Dextr’s Actively Validated Market Maker (AVMM) introduces a structured approach to liquidity prioritization through a low-latency, oracle-driven Request-for-Quote (RFQ) system. This system prioritizes order routing by matching traders with LPs based on clearly defined criteria: active price ranges, competitive fee discounts, and reputation (REP) scores. By structuring trade execution around these performance-driven metrics, Dextr ensures that the most capable LPs are rewarded, creating an efficient and fair marketplace that minimizes liquidity inefficiencies and enhances execution quality for both traders and LPs.
LP Eligibility and Priority Rules
1. LP Eligibility
Dextr enforces certain eligibility criterion to ensure that only qualified LPs are involved in trade settlements. This filtering process is based on two primary requirements:
- Active Price Range: For an LP to be eligible, the oracle price for both the inbound and outbound assets must fall within the LP’s pre-set price ranges, which are currently defined in USD. This ensures that liquidity is effectively aligned with market prices on both sides of the trade. In the upcoming version of Dextr, we’ll introduce derived ranges, allowing LPs to set price ranges directly for asset pairs, providing even greater flexibility in liquidity provisioning.
- Available Liquidity: LPs must hold at least 10% of the order size in their liquidity pool. For example, if the order size is 10 ETH, LPs must hold a minimum of 1 ETH to participate.
These rules ensure that only capable LPs are involved in trade execution.
2. LP Prioritization
Once eligible LPs are identified, they are prioritized based on two key factors:
- Fee Discounts: LPs are incentivized to offer competitive rates, with the potential to reduce fees by up to 100% from the maximum LP fee of 1%. LPs offering the highest fee discounts are prioritized, encouraging a competitive environment that benefits traders through reduced costs.
- REP Scores: In cases where LPs offer the same fee discount, Dextr employs REP scores to determine priority. LPs with higher REP scores are preferred, reflecting their reliability and performance history. If REP scores are tied, trades are allocated according to the order in which liquidity positions were created, ensuring a fair distribution of opportunities.
Order Routing in Practice: A Step-by-Step Example
To illustrate how liquidity is prioritized in Dextr, let’s assume this is the initial or “genesis” state of liquidity. In this scenario, each LP has designated assets as primary holdings at the start. As trading progresses, Dextr considers both primary and secondary asset balances when assessing liquidity. However, for simplicity in this example, we’ll focus solely on primary balances.
Consider a case where a trader requests a swap of 1 ETH for 3,000 USDC, and the oracle price is set at 3,000 USD for 1 ETH, with USDC at 1.00 USD. Here’s how the order routing algorithm proceeds:
Asset Matching: The order routing algorithm identifies LPs with an ETH balance, as only these LPs can settle this trade. Additionally, LPs must hold at least 0.1 ETH (10% of the order volume (1 ETH)) and be willing to accept USDC in return to be eligible for this trade.
Initial Filtering: Based on the liquidity book, LPs with IDs 1, 3, 5, 9, and 10 hold ETH as their primary asset at genesis.
Eligibility Checks:
- Active Price Range: LP Id 1 is disqualified due to an inactive price range, as its liquidity is positioned outside the current oracle-defined range.
- Supported Inbound Asset: LP Id 5 also excluded, as it does not accept USDC, thereby failing the asset acceptance criterion.
- Liquidity Threshold: LP Id 9 is excluded because it holds less than 0.1 ETH, failing to meet the minimum liquidity threshold of 10% of the order volume.
Final Selection: This leaves LP Ids 3 and 10 as the only liquidity providers meeting all criteria, including active price range and sufficient liquidity. Since both LPs offer the same fee discount, Dextr leverages REP scores to break the tie. In this case, LP Id 10 has a higher REP score than LP Id 3, and is therefore selected for the trade. Had their REP scores been identical, the order would have gone to the LP who created their liquidity position first.
Conclusion
Dextr’s method resembles a hybrid bidding system, rather than traditional Dutch auctions or Solver models, and leverages a ranking system that prioritizes efficiency and fairness. In auction-based models, participants often outbid one another, driving prices above market value and adding complexity to the process, while Solver systems can create inefficiencies in liquidity routing. Dextr’s ranking system, however, allows LPs to compete based on fee discounts alone, streamlining trade execution. By putting in place a ranking system that prioritises LPs with active price ranges, competitive discounts, and high REP scores, this approach ensures that the most capable LPs are selected, maximizing market efficiency and delivering optimal outcomes for both traders and liquidity providers.
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