This FAQ serves as a starting point for understanding DeFi and AMMs.
Traditional exchanges require professional market makers to handle orders and are limited by the frequency with which they can quote the best prices. Decentralized exchanges (DEXs) allow for cryptocurrency transactions to take place online, securely, and without the need for an intermediary. Users can swap between tokens in a liquidity pool (e.g., SAUCE for HBAR in a SAUCE/HBAR pool). In a nutshell, DEXs provide users with a simple, fast, affordable, and secure way to swap tokens in a permissionless and trustless environment.
DEXs rely on automated market maker (AMM) protocols, which use mathematical formulas to price assets. This formula can vary between protocols. For example, SaucerSwap's constant product AMM satisfies the equation:
where x and y are the two token reserves in the liquidity pool and k is constant unless liquidity is deposited in or withdrawn from the pool. You can think of AMMs as peer-to-contract (P2C) - there is no need for counterparties in the traditional sense, as swaps happen between users and contracts.
AMMs incentivize users to provide liquidity. Liquidity is the ability to convert one asset into another asset without changing its market price. Liquidity providers add funds to liquidity pools. You can think of a liquidity pool as a big pile of funds that traders can trade against. In the case of SaucerSwap, liquidity providers deposit an equivalent value of two tokens, e.g., $500 of $AAA and $500 of $BBB, into a $AAA-$BBB pool in exchange for LP tokens. In doing so, they are adding liquidity to that pool.
Liquidity providers earn fees from the swaps that occur in the pool in which they are providing liquidity. Every swap on SaucerSwap incurs a fee. 5/6 of the fees are aggregated and redistributed to all liquidity providers in proportion to the amount of LP tokens they hold.
You will need to deposit two tokens - in equal value parts - into the corresponding liquidity pool. Tokens can be obtained from secondary markets or through the DEX. For example, if you wanted to obtain SAUCE, you would swap HBAR in the SAUCE-HBAR pool.
LP rewards are measured in terms of annual percentage rate (APR), a rate of interest applied on an amount per year. APR indicates how much interest you will earn at the end of the year from the amount invested.
The yearly fee income is calculated as a fraction of your liquidity over all other existing liquidity multiplied by the 24h swap volume (annualized) and swap fee rate. The swap fee rate is 0.30%, where 5/6 (0.25%) is distributed to liquidity providers.
In addition to being a liquidity provider, users can earn even more rewards (in the form of SAUCE and HBAR) by staking LP tokens in yield farmss. LP farm rewards are determined by the release schedule of SAUCE tokens (i.e., emissions). 62.5% of emissions will go to LP farm rewards, with each farm being assigned a weight.
How do I participate in yield farms and what incentives do they provide?
Once you have obtained LP tokens for a supported pair, simply stake them in the corresponding farm to reap higher rewards. You may harvest rewards and / or unstake your LP tokens at any time.
The primary risks inherent to AMMs are slippage and impermanent loss. See Risks for more information.
20.0% of the max supply of SAUCE tokens (200,000,000) will be minted at genesis, with 2.0% allocated to the SAUCE/HBAR liquidity pool, 14.0% allocated to airdrop, 2.0% allocated to faucet & giveaways, and 2.0% allocated to the DAO treasury. This leaves 80.0% (800,000,000) of the max supply of SAUCE to be released over the course of 3 years in the form of emissions. 62.5% of emissions will go to LP farm rewards. SAUCE emitted (as a function of time) will follow a fixed supply, linear decay model, where the rate at which SAUCE tokens are brought into circulation is constant, and maintained until all 1 billion SAUCE are released.
How does SaucerSwap differ from Uniswap v2?
SaucerSwap differs from Uniswap v2 in some fundamental ways. For example, the Ethereum network uses the ERC20 and ERC721 standards for token operations, meaning tokens are themselves contracts. On Hedera, however, token operations are performed on HTS, therefore tokens are controlled through HTS. This is made possible by recent HSCS upgrades allowing smart contracts to use HTS through EVM precompiles. It must be stated that, while it was always possible to create a DEX on Hedera using the ERC20 standard, the ecosystem is now more amenable to tokens created by and controlled through HTS, representing the novelty of SaucerSwap. This is a significant differentiating factor, as SaucerSwap is positioned to take advantage of the network’s consistent and predictable fee structures for token operations.
SaucerSwap aims to democratize DeFi by structuring its governance model after a decentralized autonomous organization (DAO). A DAO treasury fund will serve to retain value on the protocol and fund development of community-voted features.
SaucerSwap's DAO enables the community to work towards a common goal, without the need for centralized decision-making. It resolves the issues of trust by programming governance rules in smart contracts to steer the organization towards the interests of the participants. SaucerSwap allows users to create community proposals which they may vote on, with each SAUCE equal to 1 vote (this will be capped). A proposal may be promoted to a core proposal, which will become a feature after passing vote by quorum. In addition to 2.0% of the initial supply being allocated to the DAO treasury, a portion of emissions and swap fees will go towards this fund.
SaucerSwap will be a one-stop shop for DeFi services on the Hedera network. Future implementations are listed on the roadmap.