🚤Increasing Liquidity with ML
Last updated
Last updated
While one of the immediate benefits of using Fyde is capturing diversification, another key benefit of the Fyde Protocol is the increased liquidity that's provided to the user. This comes in several forms. First, $TRSY itself acts as a pathway to liquidity, for which we use machine learning to deepen the trading depths of. Second, depositing a token into Fyde can increase the liquidity and trading volume of that deposited token as well.
A core goal of Fyde is to make the $TRSY token as liquid as possible for users to trade across markets. To facilitate this, Fyde uses revenue accrued to the protocol to incentivise users to create $TRSY/$ETH LP pools on Uniswap V3. We buy these LP tokens from users, ensuring a steady increase in liquidity over time as well as constant liquidity across market conditions. Liquidity can often dry up in bear markets due to LP providers removing their positions. By virtue of Fyde owning these LP positions, we can ensure that liquidity for $TRSY remains steadfast even in bear markets.
To identify how to deploy the liquidity, we built an agent based simulation environment to identify optimal arbitrage pathways and to stress test liquidity across market conditions. An illustrative example of our dashboard output can be seen below:
By combining machine learning with the agent based simulations, we can then deploy liquidity much more efficiently across Uni V3 in real time. Many projects simply deploy full range liquidity. However, by narrowing the deployment surface by 75%, you can increase the trading depth by 4x. To give an example, more precise deployment of liquidity can result in $100,000 converting into $400,000 of liquidity, with the machine learning engine adjusting the liquidity provisioning in real time.
Fyde helps unlock liquidity for your tokens within the Fyde vault. Similar to an AMM, Fyde encourages arbitrageurs and market traders to rebalance tokens to their target allocations. However, a key difference in behavior is that Fyde allows market drift to occur before letting the rebalancing take place, which typically results in stronger long-term performance as this significantly reduces the amount of impermanent loss.
That said, because of these types of similarities to a traditional AMM, the tokens that are deposited can also experience a similar type of liquidity phenomenon. As there is no technical constraint in terms of how many tokens can be deposited into the vault, tokens that are deposited into the vault will have now unlocked new trading pathways and liquidity with every other token in the vault. For example, if there are 50 tokens in the vault, depositing a new token will unlock trading pathways and liquidity with all 50 tokens in the vault.
Like with any backed token, there exists an arbitrage process to keep $TRSY trading in-line with the net asset value (or fair underlying value) of the vault. In our case, assuming $TRSY trades above the net asset value of the vault, users can deposit tokens directly into Fyde Protocol, mint $TRSY, sell $TRSY for the prevailing market value, buy more assets, and continue this loop until $TRSY is trading in-line with the net asset value.
Conversely, if $TRSY is trading below the net asset value of the vault, buyers and holders can burn their $TRSY directly with the protocol to withdraw a liquid portion of the underlying. They can then sell those assets, buy more $TRSY, and arbitrage the gap until $TRSY trades in-line with the net asset value of the vault. A visual representation is shown below.
This type of arbitrage process is the same arbitrage process used by ETFs to trade in-line with the underlying component stocks or bonds, and has been shown to be instrumental in increasing the liquidity of the underlying assets held by the ETF. The same is true for crypto as well.
These features make Fyde a powerful way for DAOs, protocols, and founders to both gain a new pathway to liquidity, as well as to increase the liquidity and trading volume of their native tokens.
