Dolomite is not only an innovative product in the derivatives track, but also a Web3 ecological project.

Since the rise of the DeFi industry in 2020, the development of the derivatives market has been relatively slow compared to the spot trading market and lending market. However, derivatives have always been one of the most important parts of the global financial market, providing investors with diversified income opportunities and playing an indispensable role in hedging market risks. The market size of derivatives is often tens of times larger than that of the spot market.

Therefore, DeFi derivatives are considered one of the most promising markets in DeFi. If combined with various gameplay such as spot, leverage, lending, and liquidity mining, which also have great imagination space, can it bring some innovative changes to the DeFi track?

In the DeFi world, maximizing capital efficiency and continuously expanding reproduction are key to building a successful ecosystem.

The currency market protocol Dolomite on Arbitrum has proposed an innovative LP token reproduction play, fully integrating GMX LP token GLP, dedicated to providing users with higher returns and more features.

Currently, Dolomite is performing well in the DeFi ecosystem.

According to the latest data, the weekly trading volume of the Dolomite platform reached 519.54 million US dollars, with 16,188 active users.

The platform's total supply value (Supply TVL) is $67.08 million, while the total borrowing value (Borrow TVL) is $26.05 million. In addition, the platform's weekly exchange volume (Swap Volume) is $29.19 million, and the total net flow (Total Netflow) is $12.95 million.

These data indicate that Dolomite is attracting more and more users and funds, and the platform's trading volume and number of users are showing a steady upward trend.

Today, we will detail Dolomite, explore how it unlocks the value of LP tokens in the Arbitrum ecosystem, and provide diverse DeFi solutions.

Focus on efficient capital utilization

As a DeFi protocol project in the on-chain derivatives track, the current main core business is still based on the decentralized trading market on the Arbitrum network. Around this, it gradually develops various businesses such as spot, leverage, lending, and liquidity mining.

The construction concept of Dolomite is derived from the shortcomings of its founding team in early experiences with decentralized exchanges (DEX) and centralized exchanges (CEX). They realized that existing platforms have problems such as lack of security, poor user experience, and low capital efficiency.

To this end, Dolomite has designed a new system that addresses these industry pain points through smart contracts and advanced technology architecture.

First, Dolomite's virtual liquidity model allows users to trade without actually transferring assets, greatly improving capital efficiency.

Users can use liquidity provider tokens (such as GLP) as collateral for multiple rounds of borrowing and lending, thus amplifying their earnings. This mechanism not only reduces transaction fees for each trade but also improves overall capital efficiency.

Secondly, Dolomite adopts an innovative lending and trading model. Users can engage in margin trading on the platform to achieve higher returns. For example, users can borrow USDC to buy ETH. When the price of ETH rises, they can sell ETH and repay USDC to profit from the price difference. Conversely, users can also borrow ETH for shorting to profit when the price of ETH falls.

In addition, Dolomite is actively deploying the Pendle ecosystem. As the first lending protocol to support the Pendle ecosystem, Dolomite can use assets such as PT-GLP as collateral for lending and trading. This integration enables Dolomite to stand out in the competitive DeFi market, attracting a large number of users and funds.

Critical Financial protocol

The core operation mode of Dolomite is based on its advanced technical framework and flexible financial tools, which can provide a variety of financial services and functions without the need for intermediaries from traditional financial institutions. The Dolomite protocol, based on programming languages, can automatically execute specific logics and rules, thus becoming a core component of the DeFi ecosystem.

The Dolomite smart contract system is written in Solidity and deployed on the second layer network of Arbitrum. This architecture ensures the efficiency and transparency of transactions while reducing network congestion and high gas fees. At the same time, through modular design, Dolomite can flexibly add or remove functional modules to meet the needs of different users. For example, users can interact with the system by depositing supported cryptocurrencies such as ETH or DAI, and all transactions are processed through smart contracts to ensure security and transparency.

In terms of trading, Dolomite offers two main methods: internal transfers and transactions with external protocols. Internal transfers do not change the platform's total balance, while transactions with external protocols will change the total balance.

In addition, Dolomite also supports a variety of complex financial operations, such as Flash Loans, clearing, and virtualization operations. These features enable Dolomite to provide more flexible and efficient capital management solutions. Through virtualization, Dolomite can achieve autonomous management of external rewards and voting rights, allowing users to continue using their assets without affecting the original functions. Users can provide liquidity on Dolomite while earning swap fees and borrowing income. This design not only improves capital efficiency but also provides users with more sources of income.

Security Incident Challenges

On March 21, 2024, Dolomite Exchange's old contract suffered a major security incident, with a total of approximately $1.8 million in assets stolen. This event revealed the vulnerability of DeFi platforms when facing smart contract vulnerabilities and security risks.

At that time, Dolomite's old product was deployed on the Ethereum mainnet in 2019 and was discontinued in 2020. However, some users still retained authorization for the old system, allowing hackers to exploit these outdated authorizations to steal assets from user wallets. The hacker used a complex transaction sequence, including multiple invalid orders and two valid orders, successfully bypassing multiple layers of verification and stealing user funds through the defensive programming style and gas optimization strategy of the Loopring protocol.

After the incident, the Dolomite team took immediate action, disabling the vulnerable smart contracts and suspending the operation of the old system. Nonetheless, a total of approximately 1.245 million USDC, 94,423 DAI, and 165.9 WETH were stolen, amounting to 1.8 million dollars. Dolomite swiftly initiated tracking and recovery efforts and gained control of the situation in less than an hour. By March 24th, Dolomite successfully recovered 90% of the stolen assets and decided to use company funds to compensate for the remaining 10% of the losses. Dolomite also offered a reward of $180,000 for obtaining information about the attacker or recovering the remaining assets.

Despite the Dolomite team taking prompt and effective measures, the incident has raised widespread concerns about the security of decentralized financial platforms. Dolomite's response has demonstrated the professionalism and adaptability of its team, but it also serves as a reminder to other participants in the industry that even the most advanced technological architecture may have security risks.

Summary

Through its innovative technology and flexible operation mode, Dolomite has redefined the way of lending and trading in the field of decentralized finance, solved the pain points of traditional DEX and CEX, and provided users with more efficient capital utilization and more diverse financial tools.

As the DeFi ecosystem continues to evolve, Dolomite is expected to become an important component, bringing more benefits and opportunities to users. However, whether Dolomite can maintain its competitive advantage in the ever-changing DeFi ecosystem and effectively respond to potential security threats remains to be seen.