How did Astroport make a comeback against the strongest exchange in the Terra ecosystem? The ultimate hybrid DEX!

Author: Jasur/Chain Teahouse

The most important initial tool in any DeFi ecosystem is asset exchange. If you are familiar with Uniswap, SushiSwap, and Curve Finance, you will understand the value these protocols bring to Ethereum.

Before the emergence of Astroport, the Terra chain was not completely blank in this regard.

1: The Small but Beautiful Terraswap

As the core exchange mechanism of the Terra ecosystem, Terraswap has quietly accumulated over $500 million in assets, supporting nearly $2 billion in trading volume each month, thanks to its constant product model inspired by Uniswap, excellent integration with the ecosystem, and user-friendly UI. This is indeed impressive, but it is far from enough.

The surge in LUNA's price is backed by a skyrocketing demand for the Terra chain, with trading volume and locked value geometrically increasing, and the variety of trading products continuously enriching. The core of this success is TerraUSD (UST), which is a stablecoin ranked in the top 5 by market capitalization.

Based on UST, Mirror has become the largest synthetic asset platform in DeFi, while Anchor's "savings as a service" protocol can provide high yields regardless of macro trends. With so many powerful protocols, just having Terraswap is far from sufficient.

Terra needs a new, more programmable decentralized exchange, a scalable and community-owned exchange, which is Astroport—the next-generation automated market maker (AMM) project under the Terra ecosystem.

2: The Large and Refined Astroport

Automated market makers (AMMs) have become a successful and mature architecture for achieving this goal in a decentralized, non-custodial manner. If you want to trade a variety of tokens, go to Uniswap; if you want low-slippage stablecoin trades, go to Curve; if you want to guide liquidity and customize pools and exchange ratios, you can go to Balancer.

These protocols each have their strengths and are different from one another, allowing users to choose one based on their needs. Astroport enables users to select different pool types within a single AMM system—in other words, it has it all.

Astroport features three different algorithmic trading pools: constant product pools, Stableswap pools, and liquidity bootstrapping pools (LBPs), each corresponding to different trading needs: spot trading, stablecoin trading, and liquidity guidance.

1. Constant Product Pool

The constant product algorithm was first pioneered by Bancor and Uniswap, gaining popularity in decentralized exchanges due to its simplicity and versatility. They are easy to create, easy to incentivize, and require minimal active management.

Here, Rx and Ry are the reserves of token X and token Y, respectively, and k is a constant. Any transaction that occurs will change the values of Rx and Ry, but the final product of Rx and Ry will always equal the constant k.

Astroport's constant product pool is a good choice for highly volatile currency pairs (e.g., mBTC-UST) because it facilitates trading at all possible prices. Even in sudden and highly volatile market conditions, the constant product pool can maintain market liquidity at the cost of trading depth.

However, constant product pools also have significant drawbacks. First, liquidity providers (LPs) face price risk in the form of impermanent loss, which means LPs must earn sufficient returns or other incentives to profit; additionally, under normal circumstances, most of the liquidity in constant product pools is not used to facilitate trading, leading to lower capital efficiency and higher trading slippage.

Especially for stablecoin trades like UST, people expect to receive a value equivalent to one dollar when trading UST, and the constant product algorithm falls short here.

2. Stableswap Pool

Curve Finance is renowned for its stablecoin trading protocol, and with the Stableswap AMM, Curve has become the largest stablecoin trading protocol. It offers users a more capital-efficient protocol with lower trading slippage.

Astroport's Stableswap pool adopts this algorithm. The Stableswap AMM "amplifies" liquidity around a 1:1 exchange rate (such as stablecoin UST and wrapped coin bLUNA), significantly reducing slippage. Therefore, the Stableswap AMM is more capital efficient than its constant product counterpart, as this amplified liquidity is mostly used to facilitate trading.

However, the Stableswap AMM is not without limitations. If the exchange rate deviates too far from 1:1, these types of AMMs will experience more severe slippage. The essence of Stableswap is to amplify overall liquidity through parameter A, but if the exchange rate deviates from 1:1, this amplification parameter will sharply increase slippage, which is devastating for trading highly volatile currencies.

3. Liquidity Bootstrapping Pool (LBP)

New protocol token markets often suffer from extreme liquidity shortages. If they use constant product pools for trading, they require very high initial liquidity to launch the trading pool. This leads some projects to be unable to provide such large amounts of funds, resulting in very low market depth. Even if project teams can provide substantial initial liquidity, there is still the issue of inefficient liquidity.

Liquidity bootstrapping pools are a good solution to these problems. First promoted by Balancer, Astroport's LBP functions by adjusting the "weights" of the two tokens in the pool. Weighted pools require a higher initial price but need minimal upfront capital.

Over time, the trading pool programmatically adjusts this weight, and the price gradually decreases. The benefit is that the price discovery process is spread over a longer period. Thus, some trading bots and other market manipulators' front-running trades are suppressed.

ASTRO Generators

Like other DeFi protocols, Astroport's governance token ASTRO also employs liquidity mining. However, ASTRO Generators can help LPs achieve dual mining, allowing LPs to earn ASTRO tokens while also receiving governance tokens from other DeFi projects through liquidity mining.

LPs can deposit their Astroport LP tokens into an ASTRO Generator, which forwards the LP tokens to the relevant third-party staking contracts via proxy smart contracts.

Since users mine liquidity through the ASTRO Generator for third-party contracts, these third-party contracts and Astroport can track the same LP tokens, allowing LPs to achieve dual mining and earn dual rewards.

Astral Assembly

Astral Assembly is the DAO version of Astroport, responsible for the operation, maintenance, and development of Astroport. Since it is a DAO, we must mention voting rights. Astroport's voting rights model is very similar to that of Sushiswap and Curve—indeed, Astroport is a patchwork!

ASTRO holders will be able to use ASTRO in two ways to assume governance responsibilities for Astroport:

First, by staking ASTRO in the xASTRO pool to receive xASTRO tokens, which can activate user governance rights and earn trading fee rewards. Sounds like Sushiswap's xSUSHI? The inspiration for xASTRO comes from Sushiswap.

Second, by locking xASTRO in the vxASTRO pool to obtain vxASTRO, which enhances governance capabilities while earning additional trading fee rewards. vxASTRO is inspired by Curve's pioneering veCRV model.

The longer xASTRO is locked, the more vxASTRO is obtained, which means a higher voice in the Astral Assembly.

3: Summary

Astroport possesses powerful features and performance, and as a project on the Terra chain, Astroport's UI is also quite neat. Astroport's personalized dashboard allows users to see their entire status, including locked value, yield rates, earnings, and risk exposure, all at a glance.

AMMs are the core building blocks of any DeFi ecosystem, allowing assets to flow freely in a decentralized economy in a trustless and capital-efficient manner.

The design philosophy behind Astroport is simple: to achieve decentralized, non-custodial liquidity and price discovery for any asset. To achieve this goal, Astroport prioritizes flexibility; it combines various specialized pool types and seamlessly routes between them.

Since its launch last December, Astroport's TVL has maintained good growth. While major protocols have seen their locked values plummet due to international circumstances, Astroport has steadily risen. Currently, Astroport's locked value has reached $1.33 billion, ranking 21st among major protocols.

Astroport integrates the initially outstanding algorithms and best models from various protocols, making it almost a culmination of exchanges. Without a doubt, it is the most comprehensive and powerful exchange on Terra.