Grace Kwan is the co-founder of Orca, a decentralized exchange on the Solana blockchain that drives $20-50M USD in volume per day. A programmer, designer, and writer, she is best known for her expertise in turning complex technical systems into simple user experiences, which she honed at Stanford, Coursera, and IDEO Tokyo. She is also the creator of the Orca Impact Fund, which donates 0.01% of all trading volume on Orca to climate change and sustainability (over $1M to date!).
Welcome to CryptoNewsZ, Ms Kwan; it is a pleasure to have you with us today! According to you, What’s the difference between a CEX and a DEX?
In a centralized exchange (CEX) such as Coinbase, FTX, or Binance, the platform itself holds and processes assets on behalf of users. When you exchange one coin for another on a CEX, you’re not trading directly with other users; the exchange handles the trades on your behalf.
In a decentralized exchange or DEX, transactions happen directly between users on the blockchain, and this frees users from the need to trust a third party with their assets—and their identities.
What are the limitations of CEXs?
The need to trust a CEX with your real-world identity goes contrary to one of the founding ideals of crypto: An open financial system free of intermediaries that can freeze funds, manipulate the market, or otherwise treat users’ funds as if they wouldn’t want them to be treated.
In contrast, DEXes often offer a much greater diversity of assets. In other words, no matter what cryptocurrency you’d like to trade, you’re likely to find it on a DEX.
Tell Us About Automated Market Makers (AMMs)
In an AMM, users trade assets with liquidity pools whose prices are determined algorithmically on the blockchain. In my opinion, the process of trading assets on an AMM is incredibly simple and computationally efficient. This is especially in contrast to the “order book” model used in areas of traditional finance such as proprietary trading, which requires management of buy and sell orders,
From my perspective, AMMs are also notable in that they democratize market-making. Any user willing to accept the risks can choose to deposit assets in a liquidity pool, and in return, they’ll receive a portion of trades made using their assets. Simply deposit tokens in a smart contract, and just like that — you’re a liquidity provider!
The beauty of AMMs is that they can function without intermediaries or institutions: transactions happen nearly instantly, on-chain. The LP earns rewards for providing the assets for that trade, and all transactions are automated by smart contracts and recorded on the blockchain.
How does Orca’s AMM work?
One reason our users love Orca is its refreshingly simple UX. Little details like the Fair Price Indicator, which lets you know if you’re getting a fair price on any given swap, and the “Your Tokens” panel, which provides an easy way to see your current balances, make the experience more approachable than any other AMM in DeFi.
Under the hood, Orca is powered by two different types of liquidity pools. The first is Whirlpools, our brand-new concentrated liquidity AMM. By allowing LPs with compatible risk tolerance and portfolios to “concentrate” their liquidity in specific price ranges, Whirlpools can achieve capital efficiency on par with an orderbook while maintaining the computational efficiency of an AMM. (More on that in the next question!) The second is our “standard pools” (Orca.so/pools), which use the constant product AMM formula (x * y = k) first popularized on Ethereum.
What is divergence loss?
Divergence loss (sometimes called impermanent loss) is the critical challenge that LPs must overcome to make a profit on their deposits. These losses occur when the price of the token pair—the ratio of the two tokens’ prices—changes from the time of deposit.
For instance, if you deposit in a theoretical ABC/XYZ pool when ABC is $1 and XYZ is $2 and withdraw when ABC is $2, and XYZ is $4, you will incur no losses—either way, the price of the pair is 2 ABC per XYZ.
But if ABC stays at $1 and XYZ goes to $4, the value of your deposit will be 5.72% lower than what it would be if you had simply held the tokens you originally deposited when measured in USD.
All of the above is easy to find in common definitions of divergence loss. What most answers leave out is… why does it happen?
When you contribute assets to an AMM pool, you’re providing the other side of the swaps people want to make—essentially buying whichever asset is going down. Since those trades happen at a higher price than the current market value, you’re left with less value than if you had simply held those two tokens.
These losses are “impermanent” because they are reversible if tokens return to their original price ratio while your assets are still in the pool. However, we prefer the term “divergence loss” because the cause of the loss is price divergence, and if you withdraw while divergence is high, your losses become permanent indeed.
Tell me more about concentrated liquidity.
In a concentrated liquidity AMM, LPs choose a specific price range in which to deposit their funds. This leverages their position, allowing them to provide deeper liquidity for their selected price range. We named our product “Whirlpools” to reflect this breakthrough: Deep liquidity concentrated where trades are happening, not adrift in a vast ocean.
All of this means more fees earned for the LP and lower slippage for swaps. However, as with all leverage, it also means higher risks—the most notable being a corresponding increase in divergence loss of their funds. This allows our LPs to compete for higher returns by applying their experience and knowledge of the market to select the pools and price ranges that they believe will be profitable.
Compared to existing concentrated liquidity AMMs on Ethereum, Whirlpools stand out for its incredibly low barrier to entry (a result of Solana’s much lower transaction fees) and guided UX, both of which make it easier for first-timers who are willing to take on the risks to learn the art of concentrated liquidity provision.
Aside from capital efficiency, Whirlpools are also notable for their computational efficiency. Compared to the CLOB (Central limit order book) model, our concentrated liquidity pools provide a massive amount of trading volume to a large number of unique addresses relative to the amount of space required on the blockchain. From a technical perspective, this is a huge advantage for the scalability of the wider Solana ecosystem.
Our readers would love to know more about Orca and its incredible journey since its inception.
Orca is the most user-friendly DEX in DeFi. Playful, principled, and professional, we’re proud to offer what we believe is the simplest swap in the Solana ecosystem: a marriage of intuitive design and top-notch engineering.
Having launched Orca just over a year ago, we’re proud to have become one of the most widely used decentralized exchanges in Solana, with around 30,000 active users per day! Orca reached total liquidity of $1 billion late last year, and the protocol has facilitated some $15.8 billion in total trading volume. We’re also proud to donate 0.01% of all swaps to climate change and sustainability through the Orca Impact Fund—over $1M to date.
And as we roll out more Whirlpools, we’ll continue building the foundation for a liquidity layer that is both radically capital-efficient and computationally efficient. By encouraging other protocols to build on top of Whirlpools through our upcoming Builders Program, we’ll help pave the way for “DeFi 2.0”: Protocols that compose primitives like Orca to build sophisticated financial tools that bring the opportunities of DeFi to an ever-wider audience.
But our mission is far from complete. Through our brand-new governance platform, ORCA token holders are able to have a direct say in Orca’s future by formally proposing changes to the protocol, which are followed by an on-chain vote. We’ve just started to welcome our first proposals from our podmates (our term of endearment for our users), and we’re excited to keep working hard to make Orca your favorite AMM experience in DeFi.
Communications from Orca are intended solely for informational purposes, should not be construed as investment or trading advice, and are not meant to be a solicitation or recommendation to buy, sell, or hold any digital assets mentioned. All figures are estimated and unaudited unless otherwise noted. Past performance is not necessarily indicative of future results. Transactions on the blockchain are speculative. Carefully consider and accept all risks, including the risk of loss of all funds and extreme volatility of token prices and liquidity, before taking action. As a technology company, Orca provides access to the software.