In the current world of blockchain, DeFi serves as the foundational financial infrastructure. With the growth of the crypto industry, innovative protocols within DeFi are constantly emerging. These innovative DeFi protocols not only invigorate crypto with new dynamism and inject fresh liquidity, but this enhanced liquidity also propels further innovation in DeFi protocols, creating a positive feedback loop. Among these innovative protocols, Camelot made a significant splash in the first quarter of this year, igniting a DEX frenzy within the Arbitrum ecosystem. So, what kind of project is Camelot? Why has it become so popular, and is it worth watching its future developments?

What is Camelot?

Camelot is primarily a native DEX on Arbitrum, facilitating instant exchanges and trades of native assets within its ecosystem. Utilizing a Uniswap V2+Curve dual AMM system, it supports low-slippage trading for both volatile and stable token pairs. At the beginning of the year, it emerged as a leading native DEX on Arbitrum.

Camelot has introduced some enhancements to the liquidity pool mechanics and the flexibility for its participants:

1. Dynamic Directed Trading Fees: Camelot allows project teams to adjust trading fee percentages based on market conditions and specific protocol circumstances. This ensures a reasonable return for project creators while offering a superior user experience.

2. NFT-based Incentives: Users who provide liquidity receive an spNFT representing their staked position. This spNFT has a lock-in period, preventing liquidity providers from rapidly withdrawing and causing sudden liquidity shortages.

3. Permissionless Protocol: Project teams can set incentives via the Nitro Pools. This is an additional reward pool, giving project teams greater autonomy in liquidity pool management. This promotes more active participation from project teams in ecosystem development.

Source: Camelot’s official website

Additionally, Camelot also operates as a Launchpad platform, allowing project teams to raise funds and guide liquidity. By fostering flexible and sustainable liquidity to support the Arbitrum ecosystem, Camelot equips new protocols on Arbitrum with all the necessary tools for startup, liquidity induction, and sustained growth. To date, nearly ten projects have had public sales on Camelot, raising tens of millions of dollars.

Source: Camelot’s official website

How Does Camelot Work?

Camelot integrates features such as Launchpad, customizable transaction fees, a fusion of LP (Liquidity Providers) with NFT (Non-Fungible Tokens), allowing project owners to establish incentive measures, and Nitro Pools. This not only ensures that community users can smoothly engage with its products and loyal users receive appropriate rewards but also grants project owners greater autonomy, revitalizing project creativity. Additionally, it provides ample liquidity supply and developmental tools for projects lacking liquidity but wanting to participate in the Arbitrum ecosystem.

Camelot employs a dual AMM (Automated Market Maker) model on its core dex product, supporting volatile and stable token pair transactions. AMM is a commonly used pricing mechanism for dex, akin to Uniswap. Volatile pairs consist of unrelated assets, based on the standard Uni V2 model, using the constant product formula, x*y=k. By setting an initial constant and allocating two tokens in the liquidity pool, new tokens are priced, typically using ETH or USDC. Throughout transactions, because a constant is always maintained, when one token is purchased in large quantities, and its amount reduces, its price increases, and vice versa.

On the other hand, stable pairs consist of pegged or correlated assets, keeping exchanges at a 1:1 ratio, using the Solidly curve: x^3y + y^3x = k. Moreover, the protocol’s pairs adopt dynamic directional fees, allowing each liquidity pool to have distinct fees, which can be defined differently based on the direction of the transaction. This novel AMM mechanism enables Camelot to offer more tailored and bespoke pool configurations for specific pairs.

Source: official Camelot documentation

Customizable Transaction Fees

Every project launched on or collaborating with Camelot’s AMM can configure specific transaction rates for its LPs, aligning with its strategic objectives. The team also plans to provide partner protocols with direct control over their token pair fees. Each Camelot LP can select its service type based on the anticipated price level of its token pair.

Source: official Camelot documentation

Combining LP with NFT

A notable innovation of Camelot is the introduction of liquidity methods based on NFT-staked positions. Every Camelot LP can mint staked position spNFTs by bundling their LP Tokens. This staked position adds a layer of value atop regular LP Tokens, offering LP Token holders newer use cases in other DeFi protocols besides Camelot, such as locking positions for enhanced returns or introducing custom staking strategies to boost capital efficiency.

Source: official Camelot documentation

Setting Incentives with Nitro Pools

Nitro Pools only accept staked positions (spNFT) as deposits. Each Nitro Pool is configured with:

• A specific wrapped LP (or a single asset) where only assets defined by the deployer can be deposited
• Reward tokens (with the flexibility to add additional rewards at any time)
• A deposit start time, before which no one can stake
• A reward distribution phase duration (with defined start and end times)
• An optional harvest start time, before which no one can claim their earned rewards.

These incentive settings conveniently bridge community users with project owners.

Source: official Camelot documentation

GRAIL Token Model

Camelot employs a dual-token model, leveraging GRAIL and xGRAIL, two interlinked tokens, to construct a robust and continually cycling ecosystem. GRAIL serves as the utility token of the project, primarily incentivizing ecosystem participants and being utilized by the development team.

Source: Camelot Official Documentation

xGRAIL, on the other hand, is a non-transferable governance token. GRAIL and xGRAIL can be freely exchanged, but xGRAIL cannot be transferred. xGRAIL holders are entitled to four main benefits:

1. A dividend equivalent to 60% of the platform’s trading fee revenue

2. An earnings accelerator that enhances the yield on staked NFTs

3. Access to launchpad project tokens at preferential prices

4. Participation in community governance voting

However, converting xGRAIL back to GRAIL requires a 6-month lockup period, compelling users to hold for the long term and reducing the circulating supply of tokens in the market.

Source: Camelot Official Documentation

Regarding token allocation, according to Camelot’s distribution plan, 15% of the total GRAIL supply is allocated for public sale. Of the remaining supply, 22.5% is dedicated to a liquidity mining plan spanning three years, 15% to liquidity provision to the protocol, and 32% to core contributors, partners, and advisors. Tokens allocated to the team/partners/advisors unlock fully over a span of three years. Of the 100,000 GRAIL, a portion is distributed in the form of xGRAIL.

Source: Camelot Official Documentation

The token also features a deflationary mechanism, with 12.5% of protocol transaction fees being used for GRAIL buyback and destruction, consequently reducing the total circulating supply.

Key Developments in Camelot

• November - December 2022: Genesis pool launched and deposits opened, public sales commenced, and token issuance and farming rewards began.
• June 2023: Camelot’s test version of v3 AMM contracts will be redeployed.
• July 22, 2023: According to snapshot voting results, the proposal to grant Camelot 12 million ARB tokens from Arbitrum for project funding and liquidity incentives was not approved. The vote was split with 38% opposing, 30% in favor, and 32% abstaining.

Is Camelot a Good Investment?

Camelot has refined traditional DEX design, placing emphasis on providing customized approaches with composability as a priority. It offers enhanced convenience in DEX usage and has introduced several innovations in liquidity incentives. The economic model also stands out with lock-up and burn mechanisms, which once led to a rapid price surge for the token. However, as other quality DEXs migrate to Arbitrum, native Camelot faces intensifying competition. The trading volume and protocol revenues are continuously challenged in the long run. Some projects launched on its launchpad have faced criticisms for “soft rug” incidents post-fundraising. For sustained success, partnering with top-tier projects and offering users a superior experience will be essential.