Limitations of current stableswap protocols

Learn more about the problems of existing stableswap protocols

In this section, we will explain the current limitations of existing stableswap solutions, as well as ways Hummus Exchange aims to solve this problems both for traders and liquidity providers.

Impermanent Loss

Existing Automated Market Makers (AMM), such as Uniswap, Curve, require liquidity providers to provide liquidity of tokens in pairs or in a bundle prepared to swap within the provided liquidity pool.

As a consequence, the liquidity providers are equivalent to short the volatility of the tokens being supplied and suffer from impermanent loss. In the context of stableswap, this will mean that the liquidity provider may get back assets as a combination of tokens that are different from what he or she has originally provided.

Impermanent loss happens when you provide liquidity to a liquidity pool, and the price of your deposited assets changes compared to when you deposited them. The bigger this change is, the more you are exposed to impermanent loss. In this case, the loss means less value at the time of withdrawal than at the time of deposit.

Even though stablecoins (or different wrapped versions of a coin) will stay in a relatively contained price range, you are still subjected to a certain risk of impermanent loss in case one of the stablecoins loses its peg.

Hummus Exchange is designed to remove impermanent loss risk for liquidity providers.

Capital Inefficiencies

Liquidity fragmentation

At the time of writing, most DEX (stableswap or not) have some sort of capital inefficiencies. This means that capital locked in the protocol is not being used to its full potential.

An example of capital inefficiencies is the way most protocols handle their liquidity in fragmented pools: USDT liquidity in Curve is spread around 5 pools. This makes USDT liquidity fragmented over 5 different pools, making the capital requirement for USDT 5 times higher than necessary to provide a similar service.

The same happens with Uniswap, which has +100 pools containing USDT. These pools cannot share liquidities with each other.

Obligation to provide liquidity in pairs

Another problem in Uniswap-like protocols is the obligation to provide liquidity in the form of pairs, in essence, the need to have equal value of 2 tokens in order to be a liquidity provider.

Curve tries to solve this problem by allowing single-side deposits, however, it still only uses the liquidity up to the least abundant asset in the pool, making the least popular token the bottleneck for the growth of the pool. Moreover, it is impossible to add new tokens into an existing pool (particularly if the new token’s liquidity is not comparable to other existing tokens in the pool), which hinders the scalability of the protocol.

Hummus Exchange allows for single-side liquidity provision, meaning you only need 1 token to become a liquidity provider.

User Experience Fragmentation

Composability is an important component of DeFi (e.g. using Uniswap LP tokens as collateral on Aave). However, in terms of user experience, this requires users to navigate across different protocols and may be unknown by many new users that are just getting started on DeFi.

Furthermore, this also increases the attack surface on your tokens, since the tokens are locked in several protocols.

Our objective at Hummus Exchange is to provide a StableSwap AMM with a unique friendly interface providing maximum capital efficiency, making impermanent loss a thing of the past.