Understand the product mechanism and token model of the Terra ecosystem decentralized exchange Astroport in one article

Author: Li Ke

The new generation AMM trading platform Astroport, incubated by Delphi Digital, IDEO CoLab Ventures, and Terraform Labs, has recently released a more detailed project introduction, finally giving us the opportunity to conduct a preliminary exploration of this highly anticipated new project.

In simple terms, Astroport is a new generation automated market maker (AMM) project under the Terra ecosystem, jointly incubated by Delphi Digital, IDEO CoLab, and Terraform Labs, aiming to make Astroport the trading traffic center of the Terra DeFi ecosystem.

Since the beginning of this year, the native token LUNA of the Terra ecosystem has experienced explosive growth, and the Terra ecosystem has begun to take shape, with decentralized investment platforms like Mirror and fixed-rate lending projects like Anchor achieving good development.

Within this ecosystem, Terraswap is an existing decentralized trading platform. Although Terraswap has become the decentralized trading mechanism for Mirror, Anchor, and the Terra ecosystem, Astroport aims to be a new challenger, and its success hinges on doing better in the following areas:

• Improving capital efficiency for liquidity providers (LPs) and reducing trading slippage;
• Providing a user interface and user experience that meet the needs of traders, LPs, and the community;
• Launching the first liquidity bootstrapping pool (LBP) in the Terra ecosystem, allowing projects to create liquidity for their tokens with minimal seed capital and achieve a fair launch;
• Being compatible with Terraswap data formats to enable integration with existing Terra ecosystem projects.

Three Types of Trading Pools

Astroport plans to offer users three types of trading pools, each using different algorithms to meet different needs:

• Spot trading pool
• Stablecoin trading pool
• Liquidity bootstrapping pool

Spot Trading Pool. The spot trading pool was pioneered by Bancor and Uniswap and has become popular in decentralized exchanges due to its simplicity and versatility. However, spot trading pools have their drawbacks, as LPs face the risk of impermanent loss, meaning they must earn enough fees or other incentives to be profitable. Additionally, most of the liquidity in spot trading pools is not used to facilitate trades, leading to low capital efficiency and relatively high slippage (the difference between expected and executed prices).

Stablecoin Trading Pool. Adding liquidity to spot trading AMMs helps reduce slippage; however, in certain cases, simply providing liquidity for tokens that rarely deviate from a 1:1 exchange rate is not feasible. Stablecoins pegged to the dollar are an example. When exchanging one stablecoin for another, traders expect the exchange rate to be close to 1:1, as these tokens are designed to represent the same value (1 dollar). It is very common to swap one type of stablecoin for another, so reducing slippage for these types of trades is very important.

Stablecoin trading AMMs were initially introduced by Curve, which modified the trading formula to "amplify" liquidity around the 1:1 exchange rate, significantly reducing slippage. As a result, stablecoin trading AMMs have much higher capital efficiency than spot trading, as this amplified liquidity is mostly used to facilitate trades.

Liquidity Bootstrapping Pool. Liquidity bootstrapping pools are a good way to address these issues when providing initial liquidity for tokens. Liquidity bootstrapping pools emerged from Balancer, and LBPs work by adjusting the "weights" of the two tokens in the pool. Weighted pools allow for a higher initial price while requiring minimal upfront capital. By programmatically adjusting this weight over time, the price gradually decreases—allowing participants to wait for a fair price to buy, the price discovery process is spread over a longer time. This suppresses the front-running behavior of bots and other market manipulators, making the entire process fairer.

Adoption of TWAP Price Oracles

On-chain trading relies on price oracle smart contracts to provide real-time price information. AMMs are a convenient source of oracle price information since trading and reserve values already exist on-chain. By simply calculating the reserves of each token, instant price information can be obtained from the AMM. However, this instantaneous price is susceptible to manipulation and can be attacked if there are vulnerabilities in the smart contracts.

To combat these vulnerabilities, similar to Uniswap v2, Astroport adopts a time-weighted average price (TWAP) pricing mechanism in its spot trading and stablecoin trading pools. The time-weighted average price can effectively provide near real-time price information, making it much more costly for potential exploiters to manipulate prices.

Decentralized Organization: Astral Assembly

Astroport will be governed by Astral Assembly, which is the Astroport version of a "Decentralized Autonomous Organization (DAO)." The goal of Astral Assembly is to operate, maintain, develop, and grow Astroport as a community-governed DeFi project. Holders of the xASTRO token will have the right to propose and vote on changes to smart contract parameters, smart contract upgrades, and fund expenditures, in addition to using xASTRO for non-binding/consultative votes on other matters related to the Astroport community.

ASTRO Generators Dual Mining Mechanism

Astroport plans to conduct liquidity mining through a special proxy smart contract called "ASTRO Generators" for "dual mining."

Through ASTRO Generators, LPs can earn both ASTRO tokens and other governance tokens distributed by other DeFi projects through liquidity mining.

Specifically, LPs can deposit their Astroport LP tokens into an ASTRO Generator, which will forward the LP tokens to the relevant third-party staking contracts through the proxy smart contract. Since users are conducting liquidity mining on third-party contracts via the ASTRO Generator, both these third-party contracts and Astroport can track the same LP tokens, allowing LPs to achieve dual mining and earn dual rewards.

Revenue Distribution Mechanism

All transactions conducted through Astroport trading pools will incur a fee, paid in ASTRO tokens. This fee is incorporated into the Astroport smart contract and adjusted by Astral Assembly.

For spot product pools, the fee is initially set at 0.3%, with 0.2% of the fee (2/3 of the total fee) paid to the relevant pool's LPs and 0.1% of the fee (1/3 of the total fee) paid to Astral Assembly for automatically purchasing ASTRO from the ASTRO liquidity pool.

For stablecoin trading pools, the fee is initially set at 0.05%, with 0.025% of the fee (1/2 of the total fee) paid to the relevant pool's LPs and 0.025% of the fee (1/2 of the total fee) paid to Astral Assembly for automatically purchasing ASTRO from the ASTRO liquidity pool.

Since LBP pools will be independently deployed Astroport code, the trading fees for LBP pools will be determined by the deployer, and Astral Assembly will not collect a portion of such fees as it does for other types of trading pools.

Three Tokens and Their Functions

ASTRO

Many DeFi protocols allocate governance rights to AMM liquidity providers; similarly, Astroport will distribute its governance token ASTRO to LPs through liquidity mining. The ASTRO used for liquidity mining will be released at a predetermined rate by Astral Assembly according to token economics.

The value of ASTRO will be realized through xASTRO and vxASTRO: the xASTRO token represents a (relatively modest short-term) contribution to the Astroport ecosystem, representing (relatively modest) governance power and fee-sharing rights; while the vxASTRO token represents a higher contribution, thus representing a higher level of governance capability and fee-sharing.

xASTRO

Fee Sharing: xASTRO is a transferable token that automatically earns additional ASTRO based on the existing amount of xASTRO from a portion of Astral Assembly's trading fees, with half of Astral Assembly's trading fees going to xASTRO holders.

Governance: xASTRO holders will be able to vote on Astroport governance and submit proposals, including incentive distribution votes.

vxASTRO

vxASTRO can be seen as points that users earn for obtaining additional benefits within the Astroport ecosystem using xASTRO, which includes:

• Higher Governance Power: vxASTRO holders will have greater voting power within the Astroport ecosystem.
• More Trading Fee Sharing: The other half of Astral Assembly's trading fees will be proportionally distributed to all vxASTRO holders based on the number of vxASTRO in existence at that time.

Logical Relationship Among the Three Tokens

ASTRO holders govern Astroport in two ways:

Staking: Staking ASTRO in the xASTRO pool: ASTRO holders can stake their ASTRO in the xASTRO pool to receive xASTRO tokens, activating their governance rights and generating a portion of trading fees (funded by half of Astral Assembly's trading fee share). The concept of xASTRO is inspired by SushiSwap's xSUSHI token/xSUSHI pool.

Locking: Locking xASTRO in the vxASTRO pool: xASTRO holders can lock their xASTRO in the vxASTRO pool to earn vxASTRO points, amplifying their governance rights, gaining additional trading fee shares (funded by the other half of Astral Assembly's trading fee share), and receiving other benefits, such as increased liquidity mining rewards. The concept of vxASTRO is inspired by Curve's pioneering veCRV model.

To join the vxASTRO pool of Astral Assembly, users must hold xASTRO. This xASTRO can be locked in the vxASTRO pool for up to 2 years. The longer the locking period, the more vxASTRO the user will receive. vxASTRO is non-transferable; thus, they can be viewed as "points" or credits similar to governance rights, rather than ordinary "tokens." The more vxASTRO controlled by users, the greater their voice in the ASTRO-based governance process.

The specific logical relationships among the three can be seen in the diagram below:

ASTRO Token Distribution

A total of 1 billion ASTRO tokens will be distributed as shown in the diagram below:

55% of ASTRO will be emitted to liquidity providers (LPs) through ASTRO Generators, with 11% of the total ASTRO released in the first 12 months; the annual release rate of ASTRO will decrease by 20% until no more ASTRO is released through ASTRO Generators.

10% of the ASTRO supply will be allocated to its DAO organization Astral Assembly as a "community reserve" to incentivize the Astroport ecosystem, such as funding developers who create or maintain Astroport smart contract interfaces, upgrading or patching Astroport code, and forking Astroport to other blockchains.

5% of the ASTRO supply will be allocated to other participants in the Terra ecosystem. In most cases, these recipients will be participants in certain types of activities on Terra, such as using collaborative third-party smart contract systems.

30% of the ASTRO will be donated to members of the Astroport joint fund. Currently, there are plans to distribute a portion of ASTRO to joint fund members. This donated ASTRO will have a certain lock-up period, and if the recipient does not participate in the long-term construction of the Astroport ecosystem (including actively participating in Astral Assembly meetings, etc.), all or part of this donated amount will be required to be returned.