Kilian Peter Krings

Decentralized exchanges (DEXs) have the potential to revolutionize finance — but without solving their capital inefficiency issues, they will always struggle to keep up with their centralized counterparts.



Let’s be honest: Capital efficiency is the name of the game. It’s about making every dollar — or token, or coin — work as hard as possible. Unlike CEXs, which have a more predictable liquidity structure, DEXs rely on independent liquidity providers (LPs) to contribute their assets to liquidity pools. These pools act as shared reserves that facilitate trades on decentralized exchanges without the need for intermediaries.



When traders execute a trade, they draw from these pools, paying a small fee to the <a href="https://blockworks.co/tag/liquidity-provider">LPs</a> in return. If that capital isn’t being put to work efficiently, liquidity dries up, trading slows down and fees begin to spike — all of which undermines the competitiveness of the decentralized ecosystem.



Read more from our opinion section: <a href="https://blockworks.co/news/web3-flashy-functional-infrastructure">Web3 doesn’t need flashy — it needs functional</a>



To address these challenges, it’s important to understand that profitability often relates to factors that are permanently outside an LP’s control. Market conditions, asset demand and price fluctuations all affect the fees they earn. During high trading volumes, LPs can see decent returns. But when the market cools down, they’re stuck with lower activity and fewer fees.&nbsp;



LPs also face the risk of impermanent loss, which occurs when the value of assets in a liquidity pool fluctuates due to price discrepancies. In volatile markets, these fluctuations can lead to losses, even after accounting for fees earned. This was a major pain point with earlier models like Uniswap v2’s Automated Market Maker (AMM), which spread <a href="https://blockworks.co/tag/liquidity">liquidity</a> too broadly across price ranges. As a result, LP capital often sat idle in price bands with little trading activity, leading to an inefficient use of assets.



Read more: <a href="https://blockworks.co/news/uniswap-token-pumps-fee-switch-proposal">Uniswap token pumps following governance fee switch proposal</a>



Let’s break this down with an example. Imagine a liquidity pool for trading Jupiter (JUP) and USDT. Suppose that an LP spreads its assets from $0 to infinity, allocating a huge portion of capital to price ranges that’ll never see any action — say, between $0 and $1 or $100,000 and $1 million. That means a big chunk of their liquidity ends up just sitting there, unproductive, and the LP earns nothing on that capital.



One solution to this problem is called concentrated liquidity. Rather than spreading their assets across a wide and inefficient range, LPs can concentrate liquidity near Jupiter’s current price, within a narrower band where trading is more likely to occur. This method optimizes capital allocation, leading to greater efficiency and better returns through fees.



By allowing LPs to focus their capital in areas of active trading, they can ensure that their assets are continuously productive. This kind of targeted strategy helps LPs mitigate risks like impermanent loss and also improves overall exposure over time, increasing the likelihood of ongoing returns.



It’s important to note that not every LP has the same appetite for risk — some are willing to take on more risk for potentially higher returns, while others prefer safer and more predictable investments. Offering a range of risk-return options is essential for DEXs looking to attract a broad spectrum of participants. Flexibility is key: The more choices LPs have in terms of managing their capital, the more likely they are to remain engaged with a given decentralized platform.



Read more: <a href="https://blockworks.co/news/paradigm-dex-liquidity-value-leaks">Grow the DEX pie by patching ‘value leaks,’ says Paradigm’s Robinson</a>



A relatively new concept known as virtual-margin liquidity may soon help LPs strike the right balance between risk and reward. This strategy allows LPs to adjust capital exposure based on their personal goals, making it easier to manage investments. With LPs empowered to manage their liquidity more effectively, <a href="https://blockworks.co/tag/dexs">DEXs</a> would benefit from deeper, more stable liquidity pools and fewer instances of capital inefficiency. Personally, I believe that this kind of flexibility is exactly what DEXs need to reach mass adoption and compete more effectively with centralized exchanges.



The bottom line is if DEXs don&#8217;t step up their capital efficiency game, they’re going to fall further behind centralized exchanges. CEXs already offer more stable trading experiences, deeper liquidity and lower fees for large trades. DEXs can’t afford to ignore these advantages if they want to grow. On the flip side, if DEXs embrace strategies like concentrated liquidity and virtual-margin liquidity, they can turn the tide. Addressing these issues head-on will help decentralized exchanges build trust, attract more liquidity providers and position themselves as a viable alternative to centralized platforms.



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Capital inefficiency is crippling DEXs

Jack Kubinec

Since DeFi Pulse popularized the metric in <a href="https://x.com/RyanSAdams/status/1100470822903431169?s=20">2019</a>, total value locked (TVL) has been used as a primary measure for a protocol’s success.&nbsp;



But as DeFi slogged through a bear market for much of 2023, some pointed out that TVL can distort the underlying value of a protocol. Others said DeFi should abandon the metric altogether, saying it’s less meaningful than it’s purported to be.



“You bring ten whales and all of a sudden your TVL shoots through the roof,” Oleg Fomenko, co-founder of Sweat Economy, said. “We’re seeing a lot of projects fall into the same trap.”



A possible alternative metric could be <a href="https://www.dlnews.com/articles/llama-u/how-to-track-defi-protocol-fees-and-revenues-with-defillama/">revenue</a>: the fees protocols collected minus the rewards they paid to liquidity providers (LPs).&nbsp;



Read more: <a href="https://blockworks.co/news/tvl-metrics-defi-lightspeed">Is it time to drop TVL as a DeFi metric?</a>



Revenue was measured with DeFiLlama data through Dec. 13. Notably, Uniswap Labs only began collecting revenue after <a href="https://blockworks.co/news/uniswap-fee-structure-traders">instituting a fee on its interface in October</a>. Blockworks Research <a href="https://app.blockworksresearch.com/assets/uni/analytics?tags=uni">estimates</a> the Uniswap Labs to be on track for $17.7 million in annualized revenue so far.&nbsp;



<h2 class="wp-block-heading">1. Maker —&nbsp;$95.91 million</h2>



<a href="https://blockworks.co/tag/makerdao">Maker</a> has gradually purchased US Treasury bonds <a href="https://blockworks.co/news/makerdao-votes-to-allocate-500m-dai-into-us-treasuries-bonds">since 2022</a>, capturing yield from rising interest rates. Maker’s Spark Protocol subDAO, part of founder Rune Christensen’s so-called Endgame for Maker’s future, gave investors exposure to the T-bill yield through a locked version of its DAI stablecoin. The locked DAI’s yield <a href="https://blockworks.co/news/dai-savings-rate-us">reached as high as 8% this year</a>. The savings DAI token sDAI has been put forward as an <a href="https://x.com/SasuRobert/status/1734502811696541839?s=20">example</a> of a real-world asset because it essentially tokenizes Treasury bonds.



<h2 class="wp-block-heading">2. Lido — $55.79 million</h2>



<a href="https://blockworks.co/tag/lido">Lido</a> capitalized on Ethereum’s move to proof-of-stake in 2022 by letting users stake their ether with the platform in exchange for its tokenized staked ether (<a href="https://blockworks.co/price/steth">stETH</a>) that pays users staking rewards and can be traded or used as collateral. StETH grew to become the <a href="https://blockworks.co/prices">ninth-largest</a> cryptocurrency with a market capitalization of over $20 billion. Lido most recently <a href="https://blockworks.co/news/ethereum-update-liquid-staking">caught a boost</a> from hype surrounding Ethereum’s forthcoming Dencun upgrade, <a href="https://blockworks.co/news/ethereum-dencun-upgrade-progresses">initially slated</a> for a 2023 release before <a href="https://blockworks.co/news/ethereum-developers-hard-fork">being pushed back</a>. Lido currently <a href="https://twitter.com/lidodominance">handles</a> over 32% of all staked ether, <a href="https://blockworks.co/news/lido-centralization-debate-ethereum">sparking a debate</a> about the liquid staking platform’s centralized position on the network.&nbsp;



<h2 class="wp-block-heading">3. PancakeSwap — $52.31 million</h2>



PancakeSwap is the <a href="https://blockworks.co/news/dex-trading-activity-picks-up-steam">second-largest</a> decentralized exchange (DEX) by volume behind Uniswap. The DEX launched v3 of its <a href="https://blockworks.co/news/zksync-era-pancakeswap">platform in March</a>, focusing on concentrated liquidity, where LPs can concentrate their liquidity within specific ranges to enhance chances of their funds being used for a trade and earning fees. PancakeSwap has also <a href="https://pancakeswap.finance/voting/proposal/0x9602c8f56d01f239b88ecf914ee263cc9cdd75b8d10ae4d9536fc27b2680849c">tinkered</a> with its governance model and launched a gaming marketplace. Originally native to the BNB Smart Chain, PancakeSwap remains the <a href="https://dappradar.com/rankings/protocol/bnb-chain/category/defi">largest</a> DeFi app on the chain. Nearly all of PancakeSwap’s volume <a href="https://defillama.com/dexs/pancakeswap">comes</a> from the BNB Smart Chain.



<h2 class="wp-block-heading">4. Convex Finance —&nbsp;$42.23 million</h2>



Convex is an asset management protocol that lets LPs and stakers lock up tokens issued by Curve and earn yield. Curve is the <a href="https://defillama.com/dexs/chains/ethereum">second-largest</a> DEX on Ethereum behind Uniswap, and Convex’s fortunes are largely tied to Curve’s. Convex lets LPs and holders of Curve’s CRV token amplify yield from their tokens. Convex <a href="https://www.defiwars.xyz/wars/curve">controls</a> 48% of vote-escrowed Curve tokens and a third of vote-escrowed Frax tokens.



<h2 class="wp-block-heading">5. GMX —&nbsp;$37.52 million</h2>



GMX is a perpetual swap exchange. Perpetual swaps, or perps, let DeFi traders make highly leveraged trades without the need for large amounts of capital. Unlike traditional futures, perps don’t come with an expiration date when traders need to buy or sell an asset. GMX is the largest protocol by TVL on Arbitrum, and it was the largest recipient of the <a href="https://blockworks.co/news/arbitrum-dao-funding-proposals-budget-voting-community">layer-2’s October grant</a> allocation, <a href="https://docs.google.com/spreadsheets/d/1nQrcwTjsA4IXmZiSTodkjnfHRrO1MpdydJm4BO8bAn8/edit?_branch_match_id=1133666732149676081&amp;_branch_referrer=H4sIAAAAAAAAAwXBURKAIAgFwBMh%2F90Gs1GmAgeeTsdvdwAzD%2BZH7S5qOa%2BvnM4SVRHrpR5iSNoOtU5NclSXaD%2BXGhM4NwAAAA%3D%3D#gid=0">bagging</a> 12 million <a href="https://blockworks.co/price/arb">ARB</a>, worth roughly $14 million at today’s prices.



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2023’s top 5 DeFi protocols by revenue

David Canellis

Some victims of the $48 million KyberSwap hack are no doubt waiting anxiously for the DeFi platform’s attacker to make their next move.



Others, though, seem to be taking a more proactive approach: talk directly to the exploiter through the Ethereum blockchain.



“Hello! You did amazing job, you are amazing man!” one person wrote in a message attached to a transaction overnight.



“Im drained for over $155k USDC, you can check my wallet. Could you please send some $ to help my family? I can get you the funds into any wallet just help me out please! :(.”



Other messages are much more formal: “Hello sir/madam! I was lp [liquidity provider] on [Arbitrum] — 259809.7 DAI.”



“I would like to negotiate, and ask how much would you be willing to take as a bounty? I believe code is law, and its totally up to you. Thanks in advance!”



KyberSwap aggregates liquidity across DeFi into a single pool, enabling services such as decentralized exchanges and wallets to offer end-users instant token swaps through a web of smart contracts.



Chain watchers first <a href="https://twitter.com/spreekaway/status/1727462694138024249">spotted</a> something was up with KyberSwap on Wednesday evening. Millions of dollars in crypto were suddenly siphoned from KyberSwap contracts deployed to Ethereum, Polygon, Coinbase’s Base, Arbitrum and Optimism, with the latter two hardest hit.



A complicated series of flash loan attacks and other targeted exploits had <a href="https://twitter.com/0xdoug/status/1727613541115429314">resulted</a> in emptied token liquidity pools.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">1/ Finished a preliminary deep dive into the Kyber exploit, and think I now have a pretty good understanding of what happened. This is easily the most complex and carefully engineered smart contract exploit I&#39;ve ever seen&#8230;&mdash; Doug Colkitt (@0xdoug) <a href="https://twitter.com/0xdoug/status/1727613541115429314?ref_src=twsrc%5Etfw">November 23, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



KyberSwap responded by urging users to pull funds from the platform, with about $77 million quickly withdrawn. Now, less than $8 million is kept with KyberSwap, per DeFiLlama.



So far, the stash remains in the hacker’s various addresses. After the attack subsided, the hacker initiated <a href="https://etherscan.io/tx/0x7a8912583520304ce2364fa165dafe94461a91ab2dcf45dab942e296594dc40a">a transaction</a> with the following message:&nbsp;



“Dear Kyberswap Developers, Employees, DAO members and LPs, Negotiations will start in a few hours when I am fully rested.”&nbsp;



That was about a day and 18 hours ago. Nothing since.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-us.googleusercontent.com/Qa4Bi4XQdpFucYMd0vZJt1jSqbNzxAXJl2LUcp4eX-WF_5lCXaTLGcuag-adxrf8cxjnZ0KQZ1XhqevIIW-5depXGNsK205H2UfLpTLnGY9xO6Mjj7tBbtHk9yMls9I5XSBtOOv9MLOXWpFzomh8Khc" alt=""/><figcaption class="wp-element-caption">Ethereum allows messages to be added to the input data field when sending transactions. This one cost about $2.</figcaption></figure>



While some messages tell the hacker they could keep some of the crypto if they return the rest, it’s unclear whether notes like “if that money are gone my children can school anymore, because don&#8217;t have money again, please help me” are legitimate stories from real victims.



Some messages are more lighthearted: One says: “hi. congrats for the hit thats a crazy thing, you looks like a smart, arrogant &amp; funny guy, could we talk in telegram or else? :)”



Another: “Hi legend pls send me 1mill to become the top g for life, thx love u”



There are others that offer advice: “I don&#8217;t know what you want to do next, but just want to remind that stablecoins like USDC have an address blocking function in the smart contract code.” A few even apparently sent tips, including some for 0.001 ETH ($2.06) and one for 0.0000069 ETH ($0.014).



Often hackers wait days, months, or even years before attempting to launder stolen crypto. Sometimes, the hacker returns the funds after taking 10% or 20%, playing off the whole thing as a gray-hat stunt.



Who knows where the Kyber case will end up.&nbsp;



<figure class="wp-block-image"><img decoding="async" src="https://lh7-us.googleusercontent.com/YZ0qPRtT3xcaAOvr2JREsX_dWSkjDfC-HUqtIhY_wMqLu3d6KEt9oVxAX4JLe22URrmhMwtTTxX9k-XHJYjfegLD5aigo5RazgEMq3yGHdZac8Hz_y9Wkf-QNJk5r9IgmzyaRLSsF9hfxorYHO3cYhY" alt=""/><figcaption class="wp-element-caption">Whether it’s real or pretend, this message is still sad</figcaption></figure>



In any case, it wasn’t bad enough that Ethereum network participants had to cryptographically verify the integrity of CryptoDickButts and Pixelverse Poops.



Now, they must forever ensure nonsense like, “Could you teach me your ways senpai? I too would like to make generational wealth in seconds please,” remains untampered-with, forever written to the blockchain. Great.



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Fan mail and ETH tips sent to KyberSwap hacker who stole $48M

DeFi depends on liquidity providers (LPs), but LPs can face an uphill battle in generating yield. Steer Protocol announced on Thursday that it is integrating its so-called Smart Pools on Sushi to try and make liquidity provision more attractive.



Steer’s Smart Pools take some data off-chain and automate aspects of liquidity management to increase efficiency for LPs. The Smart Pool integration comes as Sushi weighs an overhaul of its tokenomics and its native SUSHI token gets swept up in a market rally.



LPs put capital in pools that automated market makers (AMMs) like Sushi use to create order depth for DeFi assets. Providing capital as an LP <a href="https://blockworks.co/news/bell-curve-lvr-defi-liquidity-providers-unfair">can be inefficient because of loss-versus-rebalancing (LVR)</a> where an LP essentially faces arbitrage from AMM prices lagging behind centralized venues.



Read more: <a href="https://blockworks.co/news/bitcoin-ether-altcoins-etf">Bitcoin may be riding the ETF wave, but altcoins are where the rally really is&nbsp;</a>



Steer is an active liquidity management platform (ALM) that <a href="https://steer.finance/steer-protocol-and-sushi-collaborate-to-optimize-concentrated-liquidity/">focuses</a> on concentrated liquidity. LPs provide the platform with capital for a certain price range to increase their chances of the funds being used for a trade and earning fees.&nbsp;



The ALM moves some data off-chain to deal with LVR.



“From the arbitrage perspective, we can place liquidity, which looks like books that are on — let&#8217;s say a centralized exchange — which allows us to capture that price movement before it actually might happen on-chain,” Derek Barrera, the founder of Steer, said. 



Since launching over the summer, Steer has become the ninth-largest liquidity management protocol by total value locked (TVL), <a href="https://defillama.com/protocols/liquidity%20manager">according to</a> DeFiLlama.



Sushi’s Steer integration comes soon after the protocol’s “Head Chef” Jared Grey <a href="https://t.co/KWsPQKKhoV">proposed</a> changes to Sushi’s tokenomics. He indicated that these are meant to incentivize LPs to lock their liquidity into the DEX for longer periods of time.&nbsp;



Under Sushi’s current tokenomics, an average of over $100 million has been paid out in emissions to LPs for every $300 million in total value locked (TVL) created, the proposal <a href="https://docs.google.com/document/d/1UYr_BxBp8AfappwF-1vGExJWIRNkEDRjCuYcEkOWQUA/edit">said</a>.&nbsp;



The price of Sushi (<a href="https://blockworks.co/price/sushi">SUSHI</a>) jumped from around $0.55 in mid-October to $1.26 in early November, per Blockworks Research, and currently trades at $0.96 at the time of publication.



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Sushi’s ‘Smart Pools’ hope to boost LP efficiency

Uniswap Labs has seen $764,000 in revenue since enabling fees on some Uniswap trades two weeks ago, according to Blockworks Research. But it’s not the only DeFi platform to toy with enabling the fee switch.



In recent weeks, Osmosis, Blur, and Hashflow have also received proposals to introduce trading fees. One industry participant said the growing interest in fees is a sign that DeFi is maturing towards a focus on revenue. However, another speculated that fees may be impractical when trading platforms can be duplicated.



Last month, the DeFi giant Uniswap Labs began charging fees on trades through its interface involving certain asset pairs. The interface fee is in addition to the existing fee taken by Uniswap liquidity providers (LPs).



The new fees are on <a href="https://x.com/blockworksres/status/1714720938082672859?s=20">track</a> to generate tens of millions annually for the company. As one researcher <a href="https://twitter.com/0x7477/status/1717222484909380028?s=20">pointed</a> out though, only 3% of Uniswap’s total trading volume is <a href="https://blockworks.co/news/uniswap-fee-structure-traders">subject to the 0.15% fee</a>.&nbsp;



A Uniswap protocol-level fee would tax LPs on nearly all trades, but a protocol fee proposal from GFX Labs <a href="https://blockworks.co/news/uniswap-doesnt-pass-fee-switch">stalled out this summer</a>. Notably, the fee funds would go to the Uniswap DAO treasury rather than to Uniswap Labs. A GFX Labs representative said an amended version of the proposal could reach Uniswap&#8217;s forums as early as December.



The decentralized exchange Hashflow enabled its own protocol-level trading fee Wednesday morning after a governance <a href="https://snapshot.org/#/hashflowdao.eth/proposal/0x014a10517b46f895583de15713733147ca960f18a40c45d6653db7a150797ba7">vote</a> approved the update. Hashflow CEO Varun Kumar said the DEX’s move may be a symptom of fee FOMO in <a href="https://blockworks.co/tag/defi">DeFi</a>.



“I do think that proposal could have been inspired based on other protocols adding fees. And they were like ‘Ah, Sushi has a fee and Osmosis and Uniswap [are] adding a fee too, so why is Hashflow not adding a fee?” Kumar said.



Kumar added that there&#8217;s a growing interest in enabling trading fees, accompanied by a general sense that protocols should be earning revenue. In past crypto market cycles, compelling white papers or functional but unprofitable products were deemed sufficient by investors, Kumar said. Now, the focus has shifted to actual revenue generation for these protocols.



And crypto trading fees aren’t an untested concept.



“I draw parallels with…the centralized crypto exchanges,” Marc Taverner, CEO of crypto financial services provider XEROF, said. “They&#8217;ve had this transaction fee present for the longest of times, and the reason for that being present is to provide sustainable and dependable income to the platform providers.”



Still, not all in the DeFi space are sold on fees. Superposition is a zero-fee automated market maker (AMM) built on Arbitrum. The project’s CEO Shahmeer Chaudhry said that the protocol can generate revenue without trading fees if it scales up enough.&nbsp;



And with <a href="https://blockworks.co/news/dydx-ethereum-open-source">open-source code being commonplace in DeFi</a>, Chaudhry added, trading fees could lead to spin-off projects.



“In crypto, it&#8217;s always a race towards zero, right? As soon as you have good fees, you always have a fork that will have less fees,” Chaudhry said.



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As Uniswap fees accumulate, other trading platforms join the fray

James Cirrone

Eleven crypto startups pulled in a collective $66.7 million in new early stage funding rounds this week.&nbsp;



Coming in at number one was SynFutures with a $22 million series B fundraise. Pantera Capital led the round for the crypto and NFT futures DEX, along with Susquehanna International Group and HashKey Capital.



Alongside this significant cash injection from top crypto venture capital firms, SynFutures also <a href="https://medium.com/synfutures/introducing-the-v3-public-testnet-28994fc29288">debuted</a> version three of its exchange. For now, it&#8217;s in a public testnet that can only be accessed via a desktop.



The updated model for the platform relies on a new automated market maker (AMM) called Oyster. It features an on-chain order book, a new liquidation framework specifically for derivatives trading, and a way to provide liquidity through a single token of a trading pair.



Read more: <a href="https://blockworks.co/news/derivatives-trading-dex-funding">SynFutures raises $22 million, introduces public testnet for v3</a>



Speaking of liquidity on DEXs, Elixir Protocol just raised $7.5 million to address that exact issue.&nbsp;



The funds for the DeFi protocol were raised at a $100 million valuation, with Hack VC leading the round. NGC Ventures, AngelList Ventures, Bloccelerate and various angels also invested.&nbsp;



With the additional cash now on hand, Elixir wants to help <a href="https://blockworks.co/tag/dexs">DEXs</a> and other protocols be able to adopt a decentralized order book model by helping provide liquidity to get trades off the ground.



<h2 class="wp-block-heading">Metaverse gets a win</h2>



Upland, a metaverse aiming to mimic the terrain of the real world, raised $7 million on Friday as part of an extension of its 2021 series A round.



Existing investors C3 Venture Capital and Animoca Brands contributed to the round as did new investor EOS Network Ventures.&nbsp;



Upland allows its users to own virtual property mapped to the real-world geography of Earth. And like our planet, real estate on Upland varies quite a bit in price depending on the location you choose, Upland chief of staff Danny Brown Wolf told Blockworks in September 2022.



Blockworks previously reported that <a href="https://blockworks.co/news/upland-kaboom-nfts-crypto-fundraise-playground-us-access">Upland users directed a fundraising campaign for a nonprofit building playgrounds</a> in communities that lack them.&nbsp;



As of last month, Upland has raised just shy of $90,000 for charitable causes through sales of in-game map assets, in other words, <a href="https://blockworks.co/tag/nfts">NFTs</a>.&nbsp;



<h2 class="wp-block-heading">Other notable fundraises</h2>



<ul class="wp-block-list">
<li>Crypto price aggregator Coin Metrics raised over $6.7 million, according to a Wednesday <a href="https://www.sec.gov/Archives/edgar/data/1758833/000175883323000002/xslFormDX01/primary_doc.xml">SEC filing</a>.&nbsp;</li>



<li>Solana treasury asset manager Squads Protocol <a href="https://twitter.com/SquadsProtocol/status/1713968139023827056">secured</a> $5.7 million in a round led by Placeholder with a smattering of other participating VCs.</li>



<li>MyShell, an opBNB-based AI tool provider, <a href="https://medium.com/myshell-ai/myshell-secures-5-6-million-seed-funding-to-revolutionize-the-ai-native-app-landscape-b744327a235c">received</a> $5.6 million in a seed round with INCE Capital, Folius Ventures, Hashkey Capital and more investing.&nbsp;</li>



<li>Beluga <a href="https://www.businesswire.com/news/home/20231019826261/en/Beluga-Raises-4M-Seed-Round-to-Provide-a-Trusted-Platform-for-Crypto-Users-to-Invest-with-Confidence">raised</a> $4 million in seed funding from head investor Fin Capital and over a dozen others. It’s a platform designed to onboard newcomers into crypto and Web3.</li>



<li>Darewise Entertainment <a href="https://www.animocabrands.com/darewise-entertainment-raises-usd-3500000-in-token-presale">raised</a> $3.5 million through a presale of an upcoming token meant to undergird its eventual Bitcoin metaverse offering.</li>



<li>Third Time Entertainment, which created a token-based virtual horse race betting game, closed on a $2 million plus seed round.&nbsp;</li>



<li>Fileverse, a decentralized version of Google Docs and/or Medium, <a href="https://twitter.com/fileverse/status/1714288331570471336">announced</a> it raised $1.5 million on a pre-seed basis from companies, VCs and angel investors.</li>



<li>Hardware wallet provider Ryder <a href="https://www.prweb.com/releases/ryder-announces-new-hardware-wallet-replacing-seed-phrases--1-2m-raise-from-oak-grove-ventures-trust-machines-muneeb-ali-sbx-capital--others-301962021.html">raised</a> $1.2 million from multiple investors.</li>
</ul>



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Crypto funding: A focus on decentralized orderbook exchanges in $66M week

Darren Kleine

In the automated world of decentralized finance, the term LVR — often pronounced as the word “lever” — represents the problem of loss-versus-rebalancing. Jason Milionis describes it simply as “the price of knowledge.”



Whenever the price of an asset changes in an external market, the phenomenon can occur, the PhD student assistant researcher and recent crypto researcher intern at Jump Trading Group explains.&nbsp;



On the Bell Curve podcast (<a href="https://open.spotify.com/episode/2SdHXZx1wutssWaZ7U8AU1?si=uClsl3v-R-GuVR8HScUYbQ">Spotify</a>/<a href="https://podcasts.apple.com/us/podcast/the-lp-profitability-problem-lvr-dynamic-fees/id1641356619?i=1000630026811">Apple</a>), Milionis details some of the intricacies of LVR in DeFi. An automated market maker, or AMM, does not instantly “know” the market price of ether (<a href="https://blockworks.co/price/eth">ETH</a>), for example, when the asset is traded on another exchange, such as Coinbase. Thus, the AMM is prone to falling behind other trading mechanisms, offering “liquidity at stale prices,” he says.&nbsp;



Savvy traders who are aware of the discrepancy can take advantage of the situation and arbitrage with the AMM at “worse than market prices,” Milionis says. This causes the AMM’s <a href="https://blockworks.co/tag/liquidity-provider">liquidity providers</a> (LPs) to lose value “exactly because of the informational disadvantage” that resulted from the lag between markets.



This information asymmetry scenario is termed “adverse selection.” Alexander Nezlobin, professor of Accounting at the London School of Economics describes LVR as “yet another <a href="https://blockworks.co/news/the-future-of-web3-needs-zero-gas-fees">transaction cost that is imposed</a> on LPs.”



“If you are a passive LP and you want to make money by making the market,” he explains, “then you can contribute some amounts to the protocol of one token [and] of another token.”&nbsp;



Price movement can work either for or against the liquidity provider, Nezlobin says, depending on its severity. Ideally, if the price fluctuates in a relatively small range, “it’s great for LPs,” he says. “The LP will be making money.”



If the price follows a “random walk,” Nezlobin says, “then there&#8217;s a wide range of outcomes where you make money in some, you lose money in some others, but on average, that&#8217;s a fair game.”



But LVR can tilt the playing field. “The AMM ends up buying <a href="https://blockworks.co/news/bis-cbdc-project-mariana-concludes">at a price that is a little too high</a> [and] ends up selling at a price that is a little too low. And over time, this little transaction cost accumulates. And so that makes the game unfair to the LPs.”



<h2 class="wp-block-heading">We’re not living in that world</h2>



In an ideal trading world with no possibility for arbitrage between exchanges and AMMs — and no “alpha” to unduly influence the market — LVR wouldn’t exist, Blockworks co-founder Michael Ippolito says.&nbsp;



“However, we&#8217;re not living in that world. We&#8217;re living in a world where price is discovered on one venue and then it adjusts to other venues and that discrepancy in terms of timing and knowledge generally leads to the concept of LVR.”



What’s really devious about the problem, Ippolito says, is that a lot of participating liquidity providers in DeFi <a href="https://blockworks.co/news/paradigm-dex-liquidity-value-leaks">aren’t even aware of it</a>. “If you&#8217;re not a particularly sophisticated LP, LP’ing along, you might be making money, but you might be losing money in expectation from LVR.”



It’s a complex problem that <a href="https://blockworks.co/podcast/bellcurve/cec1a152-6166-11ee-aa30-43367ff5cbb9">requires further research</a>, Milionis says. As of now, most price discovery is happening on centralized exchanges, he explains, but the problem is tougher to decipher in DeFi.



<iframe loading="lazy" frameborder="0" height="200" scrolling="no" src="https://playlist.megaphone.fm/?e=BWG2569048968" width="100%"></iframe>







If an AMM is the dominant part of the order flow, then it becomes more difficult to distinguish the quantity of value lost due to adverse selection, he says, “which is basically what LVR represents.”



“It&#8217;s a very interesting research direction,” Milionis reflects, “but I don&#8217;t think we&#8217;ve certainly crystallized to this point as to what&#8217;s the right way to think about price discovery <a href="https://blockworks.co/news/chainlink-functions-developers-oracle-data">on-chain</a>.”



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Behind the times: How LVR is an ‘unfair game’ for DeFi liquidity providers

Katherine Ross

Venture capital firm Nima Capital allegedly sold more than nine million Synapse (SYN) tokens, drawing the attention of market watchers and developers.&nbsp;



Synapse Labs acknowledged the sale and liquidity removal in a post on X, formerly Twitter, saying that it is “investigating unusual activity on their wallets and are working to get in touch with them” though Synapse did not disclose who the “liquidity provider” was.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">A Synapse liquidity provider sold their SYN tokens and removed liquidity today. We&#39;re investigating unusual activity on their wallets and are working to get in touch with them. Will update once there is more info. There was no security breach of the protocol or bridge. 4&mdash; Synapse Labs (@SynapseProtocol) <a href="https://twitter.com/SynapseProtocol/status/1698865047324291412?ref_src=twsrc%5Etfw">September 5, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Nima Capital’s website has since gone offline, and Nima Capital did not immediately respond to a request for comment. Their account on X is locked, meaning that users must be approved to follow the account in order to access their posts.



Users quickly connected the sale to Nima Capital after user Spreek <a href="https://twitter.com/spreekaway/status/1698812822203879744/photo/1">posted</a> a screenshot of the sale.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">came from this mint (or bridge, idk how this token works tbh) 153 days ago <a href="https://t.co/cllIWf9zpL">pic.twitter.com/cllIWf9zpL</a>&mdash; Spreek (@spreekaway) <a href="https://twitter.com/spreekaway/status/1698814163475128479?ref_src=twsrc%5Etfw">September 4, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The Wall Street Journal <a href="https://www.wsj.com/real-estate/luxury-homes/a-condo-on-new-yorks-billionaires-row-sells-for-around-80-million-6d1137db">reported</a> in August that a condo linked to Nima Capital was sold for roughly $80 million.  



On March 14, a proposal — which later <a href="https://snapshot.org/#/synapseprotocol.eth/proposal/0x16f029d625e7dd0f8997b3cecc4297dd4f3516424e41b129e5d2535d378c93d6">passed</a> a vote — was made by ModestFarmer to engage with liquidity providers and named Nima Capital as the first liquidity provider.



As part of the <a href="https://forum.synapseprotocol.com/d/269-advancing-synapses-liquidity-model-reducing-syn-emissions">terms</a>, Nima Capital provided $40 million of locked stablecoin liquidity over a 12-month period. In return, Nima Capital received a SYN grant for the “currently planned stablecoin emissions and 33% of bridge &amp; swap fees for the duration of the term, aligning a long-term capital partner with the DAO.”



The price of SYN fell following the sale, declining roughly 12% in the last 24 hours at the time of publication.



Synapse did not immediately respond to a request for comment.



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Synapse confirms investigation into liquidity provider’s ‘unusual activity’

Bessie Liu

DeFi liquidity protocol Balancer suffered an exploit following the discovery of a critical vulnerability in its v2 pools last week.



The Balancer team acknowledged Sunday that they are aware of the exploit and most funds in affected pools have been withdrawn. 



Meir Dolev, the chief technology officer of blockchain security company Cyvers.AI, noted in a post on X yesterday that the attacker had secured $900k from the exploit.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">The attacker continues with his operation, approx $900K affected, more than $600K moved to this address 0xB23711b9D92C0f1c7b211c4E2DC69791c2df38c1 <a href="https://t.co/inNqH4zel2">pic.twitter.com/inNqH4zel2</a>&mdash; Meir Dolev (@Meir_Dv) <a href="https://twitter.com/Meir_Dv/status/1695786374186549540?ref_src=twsrc%5Etfw">August 27, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Following the vulnerability’s discovery, liquidity providers were asked to exit their positions through a <a href="https://app.balancer.fi/#/ethereum/recovery-exit">proportional exit</a>. 



Read more: <a href="https://blockworks.co/news/balancer-vulnerability-detected">‘Critical vulnerability’ reported in Balancer v2 pools</a>



An earlier Balancer <a href="https://twitter.com/Balancer">post</a> noted that over 99.7% of liquidity originally at risk is now safe and only<a href="https://twitter.com/Balancer/status/1695064684620140942"> 0.08%</a> of the total value locked (TVL) remained at risk. 



Blockchain security company <a href="https://twitter.com/peckshield/status/1696185272445419961?s=20">PeckShield</a> questioned this figure in a Monday post, contending that their analysis indicates more than $2.1 million remains in affected v2 pools.



“The Balancer team has done a great job in alerting the community to remove liquidity from affected vaults, the original estimate of &#8220;only 0.08% of total TVL ($565,199) remains at risk&#8221; seems to be seriously mis-calculated,” PeckShield tweeted.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Our initial analysis indicates the <a href="https://twitter.com/Balancer?ref_src=twsrc%5Etfw">@Balancer</a> loss (incl. <a href="https://twitter.com/beethoven_x?ref_src=twsrc%5Etfw">@beethoven_x</a>) has been &gt;$2.1M, affecting a number of pools in <a href="https://twitter.com/ethereum?ref_src=twsrc%5Etfw">@ethereum</a> <a href="https://twitter.com/FantomFDN?ref_src=twsrc%5Etfw">@FantomFDN</a> <a href="https://twitter.com/optimismFND?ref_src=twsrc%5Etfw">@optimismFND</a> The <a href="https://twitter.com/Balancer?ref_src=twsrc%5Etfw">@Balancer</a> team has done a great job in alerting the community to remove liquidity from affected vaults, the original… <a href="https://t.co/2xiWMKOOns">https://t.co/2xiWMKOOns</a> <a href="https://t.co/5YoFvV510S">pic.twitter.com/5YoFvV510S</a>&mdash; PeckShield Inc. (@peckshield) <a href="https://twitter.com/peckshield/status/1696185272445419961?ref_src=twsrc%5Etfw">August 28, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



At the time of writing, Balancer’s native token (<a href="https://blockworks.co/price/bal">BAL</a>) was trading at $3.51, a little below $3.6 prior to the discovery of the vulnerability.



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Balancer pools exploited after last week’s vulnerability reveal

Trader Joe, the largest decentralized exchange (DEX) on proof-of-stake blockchain Avalanche, has launched on Ethereum mainnet.&nbsp;



The pseudonymous <a href="https://twitter.com/cryptofishx" target="_blank" rel="noreferrer noopener">Fish</a>, co-founder of Trader Joe, told Blockworks that the DEX’s decision to launch on Ethereum now was driven by the opportunity to capture the stablecoin markets on the network amid the upheaval around Curve.&nbsp;



Curve, a well-known stablecoin DEX, <a href="https://blockworks.co/news/curve-suffers-exploit">suffered an exploit this week</a> that saw over $70 million in various digital assets attacked due to a bug in Vyper, the coding language used by Curve.&nbsp;



This latest exploit has led many liquidity providers to sell their holdings of CRV, Curve’s native token. At the time of writing, CRV currently has a <a href="https://defillama.com/protocol/curve-finance?volume=false&amp;tokenLiquidity=true&amp;events=false&amp;tvl=true" target="_blank" rel="noreferrer noopener">token liquidity</a> of $6.75 million, a significant dip from $70.42 million before the hacks.



“LPs (liquidity providers) are moving to other pools, so you’re seeing a lot of volume go to other DEXes,” Fish told Blockworks. “We want to join and put ourselves into that mix.”



<h2 class="wp-block-heading">Capturing the stablecoin market</h2>



Fish notes that Trader Joe’s initial plan was to deploy on Ethereum in a month or two, around the beginning of Q4, after working on improving its <a href="https://joecontent.substack.com/p/auto-pools-automated-liquidity-built" target="_blank" rel="noreferrer noopener">auto pool</a> technology.



“But this opportunity came up, and we felt this is the best time to deploy,” he said.&nbsp;



Auto pools are designed to help automate the balance of liquidity for users passively.&nbsp;



“Ethereum runs a little bit slower, it is gas intensive, and our AMMs also use a lot of gas,” Fish explained. “If you’re managing positions in a concentrated liquidity AMM, which requires you to rebalance often, and make a lot of transactions every day, then for the average Joe it’s going to be very uncomfortable for him to market make.”



Luckily, managing positions in a stable stablecoin market is relatively simple, Fish said.



“The price of USDC and USDT isn’t going to vary that much,” he said. “So in most cases, people can just deploy in that range and then earn fees from within that range.”



Trader Joe’s initial launch on Ethereum will include stablecoin pools USDC/USDT and USDC/DAI.



<h2 class="wp-block-heading">How Trader Joe compares to Uniswap</h2>



Like Uniswap v3, Trader Joe is a <a href="https://app.blockworksresearch.com/research/trader-joe-liquidity-book-the-next-chapter-in-amm-evolution" target="_blank" rel="noreferrer noopener">concentrated liquidity AMM</a>, providing constrained liquidity within a tight range for its users.



Compared to its competitor, its unique edge is that it offers dynamic fee components, Fish noted.



On Uniswap v3, liquidity providers are offered three fee tiers, ranging from 0.05%, 0.3% and 1%.&nbsp;



By contrast, on Trader Joe, there is a base fixed fee and a variable component which is dependent on the volatility within the past few seconds to minutes.&nbsp;



Trader Joe is currently deployed on Avalanche, Arbitrum and BNB chains.



According to <a href="https://defillama.com/protocols/dexes/Avalanche" target="_blank" rel="noreferrer noopener">data</a> on DeFiLlama, Trader Joe has a $57.45 million TVL on Avalanche, making it the largest DEX on the network.



On Arbitrum, however, it sports a TVL of <a href="https://defillama.com/protocols/dexes/Arbitrum" target="_blank" rel="noreferrer noopener">$31.9 million</a>, a significantly less amount compared to Uniswap v3, which currently reports volumes of <a href="https://defillama.com/protocols/dexes/Arbitrum" target="_blank" rel="noreferrer noopener">$261.7 million.</a>



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Avalanche DEX favorite Trader Joe is launching on Ethereum

Uniswap, the largest crypto decentralized exchange by volume, recently broke news of a series of planned updates, including the introduction of a single contract pool structure.



The “<a href="https://blockworks.co/news/uniswap-labs-dex-v4">singleton contract</a>” is not yet implemented on <a href="https://blockworks.co/tag/uniswap">Uniswap</a>, but similar technology can already be found on the Ambient decentralized exchange, or <a href="https://blockworks.co/tag/dex">DEX</a>.&nbsp;



Founder of the competing DEX, Doug Colkitt, spoke to Blockworks on an upcoming episode of the 0xResearch podcast (<a href="https://open.spotify.com/show/0rGocvZ7oZR6vuy0UHKAON?si=522d824d27c74f03">Spotify</a> / <a href="https://podcasts.apple.com/us/podcast/0xresearch/id1651683074">Apple</a>) about the advantages of the new slimline design.



“The big deal” with the new architecture, Colkitt says, is that in previous DEXs, “every time you had a new pool, you had to stand up a new contract.”



“It meant that every single contract was individually managing its own collateral.”



“Standing up a pool,” Colkitt explains, is a relatively “heavyweight” task that deploys a costly contract to the mainnet.&nbsp;



“You&#8217;re talking about a few hundred dollars,” which isn’t much for a larger-scale project, but to experiment on the cheap, he says, “it’s not great.”



More importantly, Colkitt says, a single contract allows a DEX to behave like one market rather than a collection of separate ones interacting with each other. Without the new design, “I’m trading between different markets,” he says.



Trading between two tokens and ether (<a href="https://blockworks.co/price/eth">ETH</a>) would normally involve numerous steps, jumping from one pool to another to complete the trades, with gas fees incurred at each step. “That&#8217;s pretty heavyweight and unnecessary.”



“At the end of the day, ETH just winds up back at the market.”



“The tokens are all in a central location. The pools are separate, but they&#8217;re just lightweight data structures inside a larger contract.”



This design reduces restrictions between markets, making them more efficient, according to Colkitt. It also adds some interesting trading possibilities that were not possible under the previous multi-contract architecture.



“You can do interesting stuff with flash accounting,” he explains. “You can trade in one pool and you don&#8217;t actually need to fill in those tokens until the end of the trade.”&nbsp;



“So it also makes arbitrage a lot lower cost.”



<h2 class="wp-block-heading">Reducing toxic flow</h2>



Podcast host Dan Smith notes that transferring tokens incurs about half the gas cost of an ERC-20 trade on DEXs like Uniswap or <a href="https://blockworks.co/tag/curve">Curve</a>, reducing the capacity for arbitrage.



Colkitt says that the single contract design lowers the profitability threshold on arbitrages. Thus, prices will “stay in line” with markets more efficiently over time because arbitrages can be performed at “smaller discrepancies.”



Additionally, lowering the barriers to arbitrage could potentially reduce “<a href="https://twitter.com/blockworksres/status/1640744469220958208?s=20">toxic flow</a>,” a problem whereby predatory traders can cause market makers to provide liquidity at a loss.



“If you lower the barriers to arbitrage,” Colkitt says, “it actually decreases the total amount of toxic flow” on any particular trade. Increasing the number of trades at smaller increments is better for liquidity providers, he explains.



“Ultimately,” he says, “you get the same total toxic flow, but you get a lot more arbitrage trades.” Therefore, <a href="https://blockworks.co/tag/liquidity">liquidity</a> providers collect more fees over time, resulting in “a better deal.”



The fact that Uniswap is also planning, <a href="https://blockworks.co/news/uniswap-v4-dex-hooks">among its improvements</a>, to build a single contract is “good validation” for Ambient, he says.&nbsp;



Colkitt explains that when the team started working on the new design, people were skeptical, asking, “Is that a good idea? Should you put everything in one contract?”



“At least I never have to answer that question again.”



Subscribe to 0xResearch on <a href="https://open.spotify.com/show/0rGocvZ7oZR6vuy0UHKAON?si=522d824d27c74f03">Spotify</a> or <a href="https://podcasts.apple.com/us/podcast/0xresearch/id1651683074">Apple</a> so you don&#8217;t miss this episode!



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Ambient founder touts advantages of single-contract DEX architecture

A new class action lawsuit, helmed by Hoppin Grinsell, has been filed against BProtocol Foundation and Bancor DAO.



“The lawsuit alleges that Defendants violated federal securities laws and various state laws by offering and selling investment contracts to Bancor liquidity providers, without registering under applicable federal securities laws as an exchange or brokerdealer, and without a registration statement in effect for the securities it offered and sold,” a press release for the lawsuit said.



When Bancor, a DeFi liquidity protocol, rolled out the second version of the investment product, it introduced impermanent loss protection — insurance for losses caused by value differences between automated market makers and spot markets. 



The function attracted liquidity providers (LPs) to the protocol, which led to over $2.3 billion worth of crypto assets invested in it.



But &#8220;the quantity of the crypto assets held by Bancor was insufficient to meet its obligations to LPs. If a sufficiently large number of LPs withdrew their investments at the same time, the protocol would crumble, much like a run on the bank,&#8221; the lawsuit <a href="https://storage.courtlistener.com/recap/gov.uscourts.txwd.1218725/gov.uscourts.txwd.1218725.1.0.pdf" target="_blank" rel="noreferrer noopener">alleges</a>.



In 2022, after withdrawals triggered a payment obligation from the liquidity providers, Bancor suspended the impermanent loss protection, leaving the providers to incur &#8220;the very losses that Defendants had promised to ‘100% protect’ against.&#8221;



Blockworks at the time <a href="https://blockworks.co/news/bancor-halts-impermanent-loss-safeguard-to-fight-off-hostile-antagonist" target="_blank" rel="noreferrer noopener">reported that Bancor temporarily paused</a> its impermanent loss protection feature due to &#8220;<a href="https://blockworks.co/news/bancor-describes-hostile-antagonist-behind-impermanent-loss-defense" target="_blank" rel="noreferrer noopener">hostile market conditions</a>&#8221; and &#8220;manipulative behavior.&#8221; Mark Richardson, Bancor product architect said “it would be difficult to imagine the protocol withstanding such a large flight of liquidity all at once.”



Through conferences and interviews, Bancor and its representatives targeted US investors, the lawsuit alleges. Representatives for the protocol used condoms and t-shirts to advertise to potential investors.



In 2021, a New York City court <a href="https://www.scribd.com/document/495824058/Bancor-Dismissal?irclickid=TLy1zAzcqztNWrKzLcSXdTO3UkAXM1RsexpoXI0&amp;irpid=10078&amp;utm_source=impact&amp;utm_medium=cpc&amp;utm_campaign=affiliate_pdm_acquisition_Skimbit%20Ltd.&amp;sharedid=coindesk.com&amp;irgwc=1" target="_blank" rel="noreferrer noopener">dismissed</a> a class action suit against Bancor and BProtocol Foundation, which alleged that the protocol offered unregistered security offerings.



Hoppin Grinsell and Bancor did not immediately respond to requests for comment.&nbsp;



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Bancor Perks for Liquidity Providers Broke Securities Laws: Lawsuit

Drew Mailen

To break down the mechanics of a crypto-liquidity crunch, we sat down with an institutional market expert, Chuck Lugay, head of execution services at sFOX. <a href="https://bit.ly/3AT2TMm" target="_blank" rel="noreferrer noopener">sFOX</a> is known by institutional investors for its deep order books — sourced from more than 30 top exchanges, OTCs and over 80 markets. Lugay brings more than 20 years of institutional experience and has lived through the significant market swings in the last two decades.&nbsp;



<h3 class="wp-block-heading">What is a crypto liquidity crunch, and how does it start?&nbsp;</h3>



The definition is simple. A crypto liquidity crunch is when platforms lack the liquid supply of cash reserves and 1:1 convertible stablecoins needed to meet demand all without collapsing market prices.



It&#8217;s a bank run.



And in the world of digitized assets, human behavior isn&#8217;t different. Like the 2007-08 real estate market crash, both follow a period of hyper-competitive yield chasing with little interest in risk-averse asset management. Those like Chuck Lugay have witnessed the same behavior across multiple industries.&nbsp;&nbsp;



&#8220;I lived through the market corrections in 2001. I lived through the real estate disaster in 2008. I think that if you haven&#8217;t had experiences like that within your professional career, you may leave yourself open to big issues like this,&#8221; Lugay said.&nbsp;



&#8220;There are no specific guaranteed red flags that give an indication of a liquidity crunch, but you need to prepare for the worst. It might come at the sacrifice of immediate returns of what you&#8217;re doing now. But I&#8217;d almost rather lose a small amount of money on a trade today, than lose half of my equity in the entire portfolio because I didn&#8217;t practice good hedging strategies. Multiple players in the space right now will not make it because they did not hedge themselves correctly,&#8221; Lugay said.&nbsp;



<h3 class="wp-block-heading">How the liquidity mechanics differ&nbsp;</h3>



While human behavior remains consistent across industries, the mechanics of a crypto liquidity crunch function differently. In crypto, very few on-ramps allow institutions to transfer large amounts of capital in and out of the market. Think of it as a new city with many highrises but not enough highways in and out. Crypto platforms developed solutions akin to an above-ground rail to alleviate congestion within the market. They either tokenized assets by holding a 1:1 equivalent value in cash or used algorithmically governed monetary policy to maintain a 1:1 peg. Like above-ground rails, these solutions help transfer liquidity within the system but do not offer an easy way out. They still need exchanges or stablecoin bank redemptions to exit completely.&nbsp;&nbsp;&nbsp;



Terra/Luna&#8217;s UST was an example of a 1:1 algorithmic stablecoin that crumbled from poor architecture. Before its collapse, funds and exchanges used it as a critical source of liquidity. But when it started to depeg, some of the biggest market makers could not move fast enough to meet liquidity demands. And in a world of automated and decentralized smart contracts, prices collapsed to zero in hours. Funds with UST on their balance sheet suffered the consequences. And now, multiple crypto lending platforms are facing bankruptcy and liquidation.&nbsp;



To say this is a big deal may be an understatement. In a recent <a href="https://cms.blockworks.co/webinars/crypto-state-of-the-union-trading-risk-management/" target="_blank" rel="noreferrer noopener">webinar on crypto&#8217;s state of the union</a>, Chuck had this to say about today&#8217;s market compared to previous bitcoin cycles:



&#8220;I think the biggest difference in this cycle is the credit fall out. We had a liquidity situation in 2017, but I don&#8217;t think you had the systemic problem that you are seeing today. We are in uncharted territory.&#8221;&nbsp;



Sourcing the proper liquidity from on-ramps and exchanges is key to navigating and preparing for a market-wide crunch. Chuck explains that institutions choose sFOX over individual exchanges because it does not limit order book access to one or two specific liquidity providers. Instead, sFOX has bundled and aggregated over 30 liquidity providers on one platform.&nbsp;



<h3 class="wp-block-heading">How aggregated liquidity providers can help during a liquidity crunch&nbsp;</h3>



Say one exchange in <a href="https://bit.ly/3chzn8F" target="_blank" rel="noreferrer noopener">sFOX&#8217;s aggregated liquidity</a> is over-exposed to a collapsed stablecoin. Chuck points out that institutional-level investors can maintain a degree of protection through the more than 30 additional liquidity providers. sFOX makes access easy because all the activity is taken care of in-house. This includes treasury management and establishing relationships — saving investors time and resources.&nbsp;



He even argues that when an institution wants to exit during a liquidity crunch, institutions can avoid some of the typical price slippage that occurs on exchanges. They achieve this efficiency through smart order routers and specific algorithmic order types.&nbsp;



<h3 class="wp-block-heading">In conclusion&nbsp;</h3>



There is no way to see a massive downturn in any specific token, so institutional investors must ensure they are thoroughly hedged. First and foremost, liquidity crunches often start with large downside market movements. In addition to environmental factors, market downturns can happen when portfolio managers, hedge funds, and institutional investors are not practicing good risk management.&nbsp;



Aggregated liquidity providers like sFOX can offer deeper pools of liquidity by drawing on more than 30 top exchange sources, including the industry&#8217;s OTC trading desks, as well as over 80 markets. 



This content is sponsored by <a href="https://www.sfox.com/" target="_blank" rel="noreferrer noopener">sFOX</a>.



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



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