This section explains the technical-mathematical terms and concepts behind ElasticSwap v1.
Technical Terms
Note: The usage of dash notation (') & delta notation (Δ) is explained in subsequent examples in the following sections.
X - The internal balance of, baseToken for accounting purposes.
DeltaX (ΔX) - The (incoming or outgoing) change in the quantity of X
XDash (X') -> X' = ΔX + X - The new quantity of X post the occurrence of a trade or a liquidity event
Y - The internal balance of quoteToken, for accounting purposes.
DeltaY (ΔY) - The (incoming or outgoing) change in the quantity of Y
YDash (Y') -> Y' = ΔY + Y - The new quantity of Y post the occurrence of a trade or a liquidity event
Alpha (α) - The ERC20 balance of baseToken currently in the Exchange.
Beta (β) - The ERC20 balance of quoteToken currently in the Exchange.
Omega (ω) - X/Y - The ratio of the internal balance of baseToken to the internal balance of quoteToken.
iOmega (iω) - Y/X - The ratio of the internal balance of quoteToken to the internal balance of baseToken.
K - X*Y - The product of the internal balance of baseToken and the internal balance of quoteToken. It is used to price trades between baseToken and quoteToken.
Sigma (σ) - α/β - The ratio of the balance of baseToken currently in the Exchange to the balance of quoteToken currently in the Exchange.
AlphaDecay (α^) - α-X - The amount of Alpha(α) not contributing to the liquidity due to an imbalance in the tokens caused by elastic supply (a rebase).
BetaDecay (β^) - β-Y - The amount of Beta(β) not contributing to the liquidity due to an imbalance in the tokens caused by elastic supply (a rebase).
Ro (ρ) - The total supply of the liquidityToken.
Gamma - Gamma is a multiplier term that is used to issue the correct amounts of liquidityToken when alphaDecay(α^) or BetaDecay (β^) exists in the system.
Further explained: Presence of AlphaDecay(α^) and BetaDecay(β^)
The presence of the terms X, Y, Alpha(α), Beta(β) Allows the ElasticSwap v1 to support stable pricing on rebasing events for an elastic-non elastic supply token pair. This is done with the concept of AlphaDecay(α^) and BetaDecay(β^). Whenever a rebase event occurs, which results in the increase or decrease in the supply of the baseToken decay is introduced. The presence (or absence) of which determines how much Ro(ρ) is issued to liquidity providers.
When there is an increase in the supply of the baseToken, essentially the quantity of Alpha(α) has increased, considering the situation where there was no decay prior to the rebase event, i.e., initially α = X (and β = Y), implying α^ = 0 (and β^ = 0). Post the rebase event: α^ = α' - X ( and β^ = 0, as there has been no change in β or Y)
Note: In the above scenario, initially ω = σ, post the rebase event, ω' != σ'
When there is a contraction in the supply of the baseToken, essentially the quantity of Alpha(α) has now decreased, considering the situation where there was no decay prior to the rebase event, i.e., initially α = X (and β = Y), due to the contraction in supply, the BetaDecay (β^) is given by β^ = (X - α') * iω.
Note: In the above scenario, initially ω = σ, post the rebase event, ω' != σ'
Issuance of liquidity Tokens ΔRo
Liquidity Tokens, Ro, are provided to liquidity providers. There are multiple ways to provide liquidity: creating an Elastic AMM pool, singleAssetEntry, doubleAssetEntry and a partialSingleAndDoubleAssetEntry.
Creation of an Elastic AMM pool: This case refers to the creation of an ELastic AMM pool( a pool that consists of both baseToken and quoteToken) on ElasticSwap, this differs from doubleAssetEntry because here there is no Omega, Sigma Until the pool has been created. The first batch of LP tokens Ro is also minted to the liquidity provider who bootstraps the pool.
The amount of liquidityTokens - (ΔRo) issued to the liquidity provider, in this case, is given by:
ΔRo = sqrt(ΔY * ΔX)
where,
# sqrt - Stands for the square root of the numbers provided, ex: sqrt(4) = 2
# ΔY - The amount of quoteTokens the liquidity provider wants to provide.
# ΔX - The amount of baseTokens the liquidity provider wants to provide.
Note: Initially, Ro = 0, hence after creation of the pool,
Ro' = ΔRo + Ro => Ro' = ΔRo + 0
(this becomes the Ro for other liquidity events, the dash and delta notation (Ro', ΔX, ΔY) is further explained in the Double Aset entry section)
Double Asset Entry: Double asset entry occurs when the liquidity provider provides both baseToken and quoteToken (in equivalent amounts, such that Omega stays constant) to the AMM. Double asset entry is only possible when there is NOAlphaDecay (α^) or BetaDecay (β^) present in the system. Double asset entry maintains the values of Omega and Sigma.
The amount of liquidityTokens - (ΔRo) issued to the liquidity provider, in this case, is given by:
ΔRo = (ΔY/Y) * Ro
where,
# ΔRo - The amount of tokens the liquidity provider receives.
# ΔY - The amount of quoteTokens the liquidity provider wants to provide.
# Y - The internal balance of quoteToken.
# Ro - The current total supply of the liquidityToken
Note: To understand the usage of Delta(Δ) and Dash(') notation, the above scenario initially(prior to Double Asset Entry) was:
Y - The internal balance of the quoteToken,
Ro - The current total supply of the liquidityToken,
The "change" that the system is introduced to the AMM by the liquidity provider, providing baseToken and quoteToken is given by:
ΔY - The amount of quoteTokens the liquidity provider wants to provide.
ΔX - The amount of baseTokens the liquidity provider has to provide. Given by ΔX = K / ΔY
Note: The vice versa also holds true, If the liquidity provider wanted to provide a specific amount of baseTokens(ΔX), then the amount of quoteTokens(ΔY) to be provided would be given by ΔY = K / ΔX
As a result of which a certain amount ΔRo(DeltaRo) is issued to the liquidity provider (refer above). Which results in the final state being:
Y' = Y + ΔY - The (new) internal balance of quoteToken after this liquidity event
X' = Y + ΔX - The (new) internal balance of baseToken after this liquidity event
Ro' = Ro + ΔRo - The (new) current total of the liquidity tokens
Note: Y', X', Ro' become Y, X, Ro respectively for the next following liquidity event(regardless of it being single or double asset entry).
The function that does this is addLiquidity in Exchange.sol
Single Asset Entry: Single asset entry is only possible when there exists decay (alpha or beta) in the system. When there is decay in the system it means that Omega != Sigma. With Single Asset Entry, the liquidity provider is "correcting" this with their liquidity, i.e bringing Sigma in line with Omega.
The amount of liquidityTokens - (ΔRo) issued to the liquidity provider, in this case, is given by: When there is alphaDecay:
ΔRo = (Ro/(1 - γ)) * γ
where,
# ΔRo - The amount of tokens the liquidity provider receives.
# γ = ΔY / ( (Alpha/Omega) + Y' )
# ΔY = α^ / ω - The amount of quoteTokens required to completely offset alphaDecay.
When there is betaDecay:
ΔRo = (Ro/(1 - γ)) * γ
where,
# ΔRo - The amount of tokens the liquidity provider receives.
# γ = ΔX / ( X + (Alpha + ΔX) )
# ΔX = α - X - The amount of baseTokens required to completely offset betaDecay(and by extension alphaDecay).
# β^ = ΔX / ω
The respective solidity functions can be found at Exchange.sol
PartialSingleAndDoubleAssetEntry: When the liquidity provider wants to provide both baseToken and quoteToken when decay is present, it is called a PartialSingleAndDoubleAssetEntry. This is because firstly, a singleAssetEntry occurs, and then a doubleAssetEntry occurs. The liquidity provider receives ΔRo(liquidity tokens) that takes into account both the entires.
The amount of liquidityTokens - (ΔRo) issued to the liquidity provider, in this case, is given by:
ΔRo = ΔRo(SAE) + ΔRo(DAE)
where,
# ΔRo(SAE) - The liquidity tokens received due to the SingleAssetEntry
# ΔRo(SAE) - The liquidity tokens received due to the DoubleAssetEntry
Note: In PartialSingleAndDoubleAssetEntry it is possible that the user might end up with a certain amount of unused baseToken or quoteToken, This is because in the presence of AlphaDecay (α^) the SingleAssetEntry uses up a certain amount of quoteToken and then the remaining amount of which is used along with an equivalent amount of baseToken for the DoubleAssetEntry, the quantity of which could be lower than the amount the liquidity provider wanted to provide.
Redemption of liquidity Tokens ΔRo
The underlying redemption value of liquidity tokens increases due to the accrual of trading fees. At any time, they can be redeemed for equivalent amounts of baseToken and quoteToken. The amount of baseToken and quoteToken received is given by:
ΔX = α * ΔRo / Ro
ΔY = β * ΔRo / Ro
where,
# ΔRo - The amount of liquidity tokens the liquidity provider wants to exchange
# ΔX - The amount of baseToken the liquidity provider receives
# ΔY - The amount of quoteTokens the liquidity provider receives
# α - The balance of baseToken currently in the exchange
# β - The balance of quoteToken currently in the exchange
The function that handles this is removeLiquidity in Exchange.sol.
Note: It is possible to redeem Ro when there is decay (alpha or beta) present in the system.
Fees:
As with any other AMM, the incentive to provide liquidity is such that the LP tokens issued accrue fees.
There is a 30 basis points (BPS) fee for swap occurrences(this is at par with other AMM's at the moment, this can be changed via vote if the ElasticSwap DAO votes to do so ), 5 BPS of which goes to the feeAddress (an address which is ElasticDAO initially, this can be changed via vote if the ElasticSwap DAO votes to do so). The remaining 25 BPS is realized by the LP holders pro-rata.
The fees are accrued on swap occurrences, the portion of the fees (5 BPS) that the feeAddress receives is sent to it when liquidity events occur.
Tokens supported by ElasticSwap:
For the rebasing token - baseToken, any ERC20 token which is Elastic in nature, i.e its supply contracts and expands due to external factors can be used to create a pool with a standard ERC20 non-elastic token - quoteToken.
Note: Support for tokens that have Fee on transfer behaviour will not supported in V1.
Examples:
Example 1:
Liquidity provider #1 provides 1000000 baseTokens and 1000000 quoteTokens.
Therefore,
X = 1000000
Alpha = 1000000
Y = 1000000
Beta = 1000000
K = 1000000000000
Omega = 1000000/1000000 = 1
Sigma = 1000000/1000000 = 1
AlphaDecay = 1000000 - 1000000 = 0
BetaDecay = 1000000 - 1000000 = 0
deltaRo = -1000000 (because sqrt(1000000*1000000) = 1000000, Negative sign indicates that it is going out of the system)
Ro = 1000000
Liquidity provider #1 has now received 1000000 Ro.
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Now a participant(Swapper #1)comes along and wants to swap 10000 quote tokens for baseTokens.
Swapper #1 receives deltaX baseTokens, where:
deltaY = 10000
X' = K / (Y + deltaY - (deltaY*liquidityFee))
(Assuming liquidity fee is 30 Basis points)
X' = 1000000000000 /(1000000 + 10000 -(10000*0.003)) = 990128.419656029387
deltaX = 990128.419656029387 - 1000000 = -9871.580343970613 (The negative sign simply indicates that the baseTokens are going to the swapper )
Y' = Y + deltaY = 1000000 + 10000 = 1010000
alpha' = alpha + deltaAlpha = 1000000 + (-9871.580343970613) = 990128.419656029387 ( Note: deltaX = deltaAlpha for swap events)
beta' = beta + deltaBeta = 1000000 + 10000 = 1010000 ( Note: deltaY = deltaBeta for swap events)
alphaDecay' = alpha' - X' = 990128.419656029387 - 990128.419656029387 = 0
betaDecay' = beta' - Y' = 1010000 - 1010000 = 0
K' = X' * Y' = 990128.419656029387 * 1010000 = 1000029703852.58968
feeAddress(ElasticDAO) recieves: ((deltaY/Y)*(liquidityFee/6)*Ro) = (10000*0.003*1000000)/(6 * 1000000)
Therefore, post 1st swap, the state of the AMM is:
X = 990128.419656029387
Alpha = 990128.419656029387
Y = 1010000
Beta = 1010000
Omega = 990128.419656029387/1010000 = 0.98032516797626672
Sigma = 990128.419656029387/1010000 = 0.98032516797626672
AlphaDecay = 990128.419656029387 - 990128.419656029387 = 0
BetaDecay = 1010000 - 1010000 = 0
K = X*Y = 990128.419656029387 * 1010000 = 1000029703852.58968
Ro = 1000000
feeAddress(ElasticDAO) recieves: 5 Ro
hence total Ro the feeAddress has 5 Ro
(Note: Omega is equal to Sigma)
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Now let's assume a positive rebase occurs such that there are now 25% more `baseTokens`, as a result of which:
Alpha = 1.25 * 990128.419656029387 = 1237660.52457003673
X = 990128.419656029387
alphaDecay = alpha - X = 1237660.52457003673 - 990128.4196560293874 = 247532.104914007343
Beta = 1010000
Y = 1010000
K = X*Y = 990128.419656029387 * 1010000 = 1000029703852.58968
betaDecay = beta - Y = 1010000 - 1010000 = 0
Omega = X/Y = 990128.419656029387/1010000 = 0.98032516797626672
Sigma = Alpha/Beta = 1237660.52457003673 / 1010000 = 1.2254064599703334
Ro = 1000000
(Note: Non zero alphaDecay and Omega is no longer equal to Sigma)
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Now a another participant (Swapper #2) comes along and wants to swap 10000 quote tokens for baseTokens.
Swapper #2 receives deltaX baseTokens, where:
deltaY = 10000
X' = K / (Y + deltaY - (deltaY*liquidityFee))
(Assuming liquidity fee is 30 Basis points)
X' = 1000029703852.58968 / (1010000 + 10000 - (10000*0.003)) = 980450.115054942479
deltaX = 980450.115054942479 - 990128.419656029387 = -9678.304601086908
Y' = Y + deltaY = 1010000 + 10000 = 1020000
alpha' = alpha + deltaAlpha = 1237660.52457003673 + (-9678.304601086908) = 1227982.21996894982
alphaDecay' = alpha' - x' = 1227982.21996894982 - 980450.115054942479 = 247532.104914007341
beta' = 1010000 + 10000 = 1020000
betaDecay' = 1020000 - 1020000 = 0
K' = X' * Y' = 980450.115054942479 * 1020000 = 1000059117356.04133
feeAddress(ElasticDAO) recieves: ((deltaY/Y)*(liquidityFee/6)*Ro): (10000 * 0.003 * 1000000)/(6 * 1010000)
Therefore, post 2nd swap, the state of the AMM is:
X = 980450.115054942479
Alpha = 1227982.21996894982
Y = 1020000
Beta = 1020000
K = X * Y = 980450.115054942479 * 1020000 = 1000059117356.04133
Omega = 980450.1150549424796 / 1020000 = 0.961225602995041647
Sigma = 1227982.21996894982 / 1020000 = 1.20390413722446061
AlphaDecay = 247532.104914007341
BetaDecay = 0
Ro = 1000000
feeAddress(ElasticDAO) recieves: 4.9504950495049505 Ro,
hence total Ro the feeAddress has 4.9504950495049505 + 5 = 9.9504950495049505 Ro
(Note: The swap was unaffected by the occurrence of a rebase event prior to the trade(resulting in the presence of non-zero decay))
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Now liquidity provider #2 comes along and wants to do a SingleAssetEntry(this is now possible due to the presence of alphaDecay), in this case the amount of quoteTokens required to be supplied to the AMM are deltaY, where:
deltaY = alphaDecay / Omega = 247532.104914007341 / 0.961225602995041647 = 257517.178217821776
For which the liquidity tokens issued to liquidity provider #2 (deltaRo) are given by:
deltaRo = (Ro/(1 - gamma)) * gamma
where Gamma is given by,
gamma = deltaY / ( (Alpha/Omega) + Y' )
where Y' = Y + deltaY = 1020000 + 257517.178217821776 = 1277517.17821782178
Therefore,
gamma = 257517.178217821776 / ((1227982.21996894982 / 0.961225602995041647 ) + 1277517.17821782178) = 0.100788146965298211
deltaRo = (1000000 / ( 1- 0.100788146965298211) * 0.100788146965298211 = 112084.984895554598
X' = X + deltaX = 980450.115054942479 + 247532.104914007341 = 1227982.21996894982
Y' = Y + deltaY = 1020000 + 257517.178217821776 = 1277517.17821782178
deltaAlpha = 0
alpha' = alpha + deltaAlpha = 1227982.21996894982 + 0
deltaBeta = deltaY = 257517.178217821776
alphaDecay' = alpha' - X' = 1227982.21996894982 - 1227982.21996894982 = 0
betaDecay = 0
beta' = beta + deltaBeta = 1020000 + 257517.178217821776 = 1277517.17821782178
Sigma' = alpha' / beta' = 1227982.21996894982/1277517.17821782178 = 0.961225602995041643
K' = X' * Y' = 1227982.21996894982 * 1277517.17821782178 = 1568768380556.38929
Omega' = X' / Y' = 1227982.21996894982/1277517.17821782178 = 0.961225602995041643
Ro' = Ro + deltaRo = 1000000 + 112084.984895554598 = 1112084.9848955546
Therefore at the end of the SingleAssetEntry the state of the AMM is:
X = 1227982.21996894982
Y = 1277517.17821782178
K = 1568768380556.38929
Alpha = 1227982.21996894982
Beta = 1277517.17821782178
Omega = 0.961225602995041643
Sigma = 0.961225602995041643
alphaDecay = 0
betaDecay = 0
Ro = 1112084.9848955546
(Note: Omega = Sigma, which is expected behaviour)
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Now, liquidity provider #2 decides to withdraw all of his liquidity, he receives a certain amount of baseTokens and quoteTokens, given by:
deltaX = alpha * deltaRo / Ro
deltaY = beta * deltaRo / Ro
Where,
deltaX - The amount of baseTokens received
deltaY - The amount of quoteTokens received
deltaRo - The number of liquidity tokens to be redeemed - here it is all that he had initially received
Hence we get,
deltaRo = (-1) * 112084.984895554598 = -112084.984895554598
deltaX = 1227982.21996894982 * (-112084.984895554598) / 1112084.984895554598 = -123766.05245700367
deltaY = 1277517.17821782178 * (-112084.984895554598) / 1112084.984895554598 = -128758.589108910888
(Note: (-1) is because the deltaRo is being redeemed for underlying quantities of deltaX and deltaY)
deltaX = deltaAlpha
deltaY = deltaBeta
X' = X + deltaX = 1227982.21996894982 + (-123766.05245700367) = 1104216.16751194615
Y' = Y + deltaY = 1277517.17821782178 + (-128758.589108910888) = 1148758.58910891089
K' = X'* Y' = 1104216.16751194615 * 1148758.58910891089 = 1268477806662.27207
Ro' = Ro + deltaRo = 1112084.9848955546 + (-112084.984895554598) = 1000000
alpha' = alpha + deltaAlpha = 1227982.21996894982 + (-123766.05245700367) = 1104216.16751194615
beta' = beta + deltaBeta = 1277517.17821782178 + (-128758.589108910888) = 1148758.58910891089
Sigma' = alpha'/ beta' = 1104216.16751194615 / 1148758.58910891089 = 0.961225602995041645
Omega' = X'/Y' = 1104216.16751194615 / 1148758.58910891089 = 0.961225602995041645
alphaDecay' = alpha' - X' = 1104216.16751194615 - 1104216.16751194615 = 0
betaDecay = beta' - Y' = 1148758.58910891089 - 1148758.58910891089 = 0
//(Note: Omega' = Omega = Sigma' = Sigma , this is expected behaviour)
Therefore at the end of the redemption of liquidity tokens event the state of the AMM is:
X = 1104216.16751194615
Y = 1148758.58910891089
K = 1268477806662.27207
alpha = 1104216.16751194615
beta = 1148758.58910891089
Omega = 0.961225602995041645
Sigma = 0.961225602995041645
alphaDecay = 0
betaDecay = 0
Ro = 1000000
And LP #2 has received,
baseTokens = 123766.05245700367
quoteTokens = 128758.589108910888
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Now, liquidity provider #1 decides to withdraw all of his liquidity, he receives a certain amount of baseTokens and quoteTokens, given by:
deltaX = alpha * deltaRo / Ro
deltaY = beta * deltaRo / Ro
Where,
deltaX - The amount of baseTokens received
deltaY - The amount of quoteTokens received
deltaRo - The number of liquidity tokens to be redeemed - here it is all that he had initially received
Hence we get,
deltaRo = (-1) * 1000000 = -1000000
deltaX = 1104216.16751194615 * (-1000000)/1000000 = -1104216.16751194615
deltaY = 1148758.58910891089 * (-1000000)/1000000 = -1148758.58910891089
(Note: (-1) is because the deltaRo is being redeemed for underlying quantities of deltaX and deltaY)
Hence LP#1 receives 1104216.16751194615 amount of base tokens and 1148758.58910891089 amount of quoteTokens, he has benefitted from the trades(accrual of fees) and the rebase event.
LP#1 initial v final state:
baseTokens -> final - initial = 1104216.16751194615 - 1000000 = 104216.16751194615
quoteTokens -> final - initial = 1148758.58910891089 - 1000000 = 148758.58910891089
Example 2: Rebase down -> SAE + DAE -> exit
LP #1 sets the pool with 10k baseTokens, 10k quoteToken, hence 10k Ro for LP1
Omega = 1
Rebase down of 5k happens
X = 10,000
Alpha = 5000
Y = 10,000
Beta = 10,000
Ro = 10,000 (all LP#1 owned )
LP#2 comes along and wants to do SAE+DAE
baseTokenAmountProvided = ((iOmega)*5000 + 10000
= 15,000
quoteTokenAmount provided = 10k
LP token LP#2 recieves:
For SAE: (5000 baseTokens) -> 3333 LP tokens
At this stage: X, Y, Alpha, Beta = 10k
Now DAE (10k basetokens + 10k quoteTokens) => (10000/10000) * 13333 = 13333 LP tokens
Hence, the LP#2 gets = 3333 + 13333 = 16666 tokens
State of the pool:
X: 20k
Alpha: 20k
Y: 20k
Beta 20k
LP outstanding = 26666 (10,000 -> LP#1, 16666 -> LP#2)
LP#1 exits their LP position:
Basetokens recieved = (10000/26666) * 20000 = ~7500.18750468761719 (had put in 10k)
quoteToken recieved = (10000/26666) * 20000 = ~7500.18750468761719 (had put in 10k)
State of the pool:
X, Alpha, Beta, Y: ~12500
LP#2 exits their LP position:
BaseToken receieved = 16666 / 16666 * 12500 = ~12500 (had put in 15k)
QuoteToken receieved = 16666 / 16666 * 12500 = ~12500 (had put in 10k)
