water. Despite the seemingly negative connotation, this is not a drawback. Progress in the DeFi ecosystem is often incremental. Rather than solely relying on groundbreaking innovations to keep propelling us forward, it’s the subtle tweaks to existing cornerstone innovations that keep the needle ticking. 

Initially, on-chain trading faced issues with the complex traditional constant reserve model (e.g., Bancor). An example is impermanent loss susceptibility leading to Uniswap's 0-1 innovation with the Constant Product formula.  Subsequent iterations of AMMs from Uniswap and other protocols have been linear towards the improvement of the Constant product model to be more capital efficient, sustainable, and robust — and has been multifaceted in approach. 

With Layer 2s like Arbitrum, AMMs became a lot more efficient in terms of fees; with concentrated liquidity, AMMs are a lot more capital efficient, likewise with tokenomics models like the Solidly ve(3,3), AMMs found a way around liquidity and incentive problems which is great but not complete. Camelot introduced some new bits as well, but that's also not the full recipe. The winner lies somewhere in between these innovations, so combining elements of them may be the way forward.

It’s on these bases that Perfect Swap is combining some bits of the ve(3,3) incentive model with the best parts of Camelot, Uniswap, and other DEXs to bring to the market a more efficient liquidity layer on Arbitrum. In the next few paragraphs, we will examine all the working parts of Perfect Swap. 

How the protocol works 

Perfect Swap allows DEX traders to perform seamless any-to-any ERC20 token swaps with a customized trading experience for correlated and uncorrelated assets or volatile and non-volatile asset types. As we said earlier, Perfect Swap combines the good parts of the Solidly model and the Camelot structure to offer a unique experience while improving on their downsides. 

For example, in terms of gas fees, the Solidly v2 engine falls short of giving users a cost-effective experience. Perfect Swap in this regard worked around three things: Oracle, external callbacks, and fee accounting; reimagining the way they function, as well as optimizing and streamlining them to achieve up to 50% reduction in gas prices when compared to other AMMs. 

Moreover, the Perfect Swap AMM adopts the Uniswap v2 formula (x×y≥k) for volatile pairs while adopting the Solidly (x³y+y³x≥k) model for non-volatile pairs.. 

In terms of fees, the protocol uses a dynamic fee structure where fees are adjustable according to market dynamics with a minimum and maximum value of 0-10% and a default setting of 0.2% for volatile pairs and 0.02% for non-volatile pairs. 

This is the first ve(3,3) to have a self-adjusting fee mechanism. The purpose is to protect LPs in turbulent market conditions and appropriately reward them for committing their capital. 

The pools are categorized into four sub-categories:

  • Ultra-stable
  • Bluechip
  • Standard 
  • Exotic 

80% of the fees are allocated for LPs and 20% for vePRFCT voters. 

Perfect Swap will also be launching directly with concentrated v3 liquidity pools. The fees on Perfect Swap’s CLAMM pools are: 

0.01% for ultra-stable pairs (e.g., USDC/USDT) with a 1 bps/tickSpacing rate.

0.05% for bluechip pools (e.g., WETH/USDC) with a 10 bps/tickSpacing rate.

0.3% for standard pools (e.g., LINK/WETH) with a 50 bps/tickSpacing rate.

1% for exotic pools (e.g., PRFCT/WETH) with a 100 bps/tickSpacing rate.

Another cool aspect of Perfect Swap is that liquidity providers can earn rewards while maintaining full control of their assets, making the act of LPing secure. Apart from this, the AMM goes further to employ two defense mechanisms to protect liquidity providers in the forms of “Just-in-time” (JIT) liquidity defense: i.e injecting liquidity into the narrowest possible price tick range within the duration of a single block to ensure favorable prices, and impermanent loss defense through the use of a proprietary algorithm to detect volatility and consequently adjust pool fees in real-time. 

With the adoption of concentrated liquidity pools, to engage in liquidity provision on Perfect Swap, liquidity providers will have to select their preferred token pair and deposit within a desired price range with upper and lower limits. The deposited liquidity is utilized when the trading price falls within these bounds, optimizing capital efficiency and increasing potential earnings from fees, emissions, and incentives. 

Additionally, fees accumulate in real-time and can be claimed every 24 hours through an on-chain reward calculation presented in the form of a Merkle tree. This innovative design minimizes the gas expenditure associated with claiming rewards, making the process both cost-effective and efficient for participants in the Perfect Swap ecosystem. Rewards for providing liquidity to Perfect Swap pools are shared pro-rata in the base currency of the pair—80% to the LPers and 20% to vePRFCT voters. 

But that’s not all. Perfect Swap takes on a unique and sustainable approach to this sharing formula for liquidity providers. 

Emissions “ve(3,3)” with a twist: 

In the race to build the most efficient AMM, it’s important to remember that the hallmark of any AMM is the ability to consistently maintain a healthy level of liquidity on the DEX such that traders find it super attractive. It is at this point that the dilemma often sets in: You need liquidity providers to achieve a consistently healthy level of liquidity, and in turn, the liquidity providers need competitive yields, and to achieve competitive yields, there needs to be sufficient volume traded.

Automated Market Makers (AMMs) enhance yield by issuing native tokens to liquidity providers (LPers), with many decentralized exchanges opting for the Solidly veToken method to maintain competitive yields. Nevertheless, challenges arise when unregulated high emission rates jeopardize the longevity of the native token, inevitably impacting the DEX's sustainability. Elevated emissions create an environment susceptible to liquidity vampires seeking short-term gains, drawn by the emission incentives to attract liquidity. Additionally, this approach contributes to overall instability, as rewards can be claimed flexibly, introducing uncertainties into the system.

For example, Camelot in a bid to solve the Incentive, yield, and emission trilemma embraced a low-to-high APR approach to attract and keep liquidity providers. However, this approach doesn’t necessarily solve the problem such that it becomes sustainable. 

Perfect Swap on the other hand is doing things differently. How?  

Vesting Mechanism: Perfect Swap fixes the problem through a vesting system for a portion of LP rewards. How this works is that 70% of the rewards are distributed to LPs in $PRFCT (the protocol’s native token) with which they (LPers) can do whatever they want, including getting involved with governance. The other 30% is distributed in vePRFCT (Perfect Swap’s veNFT governance token), and vested for a week. The rewards are distributed or released but are time-locked for the maximum duration and can be claimed when the duration expires. This vesting process creates a balance between short-term benefits and long-term engagements. 

One way to look at this approach is that every time someone provides liquidity to a pool in the protocol, they wait an extra week to fully receive their reward. What this means is that the protocol can essentially be stable, as it prevents sudden and large reward claims that can affect market dynamics without jeopardizing the incentive to attract liquidity as the amount scheduled for immediate release is still substantial (70%). Liquidity will remain within the protocol for the length of time it takes to fully claim rewards leading to long-term sustainability as it creates a balance between protocol (liquidity) and LP (rewards) needs. 

Another noteworthy aspect of compulsive vesting is that holding vePRFCT for a week compels liquidity providers (LPs) to engage in governance, aligning with the positive behavior encouraged by the Solidly model. 

How $PRFCT emissions work: 

Here’s how $PRFCT emission will work. Firstly, there will be an initial emission of 500,000 $PRFCT tokens in the first week after the launch scheduled for January, this will gradually increase by 2% weekly over the course of 10 weeks. After these 10 weeks of increase, the emissions will decrease by 1% over a space of 30 weeks. This is but a precursor to a stabilized emission rate which will come into place once the 30-week decreasing emissions occur. 

As per the tokenomics, $PRFCT will have a total supply of 2 million tokens with 500,000 used to bootstrap liquidity while another 500,000 will be used to reward early adopters that interact with the protocol. Lastly, locking $PRFCT tokens for vePRFCT will qualify lockers to receive 1 million $PRFCT tokens in rewards throughout a lock period of 4 years. 

The $PRFCT token 

The PRFCT token is Perfect Swap’s utility token that will be used to incentivize liquidity provision to the protocol’s pools and also can be converted to vePRFCT (ERC-721) veNFT on a 1:1 basis, unlocking a lot of use cases such as: 

  • Exposure to extra earnings: Holding vePRFCT will attract 20% of the fees generated by the protocol. As other protocols also try to boost their pools, offering incentives, 100% of these incentives will go to vePRFCT holders. 
  • Vote on Pool Emissions: vePRFCT holders will be able to engage in a weekly vote on which pools receive $PRFCT emissions opening the door to bribes and incentives for votes to direct emissions. 
  • Governance rights: Holding vePRFCT tokens, as we mentioned earlier, will allow holders to participate in decision-making processes relative to the progress of the protocol 
  • Boosts: Not only will vePRFCT holders benefit from the perks above, but they will also be able to boost LP positions up to 2.5x should they lock their vePRFCT tokens.  

Builders behind Perfect Swap

Nick, the pioneer of Perfect Swap, was an early adopter of Bitcoin (since 2014) and was previously involved in Ethereum mining. His introduction to the realms of DeFi occurred in 2019, and since then, he has shown a particular interest in Layer 2 solutions. Drawing from his experience with various AMMs across the DeFi landscape, Nick has curated a skilled team to develop Perfect Swap, aiming to offer an enhanced trading experience compared to the current market standards.

Concluding thoughts

Perfect Swap’s approach to building an efficient CLAMM on Arbitrum is strategic and nothing out of place as Solidly itself is a combination of different ideas targeted at sustainability. The goal for Perfect Swap is to build an efficient native DEX on Arbitrum that will later expand to other chains, and the approach to achieving this is quite solid starting with the user interface. 

Also, putting sustainability at the forefront of their development process speaks volumes— a winning formula for anyone or any protocol that’ll stand the test of time in this extremely fleeting space. 

However, we are keen to see how all of this plays out and look forward to Perfect Swap stealing some mindshare from Uniswap, Balancer, and Camelot — all leading DEXs on Arbitrum. 

We believe there’s still a lot of work to be done but we are encouraged by the team’s vision and enthusiasm to get this over the line.

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