DODO V2 was deployed to the Ethereum mainnet in February 2021, providing market makers with a customizable and flexible market-making curve, dramatically improving market makers' capital efficiency.
In the development of DEX, a constant theme is the improvement of capital efficiency. Our previous research article compares and analyzes three DEXes that improve capital efficiency by concentrating liquidity. We also present an in-depth analysis of their underlying algorithms, the performance of sampling pools, and the capital efficiency of market making in DODO. Recently, we interviewed Shadow Labs and Kronos Research, the market makers on DODO, to talk about their experience of market making on DODO as professional market makers.
Interviewee: Shadow Labs, Kronos Research
Interviewer: Bruce (Crypto Analyst at DODO Research)
Operating Experience in DODO
💡 DODO's PMM algorithm provides market makers with a flexible market-making curve and a high degree of customization. Professional market makers can customize parameters based on market-making strategies and needs for capital efficiency improvement. Because of the high frequency of parameter modification, market makers prefer to make markets on chains with lower gas fees, such as L2.
Q: DODO's PMM algorithm provides custom parameters for market makers, such as reference prices. Which parameters are commonly used in your market-making process?
Shadow Labs: We update our fee rates and prices more frequently. Since Shadow did not put the inventory adjustment on DODO, The k value ( k value is a parameter affecting the liquidity distribution, the smaller the k value, the more concentrated the liquidity distribution) has not been adjusted. We set k at a very small value. The price will be updated in about 30 seconds, and once reaching a certain threshold, we will get the price revised.
Kronos Research: Kronos will adjust the k value to hedge the flow. The fixed k value is used and changed regularly in the early stage. Later, we will update the k value in real-time according to the order book depth of the centralized exchange. But in general, the k value has the smallest he update requirement compared with the other two. The first is the price, followed by the fee rate.
Q: What is the gas-fee-related experience as a market maker on DODO?
Shadow Labs: The gas fee for market making on L2 is not high. We have not considered market making on Ethereum Mainnet as it has a relatively high gas fee. The biggest problem with gas is that gas price estimation sometimes has a great deviation. The submitted transactions cannot be on-chain on time, resulting in delayed status updates. This kind of scenario will occur when chains experiece congestion.
Kronos Research:The gas fee of quotation is acceptable for chains other than the Ethereum Mainnet. The gas fee on Mainnet is relatively too high. We can accept the gas fee of quotations below 0.3-0.5U.
Q: Is MEV a problem that needs to concern when making markets? Will MEV trouble you?
Shadow Labs: It is not a trouble, and we have not seriously taken the issues MEV creates. For us, the biggest loss would be the large deviation in gas price brought by inaccurate gas estimation. It’s difficult to update the parameters in time when blockchain congestion.
Kronos Research: Yes, the MEV issue needs to be considered. But we are avoiding arbitrages by actively adjusting our market-making strategies, such as temporarily increasing the fee rate, etc., so it will not bring too much trouble for us.
Overall Experience and Product Recommendations for DODO
💡 Market makers have an excellent overall experience and high market-making efficiency in DODO. The flexible market-making curve provides more room for market makers to play, which is suitable for professional market makers. Shadow Labs and Kronos Research also give some valuable suggestions for DODO, which are very helpful for DODO's future product iteration.
Q: How is the comprehensive experience of making markets in DODO?
Shadow Labs: The overall experience is excellent. Compared with other DEXs (Uniswap, Curve), we can make markets more flexible and efficient in DODO. DODO is suitable for experienced and professional market makers.
Kronos Research: I think the DOOD's current product is pretty good; it has a high degree of customization, such as the price, fee rate, and slippage. And the advanced pool (a trading pool that can customize and adjust parameters) can save us some gas.
Q: Tell us your profit and loss while making market in DODO?
Shadow Labs: We have made some profits. Taking the profit displayed in the pool as the benchmark, ours reaches 30%-40% after deducting gas and other expenses. In extreme market conditions, we may sometimes experience a relatively significant loss. The main reason is that the estimation of gas fee is not accurate. For example, the sequencer of Arbitrum sometimes has problems, ignoring the submitted transactions. Anyway, it is a problem of the chain, not DODO.
Kronos Research: The profit of Kronos' pool is uncertain, which is related to the market-making strategy. Kronos is frequently adjusting our market-making strategies.
Q: Any product suggestions for DODO?
Shadow Labs: First of all, we don’t know much about the infrastructure of each chain. It is more challenging to solve these chain-related problems. It would be better if DODO could provide guidance or tests for each chain.
We also have capital allocation needs. We hope that DODO can launch a loan product that uses market-making funds as collateral to lend short-term funds to further improve capital efficiency.
Finally, the market-making curve can be split to achieve an asymmetric liquidity distribution.
Kronos Research: First, users can be divided into two categories: those who provide capital and those who offer strategy. Users providing capital can deposit funds, and those giving strategies can modify parameters. Furthermore, DODO can allow users-provided capital to set certain market-making conditions for those giving strategies.
Second, after swapping, there are only two modes for repeg: reset and tunePrice/tuneParams (these two are for adjusting market-making curve parameters), which are relatively simple and can further improve.
The third is that DODO has a relatively high gas consumption of user transactions compared to AMM. It is not easy to route orders with small amounts (DODO will aggregate on-chain liquidity through routing algorithms).
Lastly, market makers can avoid losses/make profits by adjusting their behavior in extreme scenarios, but market makers will affect more if network congestions.
Conclusion
Decentralized exchanges are genuinely trustless and non-custodian, it is the future direction of trading and market-making development. For professional market makers, cost and efficiency are problems even though on-chain market making is the trend, cost and efficiency are problems that AMM hard to solve. DODO's PMM algorithm and DPP private pool provide a highly flexible market-making curve for the professional market-maker teams, it reduces market-making costs, improves capital efficiency, and brings an efficient market-making experience. DODO uses the routing algorithm to efficiently aggregate on-chain liquidity, bringing users the best quotation and low-slippage trading experience.
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「Dr. DODO」is the research arm of DODO. We track the evolvement of DeFi and related sectors. Dr.DODO leads a group of researchers to decode the crypto world, conduct in-depth research, publish distinctive views and predict the future value of the crypto world
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