HooSwap is an ethereum-based decentralized trading platform (DEX). In order to solve the problem of illiquid DEX, Hooswap uses an Automated Market Maker (AMM) mechanism.
What is Automated Market Making (AMM)?
Automated Market Making (AMM) provides continuous quotes to the market by calculating bid and ask prices according to formulas. AMM is essentially an automated process, implemented through smart contracts without human intervention.
HooSwap uses the AMM "Constant Function Market Maker" algorithm, which is characterized by its ability to provide liquidity to the market regardless of the size of the order book or the size of the liquidity pool.
The term can be seen as a function "X * Y = Z", in the sub-function, no matter how X, Y change, Z is always a constant value. And put into the Hooswap transaction means that the amount of two tokens multiplied by each other in the liquid pool before and after a transaction is kept constant, that is, pre-trade multiplier = after-trade multiplier.
A person creates a new liquid pool of ETH and SUSHI in HooSwap. The amounts of ETH and SUSHI are 10 and 100 respectively, the price of SUSHI is 0.1 ETH and the multiplier of the two amounts is 1000. Once the pool is created, the user can swap ETH and SUSHI in Hooswap. Suppose someone uses 1 ETH to buy SUSHI, that is, 1 ETH enters the liquid pool and the total amount of ETH in the liquid pool is 11. Therefore, the product of the two tokens is required to remain unchanged and the amount of SUSHI should be reduced, which is the amount of SUSHI that 1 ETH can buy.
Based on Constant Function Market Maker algorithm, that is, 10*100=（10+1）（100-N），N=9.09
Namely, in the AMM algorithm, 1 ETH can buy 9.09 SUSHI. But in fact, 1 ETH can be swapped for 10 SUSHI, indicating that there is an error of (10-9.09), which is 33.3%(the slippage in this trade) different from the actual.
In HooSwap's AMM algorithm, users can add funds to help reduce the slippage of transactions. In order to keep the current swap ratio of the two tokens intact, the user needs to add the current proportional amount of both tokens to the liquidity pool at the same time. In this way, the multiplier is increased, but the swap price does not change.
Ⅳ.What is Impermanent Loss?
The main reason for the impermanent loss of principal of liquid market makers under the AMM system is that if the prices of unstable assets in the liquidity pool rise or fall under the AMM mechanism, market makers will completely and automatically behave in the opposite way to the general traders in the market, selling the more they rise and buying the more they fall, so that when the price of assets in the pool rises, their quantity decreases, and when the price of assets rises, their quantity increases.
Assuming you are making a market in the liquid pool ETH/USDT and the swap price is set at 1 ETH = 300 USDT, you will be providing 10 ETH/3000 USDT of liquidity in the system.
Now your share of the liquid pool becomes 9.91 ETH/3026.97 USDT, which is less ETH and more USDT than at the beginning.
Impermanent losses, which are common at the beginning of a market or during a sideways market, are gradually wiped out as commissions accumulate and price fluctuations occur, realizing market-making gains.
1. Refer to HooSwap website: https://hoozh.com/hooswap/exchange
Click on “Pool” to add
2. Click on "Add Liquidity"
- Take USDT/SUSHI liquidity for example, search for the token name or smart contract address of the token to swap.
- Select the USDT in the liquidity pool and enter the USDT amount
- Select the SUSHI and enter the SUSHI amount.
The display will show the amount and percentage of the selected token, click on Add and enter the trading password.
Guide to Liquidity Farming: Take HOO as an example
- Click on HooPool
- Enter HooPool and click on Farm Now
- Find the corresponding liquid pool and click on Farming
- Click on the Staking button and the system will automatically match your share of the stakes.
- Click to confirm your password
- Selection of the corresponding liquid pool
- Click farm to stake