Asset Pricing

CFMM

Generally, most DEXs use the Constant Formula Market Maker strategy to determine the price of the two assets in a liquidity pool. A considerable reason for its popularity among DEXs is its simplicity and resilience. However, it has substantial limitations that are typically neglected. First, in comparison to traditional markets, capital allocation is exceedingly inefficient. The DEX's Total Value Locked (TVL) is evenly divided over the whole price range (0 to infinity), suggesting that an assets's price is as likely to be $1 or $10,000. Because of this assumption, the CFMM is impractical and does not reflect actual market realities. The major disadvantages of such capital inefficiencies are borne by the DEX's liquidity provider because their trading fee earnings are decreased. At the same time, their liquidity is vulnerable to impermanent losses.

Before we progress to the pricing strategy for Oscarswap, let's just look into What is Impermanent loss?

Impermanent loss

Impermanent loss is the apparent decrease in overall asset worth caused by depositing liquidity into a pool vs. just retaining the assets. It is caused by a shift in pool asset ratios (i.e. price) between deposits and withdrawals. Despite the cash generated by trading fees, this puts liquidity providers at a significant disadvantage. As a result, of the lack of liquidity in mining incentives, AMM pools with substantial impermanent losses will have their liquidity depleted over time.

Impermanent loss seems to be worrisome for liquidity providers; however, it is not as deadly as it seems. Since it almost inevitable yet special measures can be taken into account to mitigate this risk.

Calculation for asset pricing

Position Manager is used by the Oscarswap to maintain asset values and limit net loss. This features automated position adjustments to keep positions in range at all times, as well as farming incentives. To put it another way, the asset ratio in the pool is kept steady by dividing each LP take-in position into equal ratios of both coins. Secondly, instead of a free fall, the price range for these assets is constrained by upper and lower limits.

Furthermore, the position manager optimises the price range of the position to find a compromise between higher farming output and stability while minimising impermanent loss. The algorithm also automatically compounds trading fee rewards without paying gas fees and maximises farm yields by depositing them into the adjustable reward pools.