Introduction

Looking back at the development of decentralized exchanges (DEXs), they remained relatively dormant until mid-2020. Starting from June 2020, the DEX sector experienced an explosion in trading volume. Today, DEXs have evolved into the most crucial infrastructure in the DeFi sector, with daily trading volumes reaching up to $2 billion. The rise of DEXs first occurred on Ethereum, with other chains mainly replicating Ethereum’s DEX models, offering limited innovation. Generally, the development of native DEXs on various chains depends on the growth of their underlying blockchain networks.

Scalability is a hot topic in the blockchain industry, attracting continuous market attention. Scalability solutions aim to lower gas costs, reduce network congestion, and speed up transaction times. These solutions are categorized into on-chain and off-chain scaling. On-chain scaling includes sharding, modifying consensus mechanisms, increasing block size, and accelerating block production. Off-chain scaling primarily involves layer 2 networks, sidechains, and modular approaches. As the industry evolves, mainstream scalability directions have also shifted. In April 2020, NEAR, a blockchain focused on sharding, went live. Compared to Ethereum, NEAR has made faster progress in implementing sharding, garnering market attention and capital interest.

NEAR’s biggest advancement is chain abstraction. In February 2023, NEAR introduced the blockchain operating system (BOS), enabling developers to build more discoverable applications by hiding the infrastructure behind the apps. Additionally, NEAR collaborated with Eigen Labs to launch the NEAR DA, an efficient data availability layer compatible with Layer 2 solutions. In 2024, NEAR plans to further implement account aggregation, allowing users to access all Web3 applications through a single non-custodial account without needing to switch networks. NEAR will also enhance sharding performance by introducing stateless validation. NEAR positions itself not just as a simple Layer 1 blockchain but as an intermediary for account aggregation and a data availability layer for Layer 2 networks.

Ref Finance is the native DEX on the NEAR blockchain, supporting significant liquidity and trading volume. Following NEAR’s development trajectory, Ref Finance aims to become a multi-chain DEX without the need for cross-chain operations. This article will further explore its trading principles, analyze its token model, and discuss its current development status.

What is Ref Finance?

Ref Finance is a native decentralized exchange (DEX) built on the NEAR blockchain. It draws inspiration from Uniswap v2, Curve, and iZUMi to support three types of liquidity pools: classic pools, stable pools, and discrete concentrated liquidity (DCL) pools. Additionally, it supports an order book trading model through Orderly Network’s front end.

The protocol was established in April 2021, initially created by NEAR Protocol co-founder Illia Polosukhin. After deploying the application in April 2021, the focus shifted to NEAR’s development. A grant from the NEAR Foundation was allocated to the development of Ref Finance. In June 2021, the Ref Finance DAO was established to oversee the protocol’s development and operation. According to official information, the DAO comprises 15 members, most of whom remain anonymous. In July 2021, Ref Finance raised $4.8 million through an over-the-counter (OTC) deal from institutions like Jump, Alameda Research, and Dragonfly.

Product Logic

Ref Finance implements DEX functionalities by incorporating liquidity algorithms from Uniswap v2, Curve, and iZUMi. It offers three types of liquidity pools: classic pools, stable pools, and discrete concentrated liquidity (DCL) pools. Additionally, it supports singleton contract functionality, allowing multiple liquidity pools to be housed within a single contract to reduce gas costs associated with creating liquidity.

Source: guide.ref.finance

Classic Pools

Ref Finance utilizes the Uniswap v2 algorithm (x*y=k), known as the constant product automated market maker (AMM) mechanism. Users who add liquidity to these pools can earn transaction fee income. Additionally, providing liquidity in certain pools can earn users extra token rewards, such as REF, boosting their yield.

Stable Pools

The stable pools use Curve’s algorithm, which includes two or three tokens in a pool. The asset exchange curve in stable pools lies between the constant product (x*y=k) and constant sum (x+y=k) formulas. This algorithm allows for lower slippage and reduced trading friction when dealing with pegged assets under the same liquidity. When the tokens in the pool become imbalanced, the token exchange ratio increases to prevent liquidity depletion, protecting the interests of liquidity providers. Ref Finance also developed Rated Pools, a variant of stable pools designed for yield-bearing assets.

Discrete Concentrated Liquidity Pools (DCL Pools)

The DCL pools are designed based on iZUMi’s discrete liquidity pool mechanism, similar to Uniswap v3’s concentrated liquidity design. Liquidity providers can concentrate their liquidity within a specific price range, resulting in lower trading slippage but higher impermanent loss risk. In DCL pools, users can choose from three distribution methods: uniform liquidity, normal distribution liquidity, and skewed distribution liquidity. Each distribution method corresponds to different market price expectations, offering liquidity providers more options.

Limit Order Trading

Ref Finance offers a limit order trading feature where traders can set the direction and ratio of their token pair exchanges. After the transaction is completed, traders can retrieve their exchanged tokens at any time without any time restrictions. This trade is irreversible; the completed trades will not be reversed if the token price retraces after a partial fill. Users can cancel their limit orders at any time. The overall operation is similar to standard limit orders.

Source: app.ref.finance

Order Book Trading

The Ref Finance product page provides an order book trading interface based on the Orderly Network protocol, offering spot and perpetual contract trading products. Although Orderly Network itself does not provide a trading front-end, by integrating with it, Ref Finance can share a portion of the protocol’s fee income.

Source: app.ref.finance

Trading Fees

Trading fees are divided into three parts:

• 80% is allocated to liquidity providers.
• 16% is used for protocol buyback of REF tokens and distributed to REF stakers (75%) and the treasury (25%).
• The remaining 4% is distributed to the referrer of the trader.

When users stake REF tokens, they are converted to xREF, which, as illustrated, can earn 12% of the trading fees.

Source: guide.ref.finance

Economic Model

REF is the native token of the Ref Finance protocol, with a total supply of 100 million tokens. It is primarily used for liquidity incentives, the treasury, and a development fund. From July 26 to 31, 2021, the protocol conducted an Initial DEX Offering (IDO) through Skyward Finance, auctioning 2.5 million REF tokens (2.5% of the total supply).

REF token distribution is as follows: 60% for liquidity incentives (unlocking 25% in the first year, 18.3% in the second year, 11.7% in the third year, and 5% in the fourth year); 20% for the treasury; 10% for the development fund (linearly released over four years); 1% for early user airdrop; 2% for future airdrops; 2% for strategic airdrops; 2.5% for the IDO; and 2.5% for liquidity provision.

Source: guide.ref.finance

In February 2022, the protocol completed an angel round of financing, selling approximately 3.66 million REF tokens in over-the-counter transactions to institutions and market makers such as Jump, Dragonfly Capital, and Alameda Research. This raised $4.8 million, with an average price of about $1.227 per REF token.

As a governance token, REF has two primary uses: staking for trading fees and participating in governance. Staking REF tokens allows users to obtain xREF, which entitles them to 12% of the trading fees. Staking REF alone does not grant governance rights. To enhance the liquidity of REF tokens, users must provide liquidity for the REF-NEAR pair and stake it for a period to receive veREF tokens. veREF tokens enable users to participate in governance, vote on proposals, and determine token incentives.

Current Development Status

In April 2022, the first native stablecoin on USN-NEAR was launched. Initially, USN was an algorithmic stablecoin, but as the price of NEAR continued to decline, USN faced significant deficiencies. Consequently, Decentral Bank, the project team behind USN, halted USN minting and began redemptions, extracting a large amount of liquidity from Ref Finance and burning approximately $40 million worth of USN. This led to a significant reduction in Ref Finance’s liquidity.

Currently, Ref Finance’s Total Value Locked (TVL) is around $78 million, with a daily trading volume of $7-8 million.

Source: defillama

The majority of the protocol’s liquidity pools are concentrated in wNEAR, with a TVL of $27.2 million. Over half of the protocol’s value consists of NEAR-pegged assets. Based on the development of the NEAR blockchain, the protocol plans to become a multi-chain DEX.

Source: stats.ref.finance

Conclusion

Ref Finance’s overall design draws on mainstream DEX algorithms such as Uniswap and Curve, offering classic pools, stable pools, and discrete concentrated liquidity (DCL) pools to better meet diverse asset trading needs. Additionally, it provides order book trading through Orderly Network, including spot and perpetual contract products. The product design is logically consistent. In the future, Ref Finance aims to achieve trustless, multi-chain trading without the need for cross-chain operations, relying on the development of the underlying NEAR blockchain.