Lifinity, a decentralized exchange (DEX) on Solana, disrupts the status quo of DEXes, in terms of both technical makeup and business development.
To date, decentralized exchanges (DEX’s) have played much of the same role in blockchain ecosystems: support trading volume for users by incentivizing retail liquidity.
However, Lifinity diverges from traditional models, and takes a unique stance by owning the majority of liquidity on its platform. This, combined with its delta-neutral market maker (DNMM), not only generates profits for Lifinity but also ensures infinite liquidity for traders on the Solana network.
Yet, Lifinity isn’t just a trading hub; it also contributes vital infrastructure by providing liquidity and market-making services to Solana protocols.
Let’s examine the innovative features that set Lifinity apart, exploring how it charts a new course in the realm of DEXes on Solana.
What is Lifinity?
Lifinity is a decentralized exchange (DEX) on Solana, that allows users to swap crypto assets. As the name suggests, the protocol aims to provide “infinite liquidity” for users on Solana to facilitate trading of all sizes.
At the time of writing this, Lifinity is ranked 4th by total value locked (TVL) among Solana DEXes, with a TVL of $91.54m.
Despite Lifinity’s TVL rankings, it achieves the highest amount of capital efficiency among Solana DEXes. Capital efficiency is a measure of a DEX’s liquidity compared to the trading volume it can support. Capital efficiency is calculated by dividing a DEX’s trading volume by its TVL (Capital efficiency = Volume/TVL). For example, on Lifinity, a pool containing $500k can handle a weekly trading volume of $1.6m, resulting in a capital efficiency of ~5x.
The platform is directly integrated with Jupiter, Solana’s DEX-aggregator, meaning orders on Jupiter use Lifinity and other Solana DEXes to route trades.
How does Lifinity work?
Lifinity is powered by its delta-neutral market maker (DNMM) model which facilitates trades and manages liquidity. The DNMM model improves upon the constant product market maker (CPMM) formula helping the platform (a) achieve capital efficiency, (b) reduce impermanent loss (IL), and (c) generate market-making profit (MMP).
The DNMM model achieves this through the following mechanisms:
- Concentrated liquidity
- Oracles
- A rebalancing mechanism
Concentrated Liquidity
To achieve this, Lifinity adds the concept of leverage to the CPMM formula (x*y=k) by multiplying the variables x and y by L (the leverage amount).
Oracles
Price oracles help quote accurate prices of assets within liquidity pools. Lifinity employs Pyth price oracles to mitigate the impact of impermanent loss (IL) resulting from concentrated liquidity. In doing so, Lifinity can decrease IL and rely less on arbitrageurs to adjust the price –as the original CPMM formula does.
Rebalancing Mechanism
Rebalancing involves adjusting a pool’s liquidity to manage fluctuations and maintain balance within a liquidity pool.
To determine a rebalancing event, Lifnity uses the initially deposited amount of the base asset to set a “target amount”. Using a USDC/SOL pool as an example, the base asset is SOL, and the quote asset is USDC. Let’s say the target amount of the base asset is 100 SOL.
When 100 SOL comprises more or less than 50% of the pool’s value due to trading activity, the pool balance begins to change (i.e. 60/40). As the balance changes, Lifinity waits for the base asset to reach a certain threshold (i.e. 10%) before triggering a rebalancing event.
When the event is triggered, Lifinity sets a new target amount for the base asset (SOL) so that its value equals 50% of the pool at the current price –restoring balance.
Then Lifinity adjusts liquidity for buyers and sellers. If the SOL increases in value, Lifinity increases liquidity for traders buying SOL, and liquidity for traders selling SOL decreases. On the other hand, If the SOL decreases in value, liquidity for buyers decreases, and liquidity for sellers increases.
When Lifinity adjusts liquidity this way it allows the platform to sell SOL –taking profit– when the price rises and buy more SOL when the price falls. Additionally, Lifinity is continually using the platform fees to buy more USDC (the quote asset), so its value can grow gradually over time.
The process of selling assets when they’re high and buying more when they’re low –via rebalancing events– allows Lifinity to reverse the effects of IL by generating what’s known as market-making profit (MMP). Furthermore, the platform is working towards optimizing the parameters of events for each pool to capitalize on volatility and maximize MMP.
Lifinity Key Features
Protocol Owned Liquidity (POL)
A big part of what sets Lifinity apart from other DEXes is its deployment of protocol-owned liquidity (POL). Protocol-owned liquidity (POL) represents funds owned by and deployed to the platform.
Normally, a DEX must invite various users to provide liquidity causing it to relinquish the majority of its trading fees to incentivize those liquidity providers (LPs).
However, Lifinity is effectively its own LP and it only incentivizes additional deposits (if needed) so it can maximize the fees earned per unit of liquidity. This ultimately allows Lifinity to achieve the best possible profitability for the platform. Additionally, the deployment of POL ensures that as long as Lifinity is running Solana will have deep liquidity no matter the decisions of other users.
Initially, Lifinity kickstarted its POL using funds raised in its initial DAO offering (IDO). Now, Lifnity sells discounted LFNTY as veLFNTY (time-locked LFNTY) for LP tokens (e.g. SOL-USDC, ETH-USDC LP). When Lifinity sells veLFNTY for LP tokens (i.e. SOL/USDC) it uses 80% of the stable asset (USDC) to buy back LFNTY and the remaining 20% to fund ongoing development. The other half of the LP tokens, the volatile assets, are distributed pro-rata to veLFNTY holders.
Lifinity Services
Lifinity uses its unique capability of generating market-making profit (MMP) and its POL to offer two services to help DeFi protocols expand their operations, including:
- Market Making as a Service (MMaaS)
- Liquidity as a Service (LaaS)
Market Making as a Service (MMaaS)
Market Making as a Service (MMaaS), allows projects to provide assets, and leverage Lifinity’s Delta Neutral Market Maker (DNMM). When projects provide assets, Lifinity acts as the market maker generating revenue from the trading fees, while projects earn from market-making profits (MMP).
The key benefit of this option is that projects can provide liquidity without worrying about the negative impact IL could have on their assets. Moreover, Lifinity’s exceptional capital efficiency, achieved through high levels of concentration, means projects do not need to provide as much liquidity compared to other decentralized exchanges (DEXs).
Liquidity as a Service (LaaS)
With Liquidity as a Service (LaaS), Lifinity takes on the price risk by providing the assets used for market making. In return, projects compensate Lifinity with their native tokens based on the trading volume generated by Lifinity. The volume proves that the liquidity is actively facilitating trades, making it valuable to the project.
LFNTY token & NFT
For users looking to get involved in Lifinity’s community, the platform has a governance token LFNTY, as well as, an NFT collection, “Lifinity Flares.”
LFNTY Token allocation & vesting
the LFNTY token has a total supply of 100,000,000 tokens which were originally distributed to the following groups:
- DAO Treasury
- veIDO
- Flare Holders
- Team (4-year vesting with a 6-month cliff)
Vote-escrowed LFNTY (veLFNTY)
LFNTY can be locked for vote-escrowed LFNTY (veLFNTY) which earns a share of Lifinity’s revenue (from market-making profit, and platform fees), and grants holders voting power.
When locking up LFNTY for veLFNTY, users can decide to lock their LFNTY ranging from 7 days to 4 years. The longer you lock your LFNTY, the more veLFNTY –and revenue– you receive.
When Lifinity generates revenue from liquidity pools it distributes the reward pro-rata to veLFNTY holders. Let’s say Lifinity operates the following liquidity pools: SOL-USDC, BTC-USDC, and ETH-USDC. When Lifnity receives fees from these pools it distributes SOL, BTC, and ETH to veLFNTY holders, proportionate to their holding amount.
In addition to receiving protocol revenue, veLFNTY holders can receive revenue from protocol bribes. When projects launch LPs, they can allow VeLFNTY holders to vote to direct emissions/rewards to specific pools. In return for voting for a project pool, veLFNTY holders receive a “bribe”. This effectively enables token holders to monetize their voting power, giving them an additional source of passive income.
Liquid veLFNTY (xLFNTY)
xLFNTY is a tokenized version of 4-year locked veLFNTY. xLFNTY allows veLFNTY holders to freely convert between 4-year locked LFNTY and xLFNTY at a 1:1 exchange rate. Unlike veLFNTY, xLFNTY is an SPL token that is transferable, and tradable. As a fully-liquid token, xLFNTY was created to:
- Enables users to transfer their veLFNTY to another wallet
- Enables holders to exit their veLFNTY position without creating sell pressure for LFNTY
Lifinity Flares NFT
Lifinity Flares is Lifinity’s NFT collection, which consists of 10,000 animated NFTs. The NFT sale successfully raised funds for the platform by strategically incentivizing buyers. For instance, all the proceeds from the mint were directly deposited into Lifinity’s liquidity pools. Additionally, NFT holders who participated in the original mint received 1% of the total LFNTY token supply.
Aside from the LFNTY token allocation, the Flares NFT collection features characteristics that indirectly reward holders and tie the collection’s success to that of the overall project:
- The revenue generated from trading Lifinity trading fees and royalties is used to buy back NFTs off the floor.
- If the value of the collection falls below 50% of its initial mint price, a buyback mechanism is implemented using pooled funds.
How To Use Lifinity
Swapping Tokens
Lifinity utilizes Jupiter. Jupiter is a DEX-aggregator, which combines the usage of multiple DEXs to achieve the best rates
- Connect SPL Wallet at https://lifinity.io/swap/
- Select a token to exchange
- Select a token to receive
- Select “swap” and confirm the transaction
Providing Liquidity
- Connect SPL Wallet at https://lifinity.io/swap/
- Select a liquidity pool
- Swap tokens using Lifinity so that you have an even amount of each token you’d like to deposit to the liquidity pool
- Click on the liquidity pool and deposit the token pair
- Confirm Transaction
How does Lifinity differ From Uniswap V3?
As Lifinity gains more notoriety, more users gain interest in its design and how it compares to well-known DEXs like Uniswap V3. Uniswap V3 was one of the first DEX and is currently one of the largest DeFi protocols on the Ethereum network. Both projects have achieved remarkable results, and use similar features. However, they also feature some key differences that significantly impact the way users interact with both projects.
Particularly, the two protocols differ in their approach to liquidity provision, Oracles, and Impermanent Loss (IL).
Concentrated Liquidity
Lifinity combines concentrated liquidity with lazy liquidity provision so LPs don’t have to worry about manually adjusting their position to a specific price range. Instead, Lifinity sets the most profitable and active price ranges to allocate a pool’s liquidity. This flexibility allows Lifinity users to provide greater convenience for users and eliminate the risk of being trapped with undervalued assets.
On the other hand, Uniswap v3 requires users to readjust their LPs to active price ranges to continue earning fees. This allows Uniswap V3 users to access features such as Range Orders, at the expense of higher difficulty of use.
Oracles
In terms of oracles, Uniswap employs a TWAP oracle that stores cumulative sums of pair prices on a per-second basis. By checking these sums at the beginning and end of a period, Uniswap calculates a precise time-weighted average price (TWAP) over that duration. This approach has been widely adopted in the DeFi ecosystem, including projects like Compound and Reflexer. On the other hand, Lifinity embraces the use of Pyth price oracles that leverage off-chain data, which uses prices determined by centralized exchanges (CEXs). This methodology enables Lifinity to obtain accurate and up-to-date price information necessary for efficient trading.
Impermanent Loss (IL)
Users face the risk of impermanent loss (IL) when they deposit assets into a liquidity pool. Simply put, Impermanent loss (IL) is the difference between the initial value of the assets, and their subsequent value after trades in the pool occur.
While users on Uniswap V3 must battle with IL, Lifinity’s price oracles, and concentrated liquidity strategy reduce the risk of IL. Furthermore, Lifnity generates market-making profits which essentially reverse the effects of IL.
Conclusion
Altogether, Lifinity leverages its technological advancements and unique positioning to become essential to the Solana networks operations. The platforms DNMM model paired with POL not only redefine the landscape of decentralized exchanges but also establish a robust foundation for sustained growth and profitability. Additionally, with its unique structure, Lifinity invites users to hold it’s token, LFNTY, and NFT, rather than becoming a liquidity provider. It’s clear that as Solana grows, Lifinity will prove to be an important player, providing much-needed infrastructure to the ecosystem.
