This article will explore TsunamiX, its enhancements to traditional spot and margin trading, and how its features improve the overall user experience.

What is TsunamiX?

TsunamiX is a decentralized exchange (DEX) that offers margin trading, asset swaps, and liquidity provision.

Originally launched as Tsunami Finance, the platform made its debut on the Aptos blockchain in 2022. However, in January 2024, TsunamiX underwent a strategic migration to the Mantle blockchain, accompanied by a rebranding initiative.

The platform is gradually growing in popularity and currently boasts a total value locked (TVL) of $1.8m, according to DeFiLlama.

How does TsunamiX work?

TsunamiX builds on the previous models of automated market maker (AMM) Dexes while introducing several enhancements:

• Pyth Price Oracles
• Dynamic liquidity pricing (DLP)
• Tsunami Liquidity Pool (TLP)

Pyth Price Oracles & Dynamic Liquidity Pricing

Traditionally, AMMs rely on arbitrage traders to match the prices of assets in the liquidity pool to other exchanges. When these arbitrage trades take place, the weights of assets in the liquidity pool shift from their initial values causing what’s known as Impermanent Loss (IL).

However, with Pyth price oracles TsunamiX can get real-time price feeds and determine the most accurate prices of assets which is known as dynamic liquidity pricing (DLP). This mechanism ensures liquidity pool (LP) assets are priced correctly which decreases the reliance on arbitrage, and decreases slippage and IL.

Furthermore, DLP minimizes the funding rates that users pay to margin trade. Funding rates arise when spot prices differ from perpetual prices. When perpetual prices are lower than spot prices, “short” traders pay higher fees, and when they are higher, “long” traders pay higher fees.

But, since DLP quotes the same prices for spot and margin trading, the funding rate a trader pays to keep a position open is determined by the utilization of the particular asset in the pool.

Still, there’s a need for a mechanism that maintains the initial weights of assets in the liquidity pool (LP).

To maintain asset weights, the platform incentivizes swaps that maintain the target weights of the liquidity pool, with lower fees. Inversely, TsunamiX disincentivizes swaps that bring the weights farther from their initial targets with higher fees. This way, when major weight shifts occur the platform can use the extra fees to bring the LP weights back to normal– lessening IL.

Tsunami Liquidity Pool (TLP)

To decrease the chances of IL even more, TsunamiX employs a multi-asset liquidity pool known as the Tsunami liquidity pool (TLP). The TLP consists of multiple “blue-chip cryptocurrencies,” and aims for approximately equal weights between stable and volatile assets. This further decreases the chances of IL as the pool is less likely to experience major weight shifts between stable and volatile assets.

Additionally, the TLP is used as collateral for margin traders which provides known exit liquidity, unlike previous DeFi margin exchanges.

Key Features of TsunamiX

As a margin and spot exchange, TsunamiX supports three main use cases:

• Liquidity Provision
• Spot trading
• Margin trading

Liquidity Provision

Liquidity providers supply assets to TsunamiX to provide collateral for the platform. In return, liquidity providers receive a share of margin trading fees and swap fees.

Furthermore, when margin traders lose, the secured funds increase the value of the LP itself.

To enter the TLP you can deposit any of the whitelisted assets and your funds will be equally distributed between all of the assets in the pool. The current whitelisted assets include:

• ETH (39%)
• USDC (50%)
• WBTC (10%)
• MNT (1.0%)

For the best results, users should provide assets that maintain the current weights of assets to not incur high fees.

Risks of the TLP

As the sole source of liquidity for the platform, the TLP functions as collateral for margin traders. As such, the profit for the trader is a loss for the LPs, and the profit for the LPs is a loss for the trader.

Here’s a list of scenarios that show other examples of the risk incurred by providing liquidity on TsunamiX:

• If an unhealthy position isn’t liquidated in time and the collateral cannot cover the loss from the position, LPs will incur a loss.
• If there is a smart contract exploit that occurs in one of the money markets that TsunamiX uses to generate excess yield for LPs.
• If TsunamiX is unable to accurately quote prices to traders and traders can make a risk-free profit at the expense of LPs.

Spot Trading (swaps)

TsunamiX allows users to swap between assets at the current market rates aka spot trading.

Similar to the TLP, swapping relies on dynamic liquidity pricing (DLP) to incentivize trades that bring the TLP basket closer to balancing its target weights.

For instance, if a trader swaps ETH for MNT, causing an increase in ETH weight and a decrease in MNT weight, TsunamiX imposes a spread fee. The spread fee discourages this trade to maintain the pool’s balance. If the trader opts to pay the spread fee, the excess capital adjusts the weights that bring the pool back to its targets.

Margin trading

The mainstay of the TsunamiX platform is margin trading aka longing or shorting assets with leverage. When users go long they bet the price of an asset will go up using volatile assets as collateral. On the other hand, when users go short they bet on the asset price to go down using a stablecoin as collateral. 

Margin trading introduces both potential for profit and risk. If a trader’s position is closed in profit, they receive the excess profit denominated in their chosen asset. However, if the position closes at a loss, the protocol harvests the appropriate amount of collateral from the trader and shares it with liquidity providers.

To manage their positions, traders can reduce their position size or add more collateral to reduce the likelihood of liquidation.

To create a position, users specify four inputs:

• The trade type (either going long or short)
• The asset
• The collateral amount
• The desired leverage

When a trader opens a position, the reserved amount in the Liquidity Pool is occupied and cannot be accessed by any other traders.

Additionally, LPs cannot redeem any quantity of reserved assets. The moment the position is closed, the funds are available again to be reserved by any other trader on the platform. This ensures exit liquidity is always readily available.

Permissioned Entry Guard

Trade orders made on TsunamiX are not filled immediately by a TsunamiX contract. Instead, the order is filled by a permissioned keeper. When the keeper determines that the price the oracle has quoted for an order is fair, the keeper will execute the order on behalf of the trader.

If the quoted price is determined to not be fair (e.g. surprise wick), the order will not be filled. This protection ensures that LPs are quoting fair market prices with the tradeoff of slower and non-guaranteed execution of trades.

Liquidations

Liquidation occurs when the value of the collateral drops below a certain threshold, triggering the automatic closure of the position and the liquidation of the collateral to cover the losses. Third parties run liquidators to secure unhealthy positions in exchange for a fee.

It costs no capital to liquidate a position as the liquidator just needs to pay for the gas of the transaction. If there is excess capital over the predetermined fee, the pool LPs receive this amount as an additional fee.

Tsunami Seasons

Tsunami Seasons is TsunamiX’s incentive program to reward users of the platform. Each season introduces a unique set of opportunities and strategies for traders and liquidity providers. During each season, traders can margin trade or provide liquidity to earn points that translate to rewards.

How to use TsunamiX

To start using Tsunami Finance, users can follow these steps:

1. Visit the TsunamiX platform.
2. Connect to TsunamiX using a compatible wallet that supports the Mantle blockchain (Metamask Wallet).
3. Margin trade, swap assets, or provide liquidity:
   1. For margin trading, deposit collateral, specify leverage, and open a position.
   2. For LPs, deposit whitelisted assets into the TLP to receive LP tokens.
   3. For swaps, pick an input token and output token and perform a swap