A while ago I wrote an article about the state of decentralized exchanges (DEX), and their main differences with centralized exchanges (CEX) such as Coinbase or Kraken. Some of the key benefits of DEX over CEX are: the ability for users to fully own their keys and assets; increased privacy and security without the need of cumbersome KYCs to access the exchange; or the support for virtually an infinite range of token pairs without the need of a central entity listing them (provided there is enough liquidity).
There are several ways in which DEXs can be implemented: from using on-chain and off-chain order books to collect bids and asks, to the most recent and successful approach of Automated Market Makers (AMM). If you recall from the aforementioned publication, AMMs remove the need of order-books and finding counter-parties for orders to match, as they introduce algorithms to set the price, letting users trade a token A for a token B regardless of whether there’s someone on the other end of the trade. This is facilitated through what is known as liquidity pools. Briefly, platforms that use liquidity pools pay their users interest in exchange for keeping their funds in the smart contract that operates the exchange, so they can be tapped for trades. In this approach, individual users are playing the role of financial institutions in traditional markets, where they ensure that the market stays liquid at all times.
In practice, all the AMM processes are implemented in a smart contract that maintains user pools, pays them an interest rate for their funds, receives the trade orders from users, and automatically executes them against the pool if it has the required funds. AMMs also require every transaction to be performed on-chain in order to interact with the platform. Unfortunately, this has a significant impact for users in terms of performance and cost, as transactions need to be made directly in L1, which means slower throughput and higher fees.
At the time of writing, a simple ETH/USDT swap had a fee of over 21$, but I recall making swaps a few weeks ago where I paid over 100$ in fees. This is not sustainable, and it is a significant entrance barrier for new and high-scale use cases. Fortunately, new players are arising to tackle this problem and make DEXs accessible and UX-friendly for everyone. Let me introduce you to Netswap, the new L2 AMM in town.
Why yet another DEX? Why Netswap?
Well, that’s a great question. Netswap is a DEX project that runs on Metis’ Layer 2, Andromeda. Instead of implementing a hybrid L1/L2 DEX like Uniswap where you can choose the network over which you want to interact with, Netswap exclusively runs over Metis L2. Apart from the straightforward advantages of low fees and high performance of Metis, by natively running on L2 there is no need to keep a liquidity pool in every network they interact with (as is the case for Uniswap). By running in Metis, Netswap also indirectly benefits from Metis innovations such as its built-in scalability and bridges with other networks.
Netswap uses the same automated-market-making algorithm used by Uniswap. Even their UX is close to Uniswap’s. If you go to https://netswap.io/#/swap you’ll see almost no difference in the UI apart from the fact that when you connect your wallet, it will ask you to connect to the Metis network. Netswap has launched promoting liquidity pools for m.USDT, m.USDC, m.WOW, NETT, WETH, AAVE, etc. (which are Metis bridged tokens). Moreover, Netswap has its own native governance token, NETT, which we will discuss further in just a moment.
But Netswap is not just plain token swaps, users can also perform:
- Leveraged swaps. Netswap will support up to 5x leverage swaps. With this, users will be able to leverage and short certain token pairs enabling more complex swaps and achieve additional profit. Netswap uses WOWswap to provide their users with leverage. Thus, a user can make a short swap. They can borrow X units of a token from the liquidity pool for an interest rate, trade with them, and return X plus the pool. Throughout the process, users can gain additional profit (or multiply their loss) as it happens with traditional shorts.
- Liquidity pooling and staking. These are not just a tool to run an AMM, but also an opportunity for users to deposit their cryptocurrency and get an additional profit from their owned currencies. In the current fee model of Netswap, for every transaction a 0.3% transaction fee is charged, with 0.25% rewarded to liquidity providers, and 0.05% collected by the platform.
- And launchpad their tokens: This is a feature that will be released by the end of January, and the idea of the Netswap team is to provide new projects with a launchpad to promote their tokens and make them accessible to their community.
These features are interesting enough on their own, but something I am really excited to see in the feature is how Metis DACs end up using these. Running natively in Metis not only has the benefits of the platform’s low fees and high-performance, but it allows native integration with DACs. My bet is that in the future, individual investors won’t be the core users of Netswap, but DACs using Netswap as a tool to find additional sources of profit or investment, or to protect the cash reserves. The same way traditional organizations use the financial system as a tool to fund their business goals, DACs will leverage Netswap for their needs. This opens the door to an interesting landscape, as Netswap will benefit from the growth and future user base of Metis.
Finally, before Netswap, there was no DEX in Metis. Even the basic swapping features weren’t covered in Metis L2. They are trying to fill this void becoming the de-facto DEX of the Metis ecosystem. Ethereum has Uniswap, AVAX has Pangolin, and Polygon has Quickswap, and now Metis has Netswap.
NETT, a community-focused governance token
As mentioned above, Netswap has a native governance token called NETT that is fully community distributed. AMM DEXs can’t run with the contributions of their users, and this is something Netswap has clearly understood. This is why their token distribution is designed to be fully distributed to the community. NETT provides voting power to their holders, so they can vote on new proposals and influence the evolution of the Netswap platform. Community proposals haven’t been opened yet, and they will open in three months when enough NETT has been distributed (preventing power aggregation).
NETT is distributed following two key schemes:
- 1% of NETT through an airdrop. From this 1%: 10% of the supply is distributed to reward early members who participated in the project’s promotion plan. This can be seen as a reward for early contributors and adopters; the remaining 90% of the Airdrop supply is distributed to early traders and liquidity providers through a scoring system within the first 30 days after the launch of the scoring plan. There are two ways to improve your score by using Metis: one performing swaps, and the other one by contributing to the liquidity pool. The swap score is computed as the sum of the swap fees and the pair rate, so the more swaps you perform in the platform throughout the first month potentially more fees, and thus a higher score towards the airdrop. The goal of this part of the airdrop is to incentivize users to try and start swapping in the platform. In the case of the liquidity pool contribution score, this is computed according to the USD value in the moment you deposit your tokens to the pool, the pool rate, and the duration of your deposit. The platform wants to incentivize the inflow of money into the platform, and to increase the contribution of liquidity into the most demanded pool (the ones with the higher volume and needs for liquidity).
- The remaining 99% of the supply after the airdrop is for the liquidity mining allocation. This supply has a vesting period of 5 years, with the first 30% of the tokens being distributed to liquidity providers throughout the first and the rest being gradually vested for the remaining years.
The reasoning behind this approach is the following: the platform needs to incentivize the inflow of new tokens to provide sufficient liquidity to support the needs of the users joining the platform (imagine the bad press if when users tried to perform swap in the DEX there was not enough liquidity for a token pair). As the platform builds strong liquidity pools and can start being self-sustainables, there is no need for a subsidy for liquidity providers, as the amount of users in the platform is enough to reward providers through swap fees. Finally, by allocating every NETT to the community, Netswap wants to maximize the rewards and sense of ownership of the users in the platform from the beginning (without additional overheads).
NETT holders will have full power over the evolution of the protocol. As Netswap’s whitepaper describes, in the NETT farming phase (which opens in Jan), an additional 10% of each output reward will be issued to the dev team for technical incentives and project maintenance. However, by then the community will already have voting powers, so they’ll be able to decide to stop this reward programs to the core team at any time.
NETT as a tool to influence the protocol
Many of you may be wondering, but what can I do with my NETT apart from exchanging it for other tokens? Well, you better “hodl” those NETT, as if you are an active user of Netswap it will let you:
- Modification to the liquidity pools: Initially, the distribution of tokens will be entirely through the liquidity mining pools initially listed in the platform (m.USDT, m.USDC, METIS, etc.). Any community member can propose the inclusion of new liquidity pools in the platform (like for instance a bridged ETH, m.ETH?). NETT holders can vote on the proposal of adding this additional pool, and the rewards allocated to it. In the same way, NETT holders and the community can prioritize adding an additional liquidity reward allocation to token swaps that they feel deserve it to incentivize depositing the asset in the platform. You see? By using their NETTs users of the platforms are able to adapt the platform to their needs.
- Activating swap mining programs: What if users want to improve the circulating supply of NETT after the 5th year? You have NETT, you can also propose the platform to mint new tokens.
- Stake to participate in the launchpad (a feature coming soon), and proposals for more use cases or features the platform should be invested in.
But remember that all of this is in the context of the Metis ecosystem, and things could get even more interesting if DACs start actively participating in the governance of the system. For instance, if big DACs decide to become a player and participate in Netswap’s Scoring Plan, they’ll get a lot of early NETT tokens. DACs are big communities, they’ll potentially use these early NETT tokens to farm more NETT in farming.
When the NETT governance function goes live, DACs will have their speaking right, and their own community will be able to raise reasonable and innovative proposals that benefit their goals. So NETT holders won’t just be able to perform “modification to the liquidity pools” or “activate swap mining programs” but they’ll be able to propose their own projects and raise the voice of their own community by canalizing their NETT. I am really looking forward to seeing how communities merge once DACs join the governance game.