🧩What is Hot'n Cold Finance
Last updated
Last updated
Hot'n Cold Finance is a contemporary dex approach formed by the combination of two different financial models. This new model is an on-chain system of smart contracts on the JUNO Network that leverages CosmWasm. These smart contracts implement an automated market maker (AMM) protocol based on the constant product formula.
What is a DEX?
Traditional exchanges require professional market makers to handle orders, and are limited by the frequency with which they can quote the best prices. Decentralized exchanges (DEXs) allow for cryptocurrency transactions to take place online, securely, and without the need for an intermediary. Users can swap between tokens in a liquidity pool (e.g., HOT for JUNO in a HOT/JUNO pool). In a nutshell, DEXs provide users with a simple, fast, affordable, and secure way to swap tokens in a permissionless and decentralized environment.
DEXs rely on automated market maker (AMM) protocols, which use mathematical formulas to price assets. This formula can vary between protocols. For example, Hot'n Cold Finance's constant product AMM satisfies the equation:
where x and y are the two token reserves in the liquidity pool and k is constant unless liquidity is deposited or withdrawn from the pool. You can think of AMMs as peer-to-contract (P2C) - there is no need for counterparties in the traditional sense, as swaps happen between users and contracts.
AMMs incentivize users to provide liquidity. Liquidity is the ability to convert one asset into another asset without changing its market price. Liquidity providers add funds to liquidity pools. You can think of a liquidity pool as a big pile of funds that traders can trade against. In the case of Hot'n Cold Finance, liquidity providers deposit an equivalent value of two tokens, e.g., $500 of $HOT and $500 of $JUNO, into a $HOT-$JUNO pool in exchange for LP tokens. In doing so, they are adding liquidity to that pool.
Upon providing liquidity to a pool, LP tokens can then be staked in HOT dex or COLD dex staking modules. Each module on the protocol corresponds to a liquidity pool (e.g., HOT-JUNO) and receives weighted token emissions from the farm contract. Farming helps improve the capital efficiency of assets by utilizing idle LP pairs to generate yield.
You will need to deposit two tokens - in equal value parts - into the corresponding liquidity pool. Tokens can be obtained from secondary markets or through the DEX. For example, if you wanted to obtain HOT, you would swap JUNO in the HOT/JUNO pool.
Classic dexes are based on a 3-element positive feedback loop (Liquidity providers-Liquidity pools-Swap fees). While this loop determines the lifetime of the dex, the lifetime of the loop depends on the state of the elements that makes it.
Damage to any of the feedback loop elements creates a cascade that disorientates the balance of the entire dex and causes the system to crash.
Let's assume that there is a decrease in the number of liquidity providers for any reason. This directly reduces the amount of liquidity in the pool and a less liquid pool is an undesirable environment for traders. Thus, the swap fees generated in the pool begin to decrease. With the decrease in the profits going to the remaining liquidity providers due to the falling swap fees, the liquidity providers start to leave the pool and the initial positive feedback loop changes direction and turns into a negative feedback loop, causing the system to crash.
We are using an unprecedented approach to avoid a crashing situation: combining two different economic archetypes into DeFi.
In our approach, We built a modular dex structure by using the capitalist economic model (COLD DEX) and the socialist economic model (HOT DEX) together. With its own dynamics, this modular structure provides extra support to the elements of the loop. Thereby, we can prevent situations that could damage Dex's positive feedback loop.
Let's assume that Crash Scenario occurs in our modular structure. Even if the liquidity providers decrease for any reason, the collapse of the positive feedback loop is prevented thanks to HOT DEX's ownerless liquidity feature (Every trade contributes towards auto-generating liquidity that goes into HOT DEX as ownerless liquidity).
Our modular approach provides an extra layer of defense against situations that could easily put any dex in a negative feedback loop.
There are no limits to what free men, free women, and free markets can accomplish.
Our mission is to unleash COSMOS' true potential by creating a free market economy for all projects in the COSMOS.
Support for the free market is support for a way of life that values freedom, individual rights, and the belief that every person is capable of contributing to our society.
Our goal is to provide the necessary support to the COSMOS projects in need and to be a home for them.
Hot'n Cold will provide a cohesive and holistic approach, helping to streamline the efforts of project development. This accelerates the growth of the COSMOS ecosystem so that COSMOS' objective of establishing itself as a leading permissionless innovation platform is realized.
