Maladex: Algorithmic Swaps Protocol

(https://en.wikipedia.org/wiki/Wiener_process) ,

- https://en.wikipedia.org/wiki/Geometric_Brownian_motion .

The reason for all prices to be geometric in nature is the relationship between ratios and logarithm, and ratios being how we express dynamic systems (in relation to itself).

Unfortunately, majority of market making formulas have a constant form such as x * y = const or similar, leading to incredible inefficiency in the pool price discovery process. Given, you can model any process iteratively with the worst model, given a step is small enough, it will eventually converge, but in practice it gives rise to such issues as

- slippage - the execution moving the price significantly leading in overpaying for the transaction;

- inertia - pool unable to update its price due to the astronomic size of total value locked having single trades with very little effect on the price expressed by the pool,

- unnecessary expenditure of energy - a lot of energy is wasted where it is not needed (impossible scenarios) and much longer process to converge on the actual price. Yes, arbitrage bots fulfil here a role of price balancer between exchanges, but there is significant lack of arbitrage between any different assets than BTC and ETH. People who exchange cryptocurrency constantly are for sure aware of sometimes gross discrepancies between prices for such liquid assets as for instance Cardano on different exchanges.

Solution:

Perform study of cryptocurrency asset types and families of quantitative models to express the automated liquidity. Provide a rich family of quantitative models for minting liquidity pools with information on what is the ideal pool in a given case and its parameterization. Allow for dynamic on-chain update of the liquidity pool parameters.

3. Liquidity fragmentation and concurrency.

Challenge:

The recent concurrency "issue" controversy only further proved that the majority of blockchain devs think of liquidity pools in very simplistic terms. It is easiest to design a pool with global memory, but then in the case of EUTxO account model it leads to 1 transaction per block (20s), or in case of optimisation running into memory issues (16kB per transaction and 65kB per block).

Solution:

All this issue, while actually EUTxO if utilised correctly leads to a series of very desirable naturally emerging properties. If one shifts from a monolithic blocks of liquidity to fragmented nodes reflecting separate market making decisions, that naturally leads to emergence of geometric pricing models.

Uniswap v3, by introduction of concentrated liquidity and indexes observed the same. People specify liquidity in the ranges they think are good market making ranges and provide liquidity only within this range. As result, from all concentrated liquidity a geometric pricing model emerges.

It is a natural consequence of aggregation of multiple samples each allowing for individual expression of market sentiment. It is due to CTL (Central Limit Theorem: https://en.wikipedia.org/wiki/Central_limit_theorem ) which states that given a large enough set of random samples, a normal distribution naturally emerges.

Therefore, by fragmenting the liquidity into separate nodes all kinds of geometric distributions naturally emerge giving very efficient and market reflective pricing and liquidity models.

When combined with Maladex liquidity scripting language, it allows for expression of all kinds of market sentiments, and hence for an emergence of true market distribution. Maker orders in the liquidity pool express their belief of the market, and given a large enough sample it starts to naturally reflect the entire real market belief.

Hence, not only is there no concurrency issue, if we deal with this extremely complex routing and graph order formation, but it leads to some very desirable properties.

Concurrency still needs to be built into the system, but this is a routing algorithm for block EUTxO graphs.

4. Efficient price discovery via arbitrage.

Challenge:

Information about the makers and takers of asset prices is spread across multiple exchanges. This leads to such gross discrepancies as the 3rd largest crypto (by the market cap) having even sometimes 10-20 cents difference between exchanges. This gets only more extreme for smaller cap coins, as while Bitcoin, Ethereum, and to a lesser extent Cardano are actively arbitraged, the smaller caps are deemed not worthy of running arbitrage and hustle.

This creates a segmented markets between exchanges and lack of information flow. Arbitrage is a useful and necessary information exchange mechanism, and leads to efficient price discovery and convergence to the same price +/- delta delays on participating exchanges.

Solution:

On exchange A one asset might cost $3.00, while on exchange B $2.96. This obviously is a pure arbitrage opportunity - we can buy asset on the exchange B at the discounted price of $2.96 and sell it immediately on exchange A for the premium of $0.04 per unit (for the price $3.00 each).

After such arbitrage operation the assets on both exchanges A and B will now cost $2.98 and there won't be any more arbitrage opportunity, until the prices between exchanges diverge again.

This is not only lucrative to perform such arbitrage, but also leads to increased market efficiency - information from across all different exchanges is exchanged between exchanges leading to establishment of one geometric centric price (in the above example $2.98);

In the EUTxO and script validation mechanism model such arbitrage can be incorporated into a liquidity protocol, which we plan on doing. It will put market makers in the role of performing additional transactions (and earning additional fees), for takers it will provide market efficient price on Maladex reflecting the true market price at given time, and for the other applications it will provide invaluable on-chain price Oracle not approximating the true price, but having on-chain arbitrage proof of it. Such on-chain price Oracle does not have any lag meaning it is much more efficient than any other on-chain price Oracles (it is the optimal state), only subject to lack of liquidity not allowing for convergence of price in the market.

5. Expressiveness of liquidity protocol - Maladex scripting language.

Challenge:

All exchanges, even the most sophisticated centralised ones, offer a very limited number of order types.

For DEXes, usually only either CFMM AMM akin to x * y = const or limit orders.

CFMM AMM has disadvantage of all the introduced market inefficiencies, while limit orders on DEXes often leads to trading pairs without limit orders to execute against, or exploitation of the phenomena by creation of spoof orders (small order to execute at the good market price and significantly off one inserted upon the small order consumption to catch anyone executing using market price orders).

This limited number of ways to express makers' and takers' intentions and beliefs in the market leads to 2 things:

- a lot of manual work and monitoring to the market conditions, in case of some professional traders, even setting multiple alarms at night to check the market conditions;

- inability to express dynamic conditions such as, when the price starts to rise quickly, buy back, when the price starts dropping, quickly sell, create limit order, execute limit order not at once, but in a range over time, perform simple market order, provide liquidity of given parameterization, etc.

Solution:

Design Maladex own order scripting language allowing to express complex market sentiments and to allow for contract composition. This is akin to the idea described by Simon Peyton Jones et al. in <https://www.cs.tufts.edu/~nr/cs257/archive/simon-peyton-jones/contracts.pdf> . Using this scripting language, define the most commonly used order types (market, limit, liquidity pool, etc.), and allow for access to the scripting language.

Founder

Jarek - the founder and lead developer of Maladex experience:

- Master of Informatics from the University of Edinburgh (where Phil Wadler and Aggelos Kiayias research and teach) with specialisation in concurrent and distributed systems, functional programming, and formal methods.

- Quantitative Finance master equivalent degree from CQF (the bespoke industry degree).

- Head of Platforms in an international bank leading 3 teams, architecting and building complex financial systems.

- Citadel Securities (the #1 market market in the world) where I worked on designing and building a novel approach to market making.

- Microsoft Research where I worked on designing and implementation of highly scalable (cluster) machine learning algorithms used in Microsoft Office and Windows analytics (processing exabytes of data).

- Experienced Haskell developer, used Haskell multiple times in both personal and commercial applications, active participant of Haskell conferences and hackathons.

- Completed Plutus Pioneer program 1st cohort and got NFT to prove it.

I believe that my experience gives me the unique ability to combine all 3 intersections - advanced mathematical financial modelling, building scalable concurrent protocols which EUTxO requires, and many years of coding experience.

About Us

We operate stake pool (ticker MAL):

- <https://pooltool.io/pool/261789e4d39000aa333495d4dbe850708a7fe7a996011a6be98060db/> ,

- <https://adapools.org/pool/261789e4d39000aa333495d4dbe850708a7fe7a996011a6be98060db> .

We are engaged in the community promoting Cardano, answering questions (of all types, not only related to our project, including how to implement concurrency in EUTxO).

Funding

Total: $50,000

This project should receive significantly more founding due to its complexity and everything involved in delivering it, but we are conscious of other more popular projects applying in the same category (dcSpark, Minswap, and Indigo), and from experience in fund 5, we know that it is foremost popularity contest, hence we tapped down the amount to be able to receive the funding, if we made the list 4th (after those 3 projects).

This is a minimal funding possible to perform this work and we might need to apply in the future for additional funding (from audit to expanding any of the outlined concepts further).

Breakdown:

- 320 hours research and quantitative modelling of AAMM protocol, publication write up

- 320 engineering hours implementation and testing

- 80 engineering hours front-end design

Average price per hour $70 incl. VAT and tax.

Personal Funds Contribution

I have been building this project already since April 2021 and applied unsuccessfully for funding in fund 5: https://cardano.ideascale.com/a/dtd/DEX-Cardano-Decentralized-Exchange/352819-48088 .

To be able to continue the work, I have put $50,000 of my own funds toward the project, of which only part has been spent thus far.

I have spent money for hiring graphic designer who created a lot of custom art for us, I have employed developers via Upwork, and paid for the infrastructure (over $2k per month) which hosts private Cardano testnet, current website, MAL stake pool, and much more, paid for marketing, and many single time expenses.

At the same time, I had multiple parties from VCs to private investors reach out asking to invest significant portion of the funds in the project. However, thus far we did not take any of those offers as one of the goals of our project is economic decentralisation (fair and wide distribution of the tokens in the community).

Thus far I have spent akin to $20-25k on the project development. To be clear, this is money I am never getting back as I do not receive any tokens, etc. allocation for it, we have got only fixed supply of tokens for the team (20%) which will be vested over the many years that project is being build. This means that I have got a lot of skin in the game, and the reasons I am working on this projects, which are the ideals I believe in.

Features

We have got a unique and refreshing approach to DeFi.

For full description check our site: <https://maladex.com/#features> .

But, to outline our approach in the case of AAMM protocol:

- capital efficiency - we make the best use of all funds locked, your funds are generating more revenue, and as the taker you find better prices.

- risk control - we build risk control mechanisms into the protocol.

- research and new frontiers - we push the frontier of the entire DeFi ecosystem forward, and we do it on Cardano.

- powerful tokenomics - we have got one token for all our projects, and check how much we work on at <https://maladex.com/#roadmap> , and we not only have fair launch, we plan on distributing the token to the wide community to engage everything in the protocol and its decentralisation via the shared ownership.

- one of a kind team - people with experience akin to our are not interested in DeFi because their day to day job pay exceedingly well and they are surrounded by some of the brightest minds in the industry, we however base our decisions on the goals of decentralisation and wide access to means of increasing financial wealth (hence financial revolution), we put our hearts into the project because we want DeFi as the concept to be successful and Cardano as a blockchain, and we build the future in which we want to live ourselves.

Definition of Success

1 month: collect on-chain telemetry, categorise financial assets, apply stochastic modelling, design fragmented liquidity model, write draft white paper

3 months: publish AAMM research paper, implement the protocol in Plutus and Haskell, testnet evaluation, stress and performance testing

6 months: launch AAMM swap protocol.

12 months: establish a new industry standard of market making proving the superiority of EUTxO model and pushing DeFi ecosystem and how we think about designing DeFi protocols to a next level.

You can read more about our project roadmap that goes beyond AAMM on our site: https://maladex.com/#roadmap.

Expected launch date: Q4 2021 / Q1 2022.

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