TenderSwap
TenderSwap is a cost-effective, application-specific DEX for liquid staked assets. It is designed specifically to be a capital-efficient liquidity pool for homogenous liquid staked assets, like tTokens. TenderSwap uses a novel shared liquidity pool design to enable low slippage with low capital requirements.
💡 tTokens get instant liquidity thanks to TenderSwap capital-efficient pools.
TenderSwap is one of the bigger innovations in the LSDfi space seen today, with a totally new approach to AMM design that doesn’t use invariant curves like in Uniswap or curve. Instead, TenderSwap’s metapool architecture is a state machine represented in a metric space with defined optimal states.
Actions such as swaps change the position of the current state in its metric space. This change results in an increase or decrease of the ‘distance’ from the current state to the optimal state, which is compensated negatively or positively, respectively. This compensation is called the ‘distance compensation’ and is determined by a ‘distance compensation function’.
Thanks to the distance compensation, the system can remain in surplus, incentivizing organic market behavior which constantly keeps TenderSwap pools in balance. When TenderSwap is balanced, there is always ample liquidity for TenderSwap users.
Since liquidity is shared between similar-asset tTokens, newly created tTokens don’t require separate liquidity provision. New tTokens use already existing liquidity in Tenderswap, allowing for Tenderize users to enjoy liquidity without capital requirements for new tTokens.
- Staking Service Providers: Offer liquid staking to your clients without worrying about in-house liquidity management or on-chain liquidity financing.
- Solo Stakers: Continue validating the network from home while enjoying exit liquidity or lending of your stake.
- Borrowing/Lending Protocols: Deep on-chain liquidity for tToken routing/liquidations.
While Uniswap and Curve have both revolutionized the world of finance, neither are optimized specifically for LSTs. Tenderize’s shared liquidity approach works thanks to the homogenous nature of liquid staked derivatives. Each tToken can be unstaked, each of the tTokens can then be treated as a the same asset, sharing one liquidity pool.
When using Uniswap, each LSD requires its own liquidity pool, which is comprised of 50% LSD and 50% liquid, unstaked counterpart. This introduces three problems:
- Inefficient Capital Allocation: By having to incentivize both staked assets and unstaked assets in a pool, capital is stuck in the pool which could be utilized elsewhere.
- Liquidity Fragmentation: Without the ability to share one liquidity pool, traders end up paying more money for swaps due to the inability to access idle capital in like-asset pools.
- Centralization: As DeFi builders adopt the most liquid product, this funnels stake to the preferred validator cartel of that liquid staked product’s team/community.
TenderSwaps’s shared-liquidity approach can be the most liquid solution on the market while reducing the capital requirement by at least 50% while increasing decentralization.
A side by side comparison of the Uniswap and TenderSwap models in the context of the Tenderize protocol.
A side by side comparison of the Uniswap and TenderSwap models in the context of the Tenderize protocol.
In Tenderswap, liquidity doesn’t work in pairs, but instead works unilaterally. Each metapool consists out of a sub-pool of underlying assets. It shares its liquidity with an unlimited amount of sub-pools containing tTokens representing that asset 1:1.
🪣 In a Metapool, the liquidity for the underlying asset is shared between tTokens and acts as a routing asset, allowing fungibility between tTokens.
Sub-pools
Sub-pools are represented as a virtual balance sheet with a record of assets and liabilities. Assets are what is available to swap or withdraw from Tenderswap efficient exit pools. Liabilities are what is owed to liquidity providers.
As swaps occur, the ratio between assets and liabilities of various sub-pools changes. This change is what determines the slippage expense charged to swappers and the bonus provided to arbitrageurs. Both replenish TenderSwap with liquid assets.
A sub-pool is considered to be in a balanced state when its assets are greater or equal to its liabilities.
Optimal State and Distance
A Metapool is in an optimal state when all of its sub-pools are balanced, meaning all of its sub-pools have more or equal assets than liabilities on its balance sheet.
As a swap occurs, it can move the Metapool a particular ‘distance’ away from the optimal state, or back closer to its optimal state. Our calculated ‘distance’ is a measurement on the combined (im)balance created by the swap between two sub-pools.
- When a swap creates an imbalance in one pool and leaves the other balanced, it results in moving away from the optimal set.
- When a swap restores an imbalance in one pool and leaves the other one balanced, it results in moving closer to the optimal set.
Distance Compensation
Distance compensation in TenderSwap is analogous to slippage. When an action results in moving away from the optimal set, the distance away from the optimal set is compensated by a slippage fee. On the contrary, when an action results in moving closer to the optimal state, a reward can be given. This compensation fee or reward is added to, or deducted from, the assets of the balance sheet of a sub-pool.
This means that under certain conditions, when restoring the balance in a Metapool through a swap, you could be given more output tokens than input tokens. This produces an arbitrage opportunity which will be described later.
A Metapool cannot give out more rewards than accrued in slippage compensation fees. This is upheld by a critally important invariant in the model, that can be expressed as follows:
n represents the amount of sub pools + 1 (the main pool)
This model is saying that the sum of assets of the sub-pools must be greater than the sum of liabilities of the sub-pools.
After a swap, if the distance to the optimal state is small, the slippage effect will be minimal. As the distance becomes larger, the slippage effect becomes increasingly more significant.
Asset Pricing
TenderSwap is unique in the sense that it doesn’t use an invariant curve to determine the price of a pair of assets. Thanks to the ability to unstake, the price between a tToken and its underlying asset is always fixed to be 1:1. To ensure profitable arbitrage for those who rebalance TenderSwap pools, a slippage compensation fee is charged on tToken swaps. The slippage fee increases as the swapper takes out more liquidity, because the swap caused an imbalance in the metapool. As the pool becomes more imbalanced, the incentive to rebalance the pool in exchange for a positive slippage compensation becomes more lucrative.
This novel pricing model incentivizes pool rebalancing without needing extra incentives from other tokens.
Sustainability Via Arbitrage
To ensure long-term sustainability, TenderSwap is optimized to incentivize pool rebalancing without additional token incentives. When a user is swapping from a tToken to the underlying asset via TenderSwap, a profitable arbitrage opportunity presents itself thanks to slippage compensation.
Trades between assets in a metapool are subject to a slippage compensation fee depending on unstaked asset liquidity in TenderSwap. When there is ample liquidity of the unstaked asset, the slippage compensation fee is negligible. As liquidity for the unstaked asset decreases, the slippage compensation fee increases.
An inverse relationship between unstaked asset liquidity and slippage compensation is the key to sustainability. The compensation fee applied to swaps becomes the payment for market participants to remove tTokens from TenderSwap and replenish the unstaked asset liquidity.
💡User 2 swaps 98,000 MATIC for 100,000 tMATIC. This user can holds tMATIC for staking rewards or unstake 100,000 MATIC after the 48 hour unstaking period.
Liquidity Provision
Liquidity is provisioned unilaterally, meaning each subpool in a metapool has its own unique liquidity shares representing ownership over provided liquidity (i.e. depositing LPT will add liquidity for the underlying asset and give the user LPT-SWAP). These shares represent a claim on the provided liquidity.
This single token deposit model greatly improves user experience by only needing to deposit one asset. This removes the requirement for token liquidity to be deposited as pairs, with the correct ratios, to not incur impermanent loss.
Adding or removing liquidity for a sub-pool adds or removes an equal amount of both assets and liabilities on its balance sheet. Upon withdrawal, if the sub-pool has less assets than liabilities it grants you the right to withdraw proportionally from another (combination of) sub-pool(s), should that subpool have more assets than liabilities.
TenderSwap Fee
A configurable swap fee is charged on the output amount of the swap, which is split to liquidity providers proportional to the liquidity provided. This fee will be 0
Last modified 1mo ago