Elixir: Is Order-book Style the Future of PERP DEXs?

Jul 22, 2024

By @lasertheend

Elixir is a modular DPoS Network built to power liquidity across order-book exchanges and enables users to deploy liquidity to pairs and exchanges to build trustless features to enhance their liquidity. In this episode of the podcast, we have invited Philip, the founder of Elixir, to talk about Elixir, the order-book exchange market, and how regular users can participate in Elixir.

Transcription was done using GPT, so there may be errors. Please listen to the full podcast: YouTube Spotify

Risk warning: The content of this episode does not constitute any financial advice. Personal investment actions are not related to the position of WuBlockchain Media. Please strictly comply with the laws and regulations of your location.

## Market Makers Profiting from Excessive Fees, Elixir to Bring Change

Elixir addresses a fundamental problem with order-book exchanges: the lack of a trustless way for retail participants to supply liquidity. Currently, order-book based exchanges and protocols have to rely on a few large centralized market makers and pay significant fees to them. Elixir, as a modular DPoS network, provides a solution by allowing anyone to supply liquidity to order-books.

To conceptualize, think of Elixir for order-books as similar to what AMM curves are for Uniswap. We have native integrations with over 30 of the largest order-book based exchanges, mostly in the DeFi space, with a few upcoming centralized exchange integrations. Our protocol is maker-only, resembling Uniswap V2’s xy=k curve for order-books, offering a similar risk-return profile for liquidity providers.

Users can interact with Elixir seamlessly, for example on Vertex through their native feature, Vertex Fusion. When you supply liquidity via Vertex, your funds go to a smart contract on Arbitrum or whichever chain the DEX settles on. Our protocol, connected via web sockets and APIs, updates orders and issues signatures based on the smart contract’s funds, ensuring a fully permissionless and trustless process. You retain control of your funds, can see how your liquidity is provisioned, claim rewards in real-time, and withdraw your funds back to your account whenever you choose.

## Order-book Exchanges Underrated, Set to Become One of Biggest Crypto Markets

Many people underestimate the size and importance of order-book based exchanges. There’s a general perception that platforms like Uniswap dominate, but the trend is clearly moving towards on-chain order-book style. This shift is evident in the evolution of Uniswap from v2, with its simple xy=k curves, to v3 with bands and limits, and now to v4 which includes hooks and limit orders. Other major AMMs are making similar transitions.

order-book style offer the most efficient trading environment because they allow capital to be turned over multiple times a day. For instance, platforms like Vertex, dYdX, and Hyperliquid handle billions of dollars in daily volume with relatively low TVL. This efficiency is driven by the ability to leverage trades, which is more lucrative than simple swaps on traditional AMMs.

Perpetuals, for example, are highly profitable for exchanges as they enable users to engage in leveraged trading, generating more frequent trades and higher fees. Additionally, liquidations add another revenue stream. This is why even platforms like Synthetix are transitioning to order-book style.

The move towards order-books also addresses issues like MEV and transaction costs associated with on-chain broadcasts. Off-chain order-books, while more complex, avoid these problems and allow tighter market maker quotes.

In summary, due to its efficiency and profitability, the industry is rapidly shifting towards order-book based exchanges. This will be the largest market in crypto, and it is the market that Elixir is dedicated to serving.

## Elixir Has No Plans to Charge Exchanges

Elixir does not charge exchanges directly. Currently, there are no fees in place, but the DAO can vote to implement a fee structure in the future. Here are a few potential ways this could be done:

1. Spread Fee: Instead of quoting at a 0.15% spread, Elixir could quote at 0.18%, with the 0.03% difference going to the protocol as a validator security fee. This fee would be paid by the taker who trades against the order, not by the liquidity provider. However, quoting wider spreads might result in less volume and thus fewer fees.

2. Cross-Chain Liquidity Provider Token: Elixir has a cross-chain liquidity provider token (elxETH). The DAO could stake this Ethereum and generate revenue through staking rewards.

There are other potential revenue sources and monetization strategies that Elixir could explore. However, there are no plans to charge the exchanges themselves directly.

## How Can Regular Users Participate in Elixir? What Are the Risks?

Users can participate in Elixir in several ways:

1. The easiest method is by supplying liquidity to native integrations on various exchanges. Examples include RabbitX’s FAMM, Vertex’s Vertex Fusion, and Bluefin’s Bluefin Nexus. ApeX and Orderly Network are also expected to go live soon. Users can supply liquidity to these order-books with a single click, and the protocol will manage the bids and asks, updating them every second.

2. Another way to participate is through the Apothecary points program, which tracks user contributions to the network. Users can create content and engage with the community via private Telegram channels.

3. Additionally, users can supply ETH to obtain elxETH, which is our cross-chain LP token.

In terms of risks, since the funds will be locked until the mainnet launch in August, the ETH will be securely held with no risk of impermanent loss. The Elixir network operates on a modular DPoS network with 14,000 validators, ensuring security and integrity by posting fraud proofs to the Ethereum mainnet. Funds never move onto the Elixir network; they remain in a smart contract on the chain, and the protocol issues signatures based on the funds held in the contract. Users can supply liquidity through exchange interfaces or a community-endorsed aggregator page, tracking rewards and checking the health of the pools.

However, for stablecoins like USDC or USDT, there is a potential for impermanent loss similar to providing liquidity on Uniswap, with the value potentially fluctuating slightly. Users earn exchange incentives over time, which can offset minor losses. The protocol has built-in risk mechanisms to manage liquidity, such as stopping bids if inventory exceeds two-thirds and aggressively offloading inventory on the other side. Volatility buffers ensure optimal bid-ask spreads. In spot markets, users supply both sides of the pair (e.g., USDT to USDC) and can experience impermanent loss similar to Uniswap pools. The protocol updates order-books every second, calculating optimal spreads based on liquidity and volatility to minimize slippage and ensure efficient trading conditions.

## How does Elixir balance liquidity safety and incentives for LPs?

To balance liquidity safety and incentives for liquidity providers (LPs), Elixir employs several strategies:

First, the theoretical optimal bid-ask spread is calculated based on market volatility and liquidity. This ensures that spreads are competitive enough to attract trades while being wide enough to mitigate risk. The xy=k curve equivalent is used for these calculations.

Next, Elixir doesn’t place the entire liquidity at the top of the order-book. Instead, it layers the liquidity across multiple order levels. This approach prevents cascading liquidations and ensures deeper liquidity on the books. Exchanges benefit from this deeper liquidity without the high costs associated with traditional market makers, who often require significant compensation and only provide limited liquidity at the top of the book.

Elixir’s trustless infrastructure is designed to bootstrap liquidity for order-books, making it a cost-effective solution for mid to long-tail assets. Unlike sophisticated market makers who specialize in arbitraging between exchanges, Elixir focuses on providing competitive spreads within 20 to 30 basis points on major pairs, such as those on Vertex. This allows exchanges to be more aggressive in adding new markets without the need for lengthy negotiations with market makers.

For example, with Elixir, an exchange like Vertex can quickly spin up new markets and offer high initial APRs to attract liquidity. This flexibility is particularly beneficial for adding new and potentially volatile assets without the traditional constraints and costs.

Regarding the performance of LPs, Elixir tracks the performance across different pairs and exchanges. While specifics can vary, the strategies employed by Elixir generally lead to competitive returns for LPs. This includes earning fees without excessive risk, thanks to the calculated spreads and layered liquidity approach.

## What’s the Current Market Performance of Elixir Across the Board?

Elixir has been live for almost a year, with specific pools active on Vertex since September of last year. Generally, the performance of these pools is either flat or slightly up. The spreads widen as volatility increases, allowing Elixir to avoid significant losses from large market swings. For example, if volatility reaches two sigma, all orders are pulled until volatility decreases, providing a safety mechanism.

When factoring in rewards, every pool has shown positive performance. While there have been instances where pools were down by 4–5%, these fluctuations typically occurred with highly volatile pairs, such as ApeCoin. In contrast, pairs like BTC generally perform well, staying flat or slightly up due to rebates and zero maker fees.

Average APRs on different platforms are as follows:

- Bluefin: approximately 35%

- RabbitX: about 30%

- Vertex: around 15–20%

Even during volatile periods, LPs in Elixir are generally net positive due to the rewards they earn, which compensates for any temporary losses. For instance, comparing the performance of Elixir to Uniswap for the pair say to USDT, both showed identical downswings of 4%. However, LPs in Elixir earned rewards, making them net positive over time.

Regarding the future of market maker rewards, Elixir is already facilitating the transition from centralized market makers to decentralized liquidity provision. The rewards currently being paid to LPs in Elixir come from the exchanges themselves, not from Elixir. These rewards would typically go to market makers, who would require high APRs for their capital.

By integrating Elixir, exchanges can open up the market for order-book liquidity, allowing anyone to supply liquidity and earn a share of these incentives. This reduces the need for exchanges to pay exorbitant fees to centralized market makers. For example, on Bluefin, Elixir provides over 70% of the order-book liquidity, and the APR remains around 35%, demonstrating the effectiveness of this decentralized approach.

Elixir has accumulated significant dominance, especially on platforms like Bluefin, where it accounts for over 70% of the order-book liquidity. This dominance extends to several other PERP DEXs as well. Elixir’s growth has been strategic, with the team operating in stealth for about a year and a half to build the platform, understanding that they were creating a zero-to-one solution.

Elixir has native integrations going live with major order-book based exchanges like dYdX, Orderly, and ApeX. Additionally, a significant announcement is expected in the next month. With these integrations, Elixir will be embedded into all major order-book exchanges, providing a seamless experience for users to supply liquidity.

Moreover, the ELX tokens each product, expected to hold between 250 to 300 million, will serve as a substantial liquidity backstop across these exchanges once it goes live. This setup will enable users to earn a share of the incentives offered by various exchanges, further enhancing the appeal and utility of the Elixir network.

## What are the Pros and Cons Among Different Perpetual Contract Exchanges?

The execution speed of order-book based perpetual exchanges has become quite solid. Most of these exchanges use off-chain order matching that settles on-chain, which has become the standard. Some of the largest ones, like dYdX and Hyperliquid, have even launched their own chains specifically tailored for this use case. These chains are not necessarily intended for broader application development, but rather to optimize trading performance.

One major differentiator among perpetual exchanges is liquidity. Many large traders still prefer centralized exchanges due to the higher liquidity and the trust that these exchanges, like Binance, won’t manipulate liquidation levels. This trust is crucial because there are concerns about potential manipulation in some decentralized exchanges, where traders fear their positions might be liquidated unfairly.

Centralized exchanges also offer convenience. They support a wide range of assets and provide a seamless user experience, unlike decentralized platforms where users have to manage their own security and transaction confirmations, often involving hardware wallets like Ledgers.

In short, each perpetual DEX has its strengths:

- dYdX and Hyperliquid: These are the two largest and have solid performance. dYdX, for instance, maintains strong volume even without incentives, and Hyperliquid is praised for its user-friendly product and responsiveness to community feedback.

- ApeX: Dominates in volumes without heavy incentives, particularly strong in Asia but less so in the US.

- Other competitors: Various other exchanges have niche strengths but none can be singled out as a clear winner yet.

Regarding the future, the industry is moving towards DeFi, but centralized exchanges still hold significant appeal due to their ease of use and liquidity. Solutions that allow trading on centralized exchanges while keeping funds off-exchange are bridging some of these gaps.

In conclusion, while no single perpetual DEX can be declared the outright leader, dYdX and Hyperliquid are strong contenders due to their robust platforms and community engagement. ApeX is also noteworthy for its high volumes and regional dominance. As the industry evolves, the balance between liquidity, user experience, and trust will continue to shape the competitive landscape.

## I believe order-books is 100% the Future of PERP DEXs

In the future, I believe order-books will clearly dominate the perpetual contract market. Many of the leading GLP-style exchanges are already transitioning to order-books because counterparty models struggle with scalability and risk management. For instance, if a small-cap asset with high leverage experiences a massive price movement, it can devastate the liquidity pool. Additionally, counterparty models lack features like limit orders and APIs, making them less attractive to professional traders.

Order-book exchanges offer several advantages, including better risk management and efficiency. They allow for deeper liquidity without the same risks faced by GLP models. Many exchanges, including Synthetix, are already integrating order-book features like limit orders and API support. This transition is driven by the need for more sophisticated trading environments that can support large traders and institutional participants.

While GLP-style exchanges can offer lucrative returns for LPs in a somewhat delta-neutral position, the overall scalability and efficiency of order-books make them the clear winner in the long term. Elixir aims to be the trustless infrastructure that exchanges and protocols rely on to bootstrap liquidity to their order-books, creating a win-win situation for exchanges, market makers, and LPs.

Elixir’s infrastructure will enable a more efficient trading environment, allowing for deeper liquidity, better execution, and reduced slippage. This, in turn, will facilitate advanced trading strategies like basis trades, where traders can exploit differences in funding rates across exchanges. With Elixir powering these order-books, exchanges will benefit from enhanced liquidity and efficiency, making them more competitive.

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