Author: AC Capital
On May 2, Cetus announced the completion of its seed round of financing. OKX Ventures and KuCoin Ventures led the investment, with participation from AC Capital, Comma3 Ventures, NGC Ventures, Jump Crypto, Animoca Ventures, IDG Capital, Leland Ventures, Adaverse, Coin98 Ventures, etc. The new funds will be used to support the initial development and growth of the platform and expand its market share and customer base.
Cetus is a Dex and liquidity protocol based on the Move ecosystem. It uses an algorithm similar to Uniswap V3 to build a centralized liquidity protocol and a series of ancillary functions to provide DeFi users with the best trading experience and higher capital efficiency. At the same time, it uses the unique ecological characteristics of SUI to create a different composable function from Uniswap.
01 Who does DEX serve?
The on-chain crypto trading market is a relatively small market with a rapidly growing total volume. In such a market, the biggest feature is that the vast majority of assets (and still being generated in large quantities every day) are low-liquidity and low-market-cap assets, and there is a strong demand for price discovery. In such a market, how to better perform price discovery and attract liquidity is the prerequisite for the prosperity of on-chain transactions. Therefore, we believe that DEX should first serve LP.
What are LP's demands? LP's demands are different in different trading scenarios. At the beginning of the year, we proposed the view that the audience determines liquidity, and divided the on-chain assets into two categories: mainstream assets (the top ten assets in terms of transaction volume on major public chains) and long-tail assets. Their LP demands are not consistent:
Mainstream LP: Get more commission income and less impermanent loss (Uni V3 is better)
Long-tail asset LP: Cheaper, controllable, and flexible market capitalization strategy (Uni V2 is more convenient and has low liquidity management costs)
In the long run, V3 with better capital efficiency is the trend, but because of the difference in demand, Uni V2 and V3 can always coexist in terms of data. However, the market will inevitably produce players that take into account the needs of both. In an emerging ecosystem like SUI, Cetus is a stronger candidate.
02 Cetus: The first centralized liquidity protocol Dex in the Move ecosystem
Cetus currently has complete products including Swap, permissionless liquidity pool, and cross-connection bridge.
Centralized Liquidity
Cetus uses a centralized liquidity market-making algorithm similar to Uniswap V3. An LP can create multiple positions in the same pool. By setting different price ranges, LPs can simulate different price curves to implement their custom strategies. As prices continue to change with the execution of new swaps, the smart contract consumes all available liquidity in the current quote range until the next price Tick is reached, at which point the contract will immediately switch to the new Tick, and any dormant liquidity in the newly activated Tick interval will be activated. At the same time, there is a correlation between the Tick interval and the level of transaction fees. The higher the fee, the closer the Tick points are.
By pooling liquidity, LPs can earn more transaction fees and have higher capital efficiency.
No permission required to build a pool
Before SUI, Solana was one of the representatives of high-speed public chains. However, one of the major reasons why Solana's ecological development lacked stamina was that there was a lack of permissionless pool DEX in the ecosystem for a long time. It was difficult for community-native or MEME projects to rise, resulting in insufficient attention to the ecosystem, lack of new hot money, and becoming a "big player chain". Today, when SUI is launched, the status of community-native projects will be crucial to whether the ecosystem can prosper quickly. In Cetus, users can create liquidity pools without permission, and projects can launch new tokens on Cetus without permission. Cetus will attract more early project parties and quickly form pricing power for long-tail assets.
Flexible transaction fees
Cetus allows teams and users to choose custom transaction fee levels. Multiple pools can be set for the same token with different transaction fee levels. Currently, four levels of transaction fees are allowed: 0.01%, 0.05%, 0.25%, and 1%. This design encourages the market to find the most suitable liquidity allocation plan on its own, providing greater flexibility for LPs and trading users. Low-volatility assets such as stablecoin trading pairs may be concentrated in the pool with the lowest fee, and assets with high volatility or low trading volume may be more concentrated in high-fee pools to hedge risks.
Automatic position management
Users can implement stop-profit orders and limit orders based on range orders. After a position is breached, users generally need to exit the position assets in a timely manner to prevent the spot price from re-entering the price range. Users can also use a third-party position manager integrated with Cetus for management, thereby reducing the difficulty of liquidity management and facilitating long-tail asset LPs.
Composability
CETUS supports high composability. Other project teams can also easily establish an exchange interface on their front end by integrating Cetus SDK to quickly access Cetus' liquidity. For example, the option project Typus in the ecosystem achieves one-click hedging of long-tail assets by connecting to CETUS, while improving the liquidity and coverage of its own options. The secure cross-chain bridge Cetus created based on Wormhole was launched in November last year. Users can safely and conveniently cross-chain assets of nearly 20 public chains. Strongly associated token economic model Cetus uses the xToken economic model. By holding CETUS tokens and xCETUS, users can obtain a share of the protocol revenue, ensuring the consistency of community and protocol interests.
03 Cetus Team: Mature experience in developing centralized liquidity market-making algorithms
Uniswap v3 is an innovation in Defi architecture, with the core being the centralized liquidity market-making algorithm (CLMM), which maximizes the utilization of LP funds. However, Uniswap developed a commercial source code license in March 2021 to prevent others from forking its source code, and the license expired in April. On the EVM chain, competitors such as Pancake and Quickswap have launched V3 alternatives. However, on non-EVM high-speed chains, there are fewer competitors in the CLMM track. In the future, the competition of CLMM-type DEX will tend to the operation side, and Uniswap, which is lightly operated, will gradually become weaker. Behind Cetus is a Dex team with mature development and operation experience, and its APTOS version has been deployed and is running stably. Under the premise of guaranteed products, strong BD capabilities within the ecosystem, and continuous narrative capabilities in operations, the Cetus team will be expected to gain the leading position in CLMM infrastructure on SUI.
04 The Defi innovation soil brought by the centralized liquidity protocol
LP Automated Liquidity Management Protocol
Under centralized liquidity protocols, LPs generally choose to provide liquidity near market prices. However, when the market price exceeds the strategy range, LPs not only face impermanent losses but also cannot earn LP fees. LPs need to actively deploy market-making strategies again. Automated liquidity management protocols have emerged to help LPs automatically execute market-making strategies. The TVL of leading projects such as Arrakis Finance has reached 440 million US dollars.
This type of protocol can also implement:
In unilateral asset LP mining, LP can deploy initial liquidity in a biased manner, such as only deploying project tokens. The protocol can help absorb underlying assets such as USDT or ETH to balance the liquidity portfolio. Then, as transactions progress, the project's native assets will gradually be converted into underlying assets. In this case, it means that LP can achieve liquidity without selling its own tokens or incentivizing external capital.
ERC20 LP tokens are issued to LP providers. These LP tokens are not only liquid but can also be re-hypothecated, further improving the capital efficiency of LP assets.
New machine gun pool and leveraged mining
In the past, passive liquidity mining also had leveraged mining, but because liquidity was evenly distributed, the overall rate of return of leveraged mining was not ideal. Under the CLMM algorithm, the capital advantage is magnified, and professional quantitative institutions and market maker teams can implement more customized strategies in a granular manner. The machine gun pool can obtain funds from protocol users or lending protocols and adopt active and stable strategies to obtain returns, which is of great value to large-scale users with investment needs.
New derivatives system
Under the CLMM system, while LP returns increase, they also face higher volatility risks. Under extreme market conditions, the liquidity in the range set by LPs will be drained by arbitrageurs. How to construct derivatives that can hedge LP market-making risks to cushion the damage to LP interests caused by malicious market dumping of projects is also a track worthy of attention.
Based on the composability advantage of the CLMM algorithm, there are still many potential Defi protocols to be explored. Especially after events such as the FTX crash and BUSD being regulated, the importance of Defi has become increasingly evident. The above three Defi products are just the tip of the iceberg.
05 Conclusion
We believe that the Cetus team is a team with mature product delivery capabilities, strong inter-ecological BD capabilities and operational capabilities. They have a deep and unique understanding of the DEX product and track. We believe that Cetus has a high potential to become a leader in a unique ecological track such as SUI.
