Liquidity Efficient DEX models

[IMPACT] Please describe your proposed solution.

In general, current DeFi applications are limited by financial inefficiencies that need to be addressed in order to be able to compete with centralized finance. While the orderbook approach is inherent to Cardano's unique eUTXO model, this is not the case for the automated market maker (AMM) model pioneered by Uniswap and currently implemented by most Cardano DEXs. 

The Uniswap V2 style AMM model currently used in most Cardano DEXs has multiple major downsides. For one, the liquidity provided by users is not used efficiently and liquidity providers are facing impermanent loss which often outweighs the gains. This in turn makes liquidity provision without further incentives unattractive and only accessible to expert investors. At the same time, most of the currently deployed dApps rely on centralized components to solve technical challenges related to porting the AMM model from account-based blockchains - such as enforcing a correct time order between open swaps. 

We will research and propose novel liquidity provision models in order to address problems like inefficient use of liquidity and impermanent loss. We will turn this research into open source smart contracts that will be made available to the entire Cardano community. Solving this problem will involve consultation with experts from traditional finance, development of Plutus smart contracts and smart contract audits to ensure safe community contracts. 

Even though other projects are exploring similar avenues, we believe the area of efficient use of liquidity in DeFi deserves attention and it is beneficial to have multiple research projects ongoing in parallel together with risk mitigation. Ultimately, the blockchain offering the best suite of financial instruments and tools to DeFi users will grow in terms of market share. We are trying to exploit the unique model of Cardano to achieve this goal.

[IMPACT] Please describe how your proposed solution will address the Challenge that you have submitted it in.

To improve the competitiveness of the Cardano dApp ecosystem, we need to build native dApps that take advantage of the Cardano EUTXO model instead of copying popular models seen in account-based blockchains like Ethereum. The EUTXO model allows for different and more scalable solutions. For instance, the MuesliSwap dApp uses an order book approach that is uniquely suited to the Cardano EUTXO model. The same should be done for models like automated market makers that aim to provide additional liquidity to Decentralized Finance. With this project, we are aiming to develop open-source, high-quality code that can be used as a basis for the next generation of Cardano dApps. Building a protocol that protects users from impermanent loss and using liquidity provided more efficiently will help to attract more DeFi users to Cardano and mitigate the risks for new users. Finally, by open sourcing our code and audit process, we will be able to share best practices of Cardano development with future Plutus developers.

[IMPACT] What are the main risks that could prevent you from delivering the project successfully and please explain how you will mitigate each risk?

As we already have an overview about areas that can be improved along with initial ideas how these improvements can be implemented, we don’t see any risk that the project can’t be delivered successfully. Also, we will not encounter any budget problems as any extra costs will be covered by the MuesliSwap team. As we have a big development team, we will also not encounter risks like lack of development staff. As a research oriented proposal, it might be that our findings are not optimal. We see this proposal in the context of many projects researching in the area in order to maximize the overall progress of Cardano DeFi.

[FEASIBILITY] Please provide a detailed plan, including timeline and key milestones for delivering your proposal.

The detailed budget breakdown also presents the different milestones into which the project will be divided. Throughout the entire project we are planning to do Twitter spaces and tech updates informing the community of our development process.

Timeline: 

Research: (1-2 months)

Our research will be concluded by releasing a detailed research paper outlining the proposed liquidity models leveraging the Cardano EUTXO model. The paper will be made available to other researchers and the blockchain community.

Development: (2-3 months)

The development process will be documented through open source repositories.

Audit: (1 month)

The time process for the audit is hard to plan as we can’t predict the availability of audit companies and how many revisions will be needed during the audit phase. We are planning on opening the audit process and results to the community. 

[FEASIBILITY] Please provide a detailed budget breakdown.

As the requested amount will not be sufficient to cover the full costs of research, development and audit, the MuesliSwap team is planning on covering the remaining costs to create the open-source smart contracts. 

Research: 160 hours - 12,000 USD 

Development: 750 hours - 50,000 USD

Estimated Audit costs (not sufficient to cover entire audit): 24,000 USD

External Consultancy on Traditional Finance Research: 5,000 USD

Research: 

• Research of currently existing models (incl. literature review) 30 hours
• Consultancy with traditional finance experts on liquidity provision models 10 hours + 5,000 USD 
• Development of new model 40 hours
• Review of new model including adjustment to eUTXO model 30 hours 
• Writing of research paper including review 50 hours
• including research findings
• literature history
• eUTXO model explanation
• off-chain/on-chain components
• presenting best-practice to include in DApp
• example use case
• and more

Development

On-Chain Code 450 hours

• Architecture and Model Design 50 hours
• eUTXO model and diagramming modeling, analysis 45 hours
• Development of smart contract components (Plutus, Haskell) 175 hours 
• Development of testing framework for on-chain code and writing of tests 75 hours
• Peer-Reviewing smart contract (code and security review) 25 hours 
• Security Analysis 75 hours
• Documentation of on-chain code 5 hours

Off-Chain Code 250 hours

• Technical Requirements and Analysis of data structure 30 hours
• Development of components in specified programming language 100 hours 
• Development of off-chain tests 25 hours
• Testing of Code 20 hours
• Security Analysis 50 hours
• Peer-Review of Code 20 hours
• Documentation for Off-Chain Code 5 hours

Development of example DApp sketch - 50 hours

• Analysis and outline of example DApp 10 hours
• Technical Requirements for example Dapp 5 hours
• Development of example Dapp 30 hours
• Peer-Review 2.5 hours
• Security Analysis 2.5 hours
• Documentation of example Dapp 5 hours

[FEASIBILITY] Please provide details of the people who will work on the project.

The MuesliSwap development team together with external help will work on this project. The core MuesliSwap development team currently consists of 9 developers with experience in different fields from which most are long-standing Cardano community members. With Muesliswap being the first major DAapp launching in November 2021 the team has gained a lot of experience in developing Plutus smart contracts and the corresponding off-chain code. As part of the Dapp development process, the MuesliSwap Team gained significant experience in developing decentralized finance infrastructure and Plutus smart contracts. Currently, we are operating multiple different smart contracts on Cardano mainnet (liquidity pools, order book DEX, staking contracts etc.). Moreover, already having multiple audits performed we have gained experience in the auditing process and the coordination of these audits. We are planning to apply this knowledge and our development power to our Fund9 proposal. 

[FEASIBILITY] If you are funded, will you return to Catalyst in a later round for further funding? Please explain why / why not.

We are not planning to return for further funding in a later round for that specific project. The remaining costs of development are planned to be covered by the MuesliSwap team. For example the additional costs required to cover the development, extra audit costs etc.. 

[FEASIBILITY] Are you or any member of your team working on any other proposals in this Fund9?

[FEASIBILITY] Are you or your team working on any other proposals from previous Funds?

[AUDITABILITY] Please describe what you will measure to track your project's progress, and how will you measure these?

We are trying to be very transparent throughout the entire research and development process. As part of the research process we are planning to write a research paper. 

Research paper

Once the research phase has been finished, we will publish our findings in a research paper, detailing the proposed liquidity models that can be used in the Cardano eUTXO model, along with their advantages and disadvantages. We are planning to update the Cardano community on the development process as part of our weekly twitter spaces.

Open Source Development

Once the development phase starts, we will be able to open source the repositories on GitHub so that the progress can be publicly tracked by the community. 

Audit

We are consulting multiple reputable audit companies to check availability and quotes. The audit details as well as the report will be made public.

[AUDITABILITY] What does success for this project look like?

We hope that the developed approaches will be implemented by dApps on Cardano, enriching the entire DeFi ecosystem and giving Cardano another competitive advantage over account-based blockchains. We at MuesliSwap are already planning on implementing multiple new liquidity provision approaches and thus are also happy to include the development results of this project. This means that the developed work will already have the guarantee to be included into one of Cardano's biggest DeFi protocols. 

[AUDITABILITY] Please provide information on whether this proposal is a continuation of a previously funded project in Catalyst or an entirely new one.

This is a new proposal from the MuesliSwap team.