Mercurial: Solana's Ecologically Enhanced AMM | Project Introduction

Original title: "Mercurial on Solana Ecology"

Original source: Blue Fox Notes< /blockquote>

Solana ecological projects are gradually increasing, and agreements such as lending, DEX, and derivatives have begun to enrich. Mercurial is also one of Solana's ecological projects. It provides stable asset exchange services, which sounds not much different from Curve in the current Ethereum ecosystem. However, as a latecomer, it has more opportunities to learn some advantages of previous DeFi protocols. This can be seen from its design, which has made a certain iterative optimization in terms of transaction slippage, LP income, and asset utilization that users are most concerned about.

Mercurial starts from the stablecoin AMM fund pool and provides USDC, USDT, wUSDC, wUSDT and other stablecoin exchange services for the Solana ecosystem. With the assurance and ecological development, Solana also plans to provide liquidity services for more stable assets.

So, what iterations of Mercurial are worth paying attention to? Let's start with its overall framework.

Understand the framework of Mercurial

We can look at the framework of Mercurial:

(The core part of Mercurial, from Mercurial)

You can see that there are several cores: Vault (fund library), Yield (farming or mining), dynamic fees, DAO governance.

Mercurial has a dynamic market-making treasury. Its treasury provides automatic market-making for stable asset exchange. LPs can deposit their stable assets into Mercurial's treasury, and then provide liquidity for stable asset exchange, while obtaining income from external agreements through farming or mining. , such as participating in lending, flash loans, and income aggregation. In addition, the fee income of LP is not fixed, but changes dynamically, which is also a unique design.

In terms of specific decomposition, there are several aspects that are the key to understanding Mercurial:

Mercurial Design to reduce slippage

We know that at present, large amount of exchange on AMM often brings higher slippage. This is true even for exchanges of stable assets.

Mercurial is different from the usual X*Y=Z AMM market-making model, its main difference is as follows:

(Mercurial’s market-making slippage change, from Mercurial)

The red line is the slippage change under the traditional AMM market-making mode, and the blue line is Mercurial’s Slippage variation in market making mode. This looks like low slippage. How is it designed?

There are two main aspects. First, when providing liquidity token assets, Mercurial does not require that the liquidity token pair must be 1: 1 configuration, which can be flexibly configured. Second, Mercurial uses the enlarged price curve to concentrate liquidity within the desired range. If the user's transaction exceeds the transaction rate range, it will be supported by less liquidity.

It can be simply explained by the two formulas proposed by Mercurial:

There are two generations Coins form token pairs to provide liquidity, assuming tokens are X1, X2; the exchange rate fluctuation range is p1, p2, in the constant product market-making mode, the formula is expressed as:

(from Mercurial)

On this basis, Mercurial adds some amplification factor a, then the following formula is obtained:

(from Mercurial)

In this formula, if the coefficient a is infinite, then all its liquidity is concentrated in Price range p1-p2; if the coefficient a is infinitely close to 0, then this formula is equivalent to the market-making mode of constant product.

Through the above design, Mercurial tries to reduce the slippage for users to exchange. These design ideas, we have seen similar thinking on balancer and dodo, but Mercurial currently focuses on the exchange of stable assets.

Mercurial's design for increasing LP revenue

In traditional AMM, LP's Fee income is generally fixed. For example, Curve is generally 0.04%; in Uniswap V2, the default is 0.3%; in Uniswap V3, there are optional fees: 0.05%, 0.3% and 1%.

Different from these relatively fixed fee designs, Mercurial uses a dynamic fee design. In Mercurial, all token-pair treasuries share the same dynamic fee mechanism.

The motivation for adopting the dynamic fee mechanism is to provide LP with more reasonable income. When the exchange demand increases, the exchange fee will also increase accordingly. Especially when the market is volatile, through higher handling fees, LP's impermanent losses can be reduced and higher returns can be obtained. If the market fluctuations are small and the user's demand for exchange is small, the handling fee will also decrease, thereby incentivizing users to trade.

When Mercurial determines its fees, it will use the long-term window and short-term window to measure the trading volume, and use EMA (Exponential Moving Average index moving average) calculation , whose fees are updated based on the volume ratio. The graph below represents fee updates based on changes in market volatility.

(from Mercurial)

Mercurial's design in improving asset returns

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In addition to the design of reducing slippage and providing dynamic fee income for LP generation, Mercurial also has a different design that it will perform dynamic allocation management from the assets of the treasury, Configure it to External Protocol. And its allocation algorithm is managed through the algorithm on the chain. In addition to asset allocation, Mercurial's asset management also includes interest and income collection, exit from specific platforms, and proceeds from liquidation.

(Part of the funds in the Mercurial treasury are used for farming, from Mercurial)

These income plans are only After getting the approval of DAO, it can be deployed to the external platform. The DAO determines the proportion of each treasury that can be deployed to external protocols. External revenue platforms include flash loans, lending platforms, leveraged stablecoin loans, or other revenue pools. The platform will choose according to the income, risk and liquidity situation. Through the income plan, the asset utilization rate of market makers is improved.

MER Token Mechanism

Mercurial's token is MER. MER tokens have the opportunity to capture the following values:

*Exchange fee

MER generation Coin holders have the opportunity to earn transaction fees on the Mercurail platform. How MER captures transaction fees, whether to repurchase and destroy MER, or allocate MER will be determined through DAO governance.

*Commission for farming income

MER holders have the opportunity to get "farming" Or a commission on "mining" earnings. According to DAO governance, MER tokens can be purchased and destroyed, or MER tokens can be pledged to obtain corresponding distribution.

*Collateral for synthetic assets

When generating synthetic assets or other stable assets, MER will be used as the main pledge token. If the demand for synthetic assets increases, then there will be a demand for more MER tokens. This is similar to the staking function of Synthetix's SNX token.

*Governance value

In Mercurial’s DAO governance, its main tool is the MER token currency. Through it, you can participate in the governance of DAO. And DAO governance can determine some important parameters and resolutions of the protocol. For example, determine the basic fees and commissions for transactions and treasury benefits; whether the fees are used for destruction or distribution; which protocols treasury assets can be deployed to; the proportion of treasury used for farming or mining; which new synthetic assets should be launched ; LP and pledger reward mechanism; how much money is injected into the insurance pool to deal with the risk of asset de-anchoring, etc.

This means that MER itself also has governance value. If Mercurial has a chance to grow, then the importance of its governance will be revealed.

In addition, Mercurial's liquidity providers can get LP tokens by depositing assets. LP tokens:

1) can be pledged for liquidity mining of MER tokens;

2) It can be reinvested in the Mercurial treasury;

3) It can be used as collateral on other lending platforms;

4) Can be used for the generation of synthetic assets.

Mercurial's cold start plan

In order to achieve cold start, Mercurial tries to start from the following Start with:

* On the user interface, try to conform to the design of the user experience of CEX and EVM (Ethereum users) as much as possible, so as to reduce the friction of use;

*Encourage the participation of the Kyber community. Kyber has more than 100,000 token users. Through the Kyber community, Mercurail is trying to complete the initial accumulation of users.

The entry point of Mercurial

From the above, Mercurial itself is more like a stable Asset Management Agreement. Through the construction of its stable treasury, it provides traders with stable asset exchange services, and provides liquidity providers with market-making income, farming or mining and other asset management income. From this perspective, its core lies in the management of stable assets.

Therefore, the success of Mercurial mainly depends on the success of its stable asset management. The success of stable asset management mainly depends on its stable asset exchange, stable asset farming/liquidity mining income, etc.

From this perspective, Mercurial's first entry point is the upgrade and iteration of the DEX protocol, which focuses on providing stable asset traders with lower slippage , thus attracting trading users. And larger-scale trading users will attract more liquidity providers. Liquidity providers are the injectors of the Mercurial treasury, and they hope to have higher returns, which can come from liquidity provision, farming or mining, etc.

In addition, in addition to the design of the mechanism of the protocol itself, Mercurial has another entry point. It does not start from the ecology of Ethereum, nor from Polkadot, BSC or HECO and other chains cut in, but cut in from Solana. This means that it will mainly serve Solana ecological users in the early stage, and its early success is also closely related to the overall development of Solana ecology.

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