How to Earn Yield on DODO — the World’s First Proactive Market Maker (PMM)
Learn about DODO, the world’s first proactive market maker (PMM) that actively counters the risk of Impermanent Loss.
Providing liquidity to trading pools can be an excellent source of earning yield on your cryptoassets. However, DeFi liquidity providers typically face a new type of financial risk that comes with autonomous liquidity pools: impermanent loss (IL).
The DeFi protocol DODO tackles this issue with its innovative, proactive market maker (PMM) model to provide an advanced yield-generating opportunity for investors.
Learn more about DODO in this guide.
DODO is an automated market maker (AMM) and yield farm powered by the DODO token. It differentiates itself from other AMMs through the invention and use of the Proactive Market Maker (PMM) algorithm.
PMM is a powerful algorithm that tackles some of the biggest issues investors face in the DEX ecosystem, such as impermanent loss, high slippage, and low liquidity.
The DODO app offers a suite of products, including:
- its trade router Smart Trade;
- customizable pool formats enabling pools compatible with single-asset deposits and token issuance without needing high starting capital;
- mining incentives and rewards for traders and liquidity providers.
If you want DeFi yields with a reduced chance of impermanent loss, or decentralized trading without high slippage and low liquidity, read on to learn how DODO raises the DEX standard.
What is a Proactive Market Maker (PMM)?
Unlike the AMM algorithm, the PMM algorithm is highly customizable and features active price discovery.
Let’s compare by observing both the traditional AMM model before DODO and the PMM.
For AMM formulas:
*k: pool constant a and b: numbers of token A and B deposited P_a and P_b: prices of token A and token B*
For PMM formulas:
*B and Q: current numbers of base tokens (ask-side liquidity) and quote tokens (bid-side liquidity) B_0 and Q_0: original numbers of base and quote tokens k: configurable pool metric acting as pricing curve’s slope i: configurable pool metric as mid-price P_a and P_b: same as AMM formulas*
In AMMs, the quantity of each asset in the pool, a and b, can fluctuate due to two reasons:
- traders selling or buying either asset,
- or the pool itself buying or selling either asset to maintain the pool constant (k).
The reason why k is constant is because both assets in the pool need to be in equivalent proportions so that traders are free to convert one asset for the other. If you deposit in such a pool, your balance of the asset appreciating will decrease as the pool trades it for the other asset in order to maintain the pool constant. That’s impermanent loss.
The drawbacks to the AMM model are many:
- Liquidity providers have to deposit both assets in equivalent proportions rather than just one.
- Token issuers need a second asset in bulk to issue their token since the AMM formula isn’t compatible with single asset pools.
- Impermanent loss and high slippage are rampant.
With the PMM model, the price formula for each asset isn’t dependent on the quantity of the other asset and, there’s no pool constant to maintain. This eliminates the need for the pool to buy or sell assets itself, resulting in a significant reduction in impermanent loss.
It also means that token issuers can issue assets without having to buy another asset in bulk to pair it with. A plus for the emerging DeFi world.
Where it really gets interesting is the mid-price, or i, in the PMM formula. Depending on the pool set-up, i could be:
- the price feed of the tokens retrieved from an external high-liquidity market via chain.link;
- or a constant price that doesn’t change, e.g. for pools issuing new stable coins.
If Chainlink is used for i, then the price of the asset in the pool will reflect the wider market price more closely.
But the innovative new PMM algorithm doesn’t stop there! Below is an explanation as to how it adjusts the mid-price i slightly to undo any IL caused by trading activity.
PMM Example for ETH-USDT Pool with Appreciating ETH Price
- The price of ETH rises and as a result, the number of ETH decrease in the pool (just like the IL in the AMM formula).
- The PMM then adjusts the price of ETH slightly above the market price i. The extent of this adjustment depends on the configured k value.
- The arbitrage opportunity created encourages traders to sell their ETH into the pool, ultimately increasing the number of ETH and undoing IL.
This algorithm works whether the ETH price appreciates or depreciates or whether the same happens to USDT, despite it being a stablecoin.
DODO terms this phenomenon as active price discovery because it maintains the price where most traders will engage with it: the mid-price.
Configuring k allows pool creators to control the extent of the price change from the mid-price i. As you can see from the graph, setting k between 0 and 1 provides resistance to price fluctuation at the mid-price (where the yellow graph is flat), resulting in higher liquidity and lower slippage.
A k value of 1 creates a price curve identical to AMMs, which goes to show how the PMM is an advancement of the AMM algorithm and not a new one altogether.
Drawbacks of PMM
The traditional AMM determines the price of assets without an oracle (an external source of data). Rather, it relies on arbitrageurs to shift its prices towards the market price. The PMM has a much smaller dependence on arbitrageurs and, thus, it is a poor choice for arbitrage traders.
Another potential drawback is the newness of DODO. The platform hasn’t stood the test of time yet as it’s less than a year old. In fact, in the early days of the DApp, the DODO smart contract experienced a hack. Fortunately, the majority of funds stolen were returned, and the vulnerability has since been amended.
Moreover, PMMs rely on Chainlink oracles for pricing, so there is a single point of failure and potential risk, should any issues arise with the price oracle.
Earning Yield on DODO: Here’s How with Trust Wallet
With all that said, how can you tackle IL and start benefiting from the PMM algorithm yourself? The answer is: using Trust Wallet.
With native support for DODO, Trust Wallet allows seamless access to the platform.
To earn a yield on Dodo with Trust Wallet, follow the steps below:
- Navigate to the Trust Wallet DApp browser and enter app.dodoex.io in the address bar.
- In the top navigation bar, select Mining, and in the menu that opens, select Liquidity Mining. Make sure you set Trust Wallet to the Ethereum network in the top right corner.
- Now you can see all the different pools you can stake in to earn your very own DODO tokens!
- Select a pool by clicking its Stake button.
- On the next screen, enter the amount you would like to stake and hit the new Stake button. Once you approve the transaction, you can manage your liquidity through the Liquidity section in the top navigation bar.
Now you’re on your way to earning your very own DODO tokens with the convenience and security of Trust Wallet! Enjoy your first PMM experience, alongside the differences it can potentially make for your yields.