(Rye, Van Gogh)
Mercurial is also one of the projects on the Solana ecosystem. It provides stable asset exchange services, which sounds like it is not very different from Curve in the current Ether ecosystem. However, as a latecomer, it has more opportunities to learn some of the advantages of the previous DeFi protocol. This can be seen in its design, which has made certain iterative optimizations in terms of transaction slippage, LP returns, and asset utilization, which are of most concern to users.
Mercurial starts from the stable coin AMM pool and provides exchange services for stable coins such as USDC, USDT, wUSDC and wUSDT for Solana ecology. With the grasp of user needs and the development of the ecology, Solana also plans to provide liquidity services for more stable assets.
So, what are the iterations of Mercurial that deserve attention? Let’s start with its overall framework.
Understanding Mercurial’s framework
We can look at Mercurial’s framework diagram at
(The core of Mercurial, from Mercurial)
You can see that there are several core parts: Vault, Yield, Dynamic Fees, and DAO Governance.
Mercurial has a dynamic pool of market-making funds. Its funding vault provides automatic market making for stable asset exchanges. LPs can deposit their stable assets into Mercurial’s funding vault, which then provides liquidity for stable asset exchanges, while gaining revenue from external agreements such as participation in lending, flash lending, and revenue aggregation through farming or mining. In addition, the LP’s fee return is not fixed, but changes dynamically, which is one design that sets it apart.
Broken down specifically, there are several aspects that are key to understanding Mercurial.
Mercurial’s design in terms of reducing slippage
We know that making larger exchange amounts on AMMs currently tends to bring higher slippage. This can be true even for exchanges of stable assets.
Mercurial differs from the usual X*Y=Z model of AMM market making in that its main differences are as follows.
(Mercurial’s market making slippage variation, from Mercurial)
The red line is the slippage variation in the traditional AMM market making model, and the blue line is the slippage variation in Mercurial’s market making model. This looks like very low slippage. How is it designed?
There are two main aspects. One, when offering liquid token pairs of assets, Mercurial does not require that the token pairs offering liquidity must be in a 1:1 allocation and can be flexibly allocated. Second, Mercurial utilizes an amplified price curve to focus liquidity into the desired range. Users will receive less liquidity if their transactions are out of the trading rate range.
This can be briefly illustrated by the two formulas proposed by Mercurial.
There are two tokens forming a token pair to provide liquidity, assuming that the tokens are X1, X2; their exchange rates fluctuate in the range p1, p2, and in the constant product market making model, the formula is expressed as
Mercurial adds some amplification factor a to this base, which then yields the following equation.
In this formula, if the coefficient a is infinite, then all its liquidity is concentrated in the price range p1-p2; if the coefficient a is infinitely close to zero, then this formula is equivalent to the market-making model of the constant product.
With the above design, Mercurial tries to reduce the slippage of user exchanges. These are design ideas that we have seen similar thinking on balancer and dodo, although Mercurial currently focuses mainly on the exchange of stable assets.
Mercurial’s design for increasing LP returns
In a traditional AMM, the LP’s fee return is generally fixed. For example, Curve is generally 0.04%; in Uniswap V2, it is generally 0.3% by default; in Uniswap V3, optional fees are available: 0.05%, 0.3% and 1%.
Unlike these relatively fixed fee designs, Mercurial uses a dynamic fee design. In Mercurial, all token-to-fund pools share the same dynamic fee mechanism.
The motivation for the dynamic fee mechanism is to provide a more reasonable return for LPs, and as the demand for exchange increases, so does the exchange fee. Especially when market volatility is high, by having a higher fee, LPs can reduce their unpredictable losses and gain higher returns. If the market is less volatile and user exchange demand is lower, fees will also fall, thus providing an incentive for users to trade.
Mercurial uses volume measures for both long and short time windows in determining its fees, which are calculated using EMA (Exponential Moving Average), and its fees are updated based on volume ratios. The chart below represents the update of fees based on changes in market volatility.
Mercurial’s design to enhance asset returns
In addition to its design in terms of reducing slippage and providing dynamic fee returns for LP generation, Mercurial has a different design in that it will manage dynamic allocations from the assets of the funding pool to external protocols. And its allocation algorithm is managed through an on-chain algorithm. In addition to the allocation of assets, Mercurial’s asset management includes interest and revenue collection, exit from a specific platform and liquidation of the proceeds.
(A portion of the Mercurial pool is used for farming, from Mercurial)
These revenue programs can only be deployed to external platforms with the approval of the DAO, which determines the percentage of each pool that can be deployed to external agreements. External revenue platforms include flash lending, lending platforms, stablecoin lending with bars, or other revenue pools. Platforms are selected based on return, risk, and liquidity. Asset utilization of market makers is enhanced through the income scheme.
MER Token Mechanism
Mercurial’s token is MER. MER tokens have the opportunity to capture the following values.
- The fee cost of conversion
MER token holders have the opportunity to earn transaction fees on the Mercurail platform. exactly how MER captures transaction fees, whether to buy back and destroy MERs, or allocate MERs, is determined through DAO governance.
*Commissions on seeding revenue
MER holders have the opportunity to receive commissions for “farming” or “mining” proceeds. Depending on the DAO governance, this can be in the form of buying and destroying MER tokens, or pledging MER tokens to receive the corresponding allocation.
*Collateral for synthetic assets
MERs are used as the primary pledge tokens when generating synthetic assets or other stable assets. If the demand for synthetic assets increases, then a demand for more MER tokens will be generated. This is similar to the pledge function of Synthetix’s SNX tokens.
- Governance value
In Mercurial’s DAO governance, its main tool is the MER token. Through it one can participate in the governance of the DAO. And DAO governance can decide some important parameters and resolutions of the protocol. For example, determining the base fees and commissions for transactions and for the proceeds of the pool; whether the fees are used for destruction or distribution; which protocols the pool assets can be deployed to; the percentage of the pool used for farming or mining; which new synthetic assets should be launched; LP and pledgee reward mechanisms; how much money to inject into the insurance pool for the risk of asset de-anchoring, etc.
This means that MERs themselves have governance value, which will become apparent if Mercurial has the opportunity to grow.
In addition, Mercurial’s liquidity providers who deposit assets can receive LP tokens.LP tokens.
1) can be pledged for liquidity mining of MER tokens.
2) can be reinvested in the Mercurial pool of funds.
3) can be used as collateral in other lending platforms
4) can be used for synthetic asset generation.
Mercurial’s Cold Start Program
To achieve a cold start, Mercurial has attempted to start with the following.
- User interface designed to conform as much as possible to the CEX and EVM (Ether users) user experience as a way to reduce friction in use.
- Encouraging the participation of the Kyber community, which has over 100,000 token users, through which Mercurial tries to complete the initial user accumulation.
Mercurial’s entry point
From the above, Mercurial itself is more like a stable asset management protocol. It offers traders a stable asset exchange service through the construction of its stable funding pool, and liquidity providers asset management gains such as market making gains, farming or mining. From this perspective, its core lies in the management of stable assets.
Therefore, the success of Mercurial depends largely on its success in managing stable assets. And the success of stable asset management depends mainly on its stable asset exchange, stable asset farming / liquidity mining returns, etc.
From this perspective, Mercurial’s first entry point is an upgraded iteration of the DEX protocol, which focuses on providing lower slippage for stable asset traders and thus attracting trading users. Larger trading users, in turn, attract more liquidity providers. Liquidity providers are the injectors of Mercurial’s pool of funds, and they want a higher return, which can come from liquidity provision, but also from farming or mining, for example.
Moreover, in addition to the design of the protocol itself mechanism, Mercurial has an entry point in that it does not cut from the ethereum ecosystem, nor from chains such as PoC, BSC or HECO, but from Solana. This means that it will mainly serve Solana ecosystem users in the early stage, and its early success is closely related to the overall development of Solana ecosystem.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/solana-eco-on-mercurial/
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