Preface

DEX can be divided into two types: order book and AMM. Initially, DEX operated based on the order book model, but liquidity struggled to grow significantly. It wasn’t until the rise of the AMM trading model that the market experienced rapid growth in trading volume and user adoption. Bancor, introduced in 2017, pioneered AMM, followed by Uniswap, the leading project in 2018, and other AMM protocols such as Sushiswap and Balancer. Curve Finance specialized in trading stablecoins. Currently, most mainstream on-chain DEXs are built on the Automated Market Maker (AMM) mechanism.

The completion of a transaction relies on four roles: trader, aggregator (DEX or aggregator), underlying DEX protocol, and liquidity provider. Currently, liquidity providers, also known as market makers, play a crucial role in DEX and are a highly sought-after resource for various protocols. Market makers enhance market liquidity by constantly quoting buying and selling prices, enabling users to trade at optimal prices with minimal slippage. DEX market makers can be divided into two types: professional market makers, who mainly provide buy and sell orders for order book DEXs, and individual market makers, who contribute liquidity to liquidity pools by depositing funds and determining to buy and sell prices through algorithms. A significant portion of liquidity in AMM DEXs comes from individual market makers.

The introduction of AMM brought disruptive innovation to DEXs by eliminating the need for market makers’ quoting functions. Instead, AMM algorithms automatically calculate transaction prices, allowing anyone to provide liquidity and increase on-chain liquidity. However, AMMs face challenges such as low capital efficiency and impermanent loss. Capital efficiency measures the ability to achieve higher trading volumes with less Total Value Locked (TVL), providing lower slippage and better market depth. The core market-making algorithm determines a DEX’s capital efficiency and the resulting trading experience. Therefore, as liquidity in the market tends to consolidate, competition among DEX protocols will become more intense. Protocols continuously improve their market-making algorithms and market-making experiences to attract more liquidity and capture a larger market share in aggregation.

DODO innovatively introduced the PMM (Proactive Market Maker) algorithm in 2020. This algorithm concentrates liquidity around the market price by incorporating external market maker quotations, thereby reducing slippage and improving capital efficiency. After two to three years of development, the protocol has built its products, and this article will provide a detailed analysis of the PMM algorithm’s pricing logic, product experience, token model, and current development.

Introduction to DODO

DODO is a DEX project launched on the Ethereum mainnet in August 2020. It operates on a model called “spot-pool” and utilizes its self-developed PMM (Proactive Market Maker) algorithm to aggregate liquidity around the reference price, thereby improving capital efficiency and reducing slippage. The protocol also incorporates smart routing to search for quotes from other DEXs, enabling users to obtain the best prices in the market. In addition to token trading and fund pool management functions, one of the unique features of DODO is the issuance of crowdfunding pool tokens.

The project has a strong background in investment institutions, having received funding from well-known organizations such as Binance Labs and Coinbase Ventures. Starting in March 2021, the protocol began unlocking staking rewards and liquidity mining rewards. Currently, the product is deployed on multiple public chains, including Ethereum, BSC, Polygon, Arbitrum, and Optimism. It has also introduced cross-chain asset trading functionality. In mid-April of this year, v3 officially announced the launch of its Beta testing version, which includes professional LP-enabled leverage functionality.

PMM Algorithm

The PMM (Proactive Market Maker) algorithm is a new-generation on-chain liquidity solution proposed and implemented by the DODO team. It is a versatile liquidity framework that aims to aggregate a significant amount of market-making funds around the mid-market price of a specific token. This algorithm enables relatively smooth price curves and provides ample liquidity.

In the PMM pricing mechanism, the base token represents the token before the hyphen in a trading pair, while the quote token represents the token before the hyphen in the trading pair. For example, in the ETH-USDC pair, ETH is the base token, and USDC is the quote token. In a transaction, the price represents how many quote tokens can be exchanged for 1 base token. The specific formula for the PMM algorithm is as follows:

In this formula, i represents the reference price introduced by the oracle. The curve’s shape and liquidity concentration can be adjusted by flexibly setting the k value. The k value, a risk parameter, determines the slope of the trading curve. It can be adjusted flexibly between 1 and 0, distributing liquidity between “0 to positive infinity” with an increasing concentration around the reference price. The larger the k value, the more curved the curve becomes. Different k values result in different price curves, k=1 representing Uniswap’s liquidity curve.

To better explain how the PMM algorithm controls the price curve, the team has also introduced a price curve simulator.

Image Source: https://simulator.dodoex.io/

Pricing Logic

The most important aspect for traders is the transaction price. The pricing formula under the PMM algorithm is derived based on the scoring formula:

Image source: https://blog.dodoex.io/

Here, we will illustrate the entire transaction pricing logic of the DODO Classic Pool under the PMM algorithm. Let’s assume the following: the initial ETH amount in the ETH-DODO liquidity pool is 10, and the DODO amount is 1,000, with k = 0.5.

When the external quote = market price = 0.01, Alice wants to purchase ETH with 100 DODO. She submits 100 DODO to the smart contract. According to the formula, at this point, P = 0.01 [1 - 0.5 + 0.5 (1,000^2/1,0001100)] = 0.009545. Therefore, each DODO in the smart contract can be exchanged for 0.009545 ETH. Alice receives 100 0.009545 = 0.9545 ETH. The remaining pool consists of 1,100 DODO and 9.0455 ETH, each 100 DODO being exchangeable for 0.8223 ETH (=11/9.0455).

So, Alice could have purchased 1 ETH with 100 DODO, but she actually only obtained 0.9545 ETH with 100 DODO, resulting in slippage of (1 - 0.9545)/0.9545 = 4.766%. This creates an arbitrage opportunity, and Bob, the arbitrager, would use ETH to exchange for DODO to bring the price back to 0.01.

The entire transaction process requires external reference prices. In the above example, the assumption is that the external quote is accurate. However, in reality, there are often delays in external quotes, leading to a price difference between the DODO on-chain and the external market. In such cases, liquidity providers for DODO need to bear significant market-making risks. The protocol has already been deployed on Layer-2 networks such as Polygon, Arbitrum, and Optimism to mitigate the issue of delayed price feeds.

Product Experience

Classic Trading Pool

The platform provides basic asset exchange functionality and limit order functionality, charging a 0.1% transaction fee. In addition to supporting transactions within the same network, the platform enables cross-chain transactions. The protocol also introduces smart routing, which can search for quotes from other DEXs to obtain the best market price.

Image source: https://app.dodoex.io/?network=arbitrum&from=ETH&to=USDC

Liquidity Provision

Anyone can choose an existing liquidity pool or create a new one on the pool page. The DODO algorithm supports one-sided liquidity provision.

Image source: https://app.dodoex.io/pool?network=arbitrum

Crowdpooling

Currently, the issuance of liquidity in DEX faces challenges such as front-running, high buying costs, and lack of liquidity. To address these issues and ensure low costs, sufficient liquidity, and fair opportunities for traders, DODO has designed a new liquidity issuance method called Crowdpooling, inspired by the “open auction” model in the stock market.

The basic process is as follows: Firstly, the project party provides a certain amount of tokens and specifies the token price and issuance limit. During the specified time period, anyone can make deposits for the subscription. Secondly, token allocation is based on the amount of funds users deposit. In the case of oversubscription, token allocation is still based on the deposited funds, and the excess funds will be returned to the users. Finally, after the crowdpooling period ends, a public pool is automatically created on the DODO platform, and trading begins immediately with the crowdpooling price as the opening price.

Furthermore, crowdpooling has a liquidity protection mechanism. During the protection period, the initiator cannot withdraw liquidity to prevent incidents similar to early Rug-Pull events on Uniswap.

Image source: https://app.dodoex.io/cp/all?network=arbitrum

Token Model

The total supply of DODO tokens is 1 billion, with 60% allocated for community incentives, 15% allocated to the core team, 16% allocated to investors, 8% reserved for marketing and distributed to partners, and the remaining 1% as the initial IDO reserve.

Since the DODO protocol has been deployed on Ethereum, BNB, Arbitrum, Polygon, HECO, OKChain, and other networks, the DODO tokens have been distributed across multiple chains. The team has migrated 3.325 million DODO tokens to the BNB chain, 5 million tokens to the Arbitrum mainnet, and 3.52 million to the Aurora network.

The protocol also adopts a dual-token token model and introduces vDODO tokens. The use cases for DODO tokens include:

• participation in governance, creating and voting rights
• discounts for IDO and crowdpooling
• transaction fee discounts

vDODO tokens serve as a membership mechanism within the protocol and can be minted by staking DODO tokens. For every 100 DODO staked, 1 vDODO can be minted. vDODO holders can participate in voting, receive incentive rewards, enjoy transaction fee discounts, and receive transaction fee income. This incentivizes users to lock their DODO tokens and reduces the actual circulating supply of DODO.

The transaction fees collected by the DODO platform are distributed around the 22nd of each month. Among them, 80% is allocated to liquidity providers, 15% is used for DODO token buybacks and distributed as vDODO tokens to vDODO holders, and 5% is allocated to the community treasury.

Image source: https://docs.dodoex.io/english/tokenomics/vdodo

The process of converting vDODO back into DODO tokens is referred to as “vDODO redemption,” and users need to pay redemption fees proportionally. 50% of these redemption fees are immediately distributed to all unredeemed vDODO holders in the form of vDODO tokens, while the remaining 50% is burned.

The redemption fee amount depends on the DODO Loyalty Index (DLI), where the more vDODO tokens are minted, the lower the redemption fees.

Image source: https://docs.dodoex.io/english/tokenomics/vdodo

Development Status

According to the data provided on the official website, DODO has been deployed on multiple chains. It has surpassed a cumulative trading volume of 117.3 billion USD, with approximately 20 million transactions and a total user count exceeding 2.3 million.

With the attraction of liquidity mining incentives, the platform’s total value locked (TVL) peaked at around 250 million USD in January 2022 but has since declined to approximately 40 million USD.

Image source: https://defillama.com/protocol/dodo

Since its launch, the platform has accumulated a certain amount of funds and users, securing a place in the field. The competition among DEX platforms is intense. According to data from Dune, regarding trading volume rankings on various chains, DODO ranks third with a seven-day trading volume of around 720 million USD and a daily trading volume of approximately 180 million USD. It holds a 6% market share.

Image source: https://dune.com/hagaetc/dex-metrics

Conclusion

DODO’s main feature is its PMM algorithm, which actively acts as a market maker. By incorporating external oracles, it can concentrate prices around the reference price, thereby improving capital efficiency and reducing slippage. The slope and reference price parameters in the PMM algorithm can be independently set, making it applicable to various use cases and friendly to professional market makers and project parties. Additionally, crowdpooling is another distinctive feature of the protocol.

In the competitive landscape of on-chain DEX platforms, DODO, with its innovative PMM algorithm, multi-chain deployment, and liquidity mining activities, currently ranks third in terms of trading volume, securing a prominent position in the market.