Mangata: Proof of Liquidity DEX with unique features that benefit the user
Decentralized exchanges are borderless and uncensorable versions of the well-known players of the crypto trading game known also as centralized exchanges. But even though they are an evolution of CEXes, they still have their own pain points to be solved.
Mangata is trying to fix problems of today’s popular DEXes such as Uniswap, SushiSwap, or Balancer which was finally made possible by the Substrate parachain development framework.
Decentralized exchanges and their core functions
Everyone in the crypto space knows centralized exchanges. They enable you to exchange your coin with the counterparty but they own your crypto as long as you hold it on the exchange itself (not your keys, not your crypto, does that ring the bell?) :-)
Luckily, decentralized alternatives have been already created and they are getting better and better every day! At last, crypto token owners finally have the opportunity to trade their precious coins in a permissionless manner without giving up their private keys. You simply avoid the third-party provider, CEX, that can freeze your funds or could be hacked, in which case you can say goodbye to your assets. In the decentralized world, users have full control over their funds 100% of the time.
Order book vs. AMM
Similarly to a CEX, DEX can use an orderbook to match buy and sell orders together. Orders can be limit and market.
Orderbook remembers the current status of all orders at all times, which guarantees price accuracy and higher efficiency of trading management.
But a much more efficient way on a blockchain is AMM (Automated Market Maker). This simply means that liquidity providers (LPs) create and fill different pools of assets (mostly 2 assets like ETH and USDC) which then can be traded against each other.
For doing so they receive rewards based on the trading volume. Users of AMMs can do a one-click swap of two different cryptocurrencies for what they pay a fee for the platform and the LP provider.
Both approaches have their own advantages and disadvantages. The price at AMM suffers from the fact that many times people get an unfavorable price with a big slippage (due to low liquidity in the pool). It’s a mathematical deviation. The advantage, however, is that it can secure a large order with a single counter-offer. On the orderbook, 1 large order would have to be paired e.g. with 1000 smaller counter-bids. AMM is very suitable in a blockchain environment because blockchains have to save space in blocks or on the number of transactions. AMM can manage huge financial volumes in a small number of transactions.
Pain points of today’s DEXes
Gas fees, especially on Ethereum, can reach several dozens of dollars for one swap. This is not a way an average user can handle their swaps.
Users may experience ineffective trading for a variety of reasons. High slippage is a result of the low liquidity of an LP, and front-running by bots can be also a relevant reason for the worse price of a swap than a trader could expect.
What is Mangata and what problems does it solve?
Mangata is an open-source DEX parachain based on the Substrate framework. It has various advantages such as high transaction speed, resistance to front-running, and its own liquidity bootstrapping mechanism.
Unique features of Mangata
No Front-running/MEV
Front-running is a technique used by special bots that can take advantage of the price balancing mechanism of the AMM and “front-run” orders from users to earn a profit on a price change caused by a user's order.
Other blockchains are plagued by these bots and it's estimated that they incur a billion dollar losses to traders. Mangata DEX prevents this on the consensus layer, making front-running impossible.
Gasless swaps
Because Mangata is an app-specific chain focused on decentralized swaps, gas is no issue. Mangata even doesn’t charge any! The trading fee is actually taken from the token you are swapping so you don’t even have to hold native MGX to swap your token pair.
Proof of Liquidity staking
Mangata has a revolutionary consensus mechanism called Proof of Liquidity, which means that the stake is used as liquidity in Mangata DEX. This helps to create deeper liquidity pools resulting in lower slippage, increasing capital efficiency, and bringing traders a fairer price. The reasoning behind this is quite simple, just take a look at Polkadot where 50% of the circulating supply is being locked in staking and doesn’t contribute to the overall liquidity in DeFi protocols.
The key difference between Proof of Stake and Proof of Liquidity is such that in PoS, the liquidity shrinks with a higher stake. In Proof of Liquidity, more stake means more liquidity which results in more efficient trades.
Mangata X: a wilder cousin on Kusama
Mangata X is a new style DEX that already got its own parachain slot on Kusama. As with every other canary network, it serves similar purposes, but it’s kind of a testing place for the DEX, which will be once launched on Polkadot.
The main advantages and qualities are no-gas transactions, which suit better to regular people than high gas fees on Ethereum for example. Traders also benefit from the front-running protection with better efficiency.
Staking on Mangata X
Proof-of-Liquidity mechanism unlocks staked liquidity by using liquidity pool tokens as staking assets, allowing for deeper liquidity and thereby increasing capital efficiency.
This novel consensus will be fully operational in a few weeks and users will be finally able to stake their LP positions and earn additional rewards on top of them!
Liquidity bootstrapping
As we mentioned earlier, the lack of liquidity is the greatest enemy of any DeFi protocol. Therefore every protocol needs to find a way to gather as much liquidity as possible. Liquidity bootstrap is a technique by which you can attract liquidity providers to invest their resources into various AMM pools which in turn provides a smoother trading experience for average users.
This bootstrap usually takes a few days and offers interesting rewards to LPs so they have the motivation to bring their liquidity to the protocol. On the other hand, it ensures deep liquidity of a given trading pair and enables low slippage for the orders.
The great news is that the first bootstrapping event was already concluded while we are finishing this article and you already enjoy trading of MGX/TUR token pair on Mangata! You can read more in this article from the Turing network itself.
Summary
Decentralized exchanges are surely an evolution from the custodial ones. But they still lack behind in a few areas. Front-running, high gas fees, staked tokens causing overall liquidity to shrink…all these aspects has a common denominator. Capital inefficiency.
Mangata brought to the Dotsama ecosystem truly an innovative approach. By using the Proof of Liquidity consensus mechanism, all the named downsides of today's DEXes have the solution. Proof of Liquidity is an evolution of PoS at DEX-specific chains, which unlocks liquidity, increases capital efficiency, and adds additional revenue streams to both liquidity providers and stakers.
Once you search for projects, which take a totally different look on the market, you must be fascinated by Mangata DEX and its innovative approach. An approach, which focuses on trading efficiency and user experience.
Polkadotters are a community completely funded from staking rewards, so if you like what we do, please nominate our nodes on Kusama, Polkadot or any parachain network that supports staking — like Moonbeam, Moonriver, Bifrost or Turing network. All contributions are very much appreciated :-)
