Traditional platforms challenges
Describe challenges on the current swap platforms which Aggregator DEX is trying to solve.
Buy/sell taxes
On the Ethereum blockchain, buy/sell taxes are commonly applied when trading tokens, particularly in decentralized exchanges (DEXs) like Uniswap. These taxes are embedded within the smart contract of the token itself and are automatically executed during transactions. The following explains how Buy/Sell taxes work:
Smart Contract Implementation:
When a token is created, its smart contract can include code that imposes a tax on each transaction. This tax can be applied on buys, sells, or even transfers between wallets.
The tax rate is typically defined as a percentage (e.g., 5%).
Token Purchase (Buy Tax):
When you purchase the token on a platform like Uniswap, the smart contract automatically deducts the buy tax. For example, if you purchase 100 tokens and the buy tax is 5%, you will only receive 95 tokens in your wallet. The remaining 5 tokens are sent to a designated wallet or used for specific purposes like liquidity, rewards, or burning.
Token Sale (Sell Tax):
Similarly, when you sell the token, the sell tax is applied. For instance, if you sell 100 tokens with a 5% sell tax, you will only receive the equivalent of 95 tokens in Ethereum or another token in return, and the 5 tokens will be deducted and distributed according to the rules in the smart contract.
Market impact
Market impact refers to the effect that a trade has on the price of an asset, especially in decentralized exchanges (DEXs) like Uniswap that use Automated Market Makers (AMMs). In the context of Uniswap, market impact is a direct consequence of the Automated Market Maker (AMM) mechanism, which adjusts token prices based on supply and demand within the liquidity pool. Following explains how AMM works:
When a trade is executed on Uniswap, the AMM automatically adjusts the price based on the size of the trade relative to the pool's liquidity.
The market cap plays a crucial role in determining market impact. In a shallow pool with low liquidity, even small trades can cause significant price movements because the AMM has to adjust the price more aggressively to maintain the constant product formula.
Larger trades have a more significant impact on the price because they shift the balance of the liquidity pool more drastically. For instance, if you want to buy a large amount of Token A, you will need to give up increasingly more of Token B as the pool's balance shifts. This leads to price slippage, where the price you get is worse than the initial quoted price.
Arbitrage traders (MEV bots) may step in to exploit this difference by buying the underpriced token on Uniswap and selling it on other exchanges, or vice versa.
AMM behavior can be verified on Uniswap by selecting a low liquidity token, initiate a quote for 0.01eth trade, and another one for 1 eth. You will notice that although 1eth = 100x 0.01eth, the amount of output tokens is only about 93x the amount you get for 0.01eth (+5% of value lost).
High transaction fees
One of the significant challenges on liquidity pool swaps is the high gas fees associated with token swaps. These fees can vary widely depending on network congestion, but they often become prohibitively expensive during peak times. On average, gas prices cost around 10$ regardless of the order size. For users trading less than 100$, this represents more than 20% of the transaction value (including same fees on swap back).
Liquidity pool fees
On Uniswap, liquidity pool (LP) fees are the fees paid by traders when they swap tokens within a liquidity pool. These fees are distributed to the liquidity providers (LPs) who have supplied tokens to the pool. On Uniswap, fees can be anywhere from 0.3% to 1%.
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