Lifinity Deep Dive : The proactive market maker

8 min readJan 3, 2023

Automated market makers are the core infrastructure of DeFi with trading volumes growing exponentially. But problems like high fees, capital inefficiency and impermanent loss are costing traders and LPs unnecessary fees preventing DeFi from going mainstream.

Lifinity (“liquidity” + “infinity”) is the first proactive market maker created to solve the above problems. It combines concentrated market making with Oracle-based pricing and rebalancing to reduce impermanent loss and improve capital efficiency. The aggregator not only looks for the best price across exchanges but also finds the cheapest route for the swap.

Let’s understand the innovations through which Lifinity is able to solve the above issues:

Concentrated liquidity improves capital efficiency by adding depth to a market. The capital is within a limited range when compared to the constant product model where it ranges from 0 to infinity.

Proactive market making: To minimize the increased risk of impermanent loss, Lifinity uses Pyth — a Web 3 decentralized oracle, that adjusts to the correct price preventing trade from happening against stale price. This is also their main differentiator.

Rebalancing: The base trading fee is set manually for each pool. Their goal is to build a sustainable model which keeps the pool balanced, fees low and ensures profitability for LPs. The liquidity is adjusted every single time a trade happens or when there is a change in the oracle price. Let’s say the pool has x and y tokens, when x comprises <=50% of the total value of the pool, the market maker will incentivize traders to sell against the pool and discourage them from buying. Lifinity has integrated Orca, Saber, Serum and Raydium which are some of the best exchanges of Solana.

NFTs

Lifinity has a collection of 10,000 animated NFTs called Flares. The proceeds from the sale of these NFTs get deposited into liquidity pools, combining NFTs with De-Fi. This helped them in seeding capital for the pools without having to raise from VCs. The collection was sold out in 2 hours at a mint price of 1.5 SOL.

To limit the circulating supply, Flares will continually be bought back from the open market. If the floor price ever falls <50% of mint price, Lifinity will buy back all the flares below that price using the funds in the pool.The revenue will be a combination of royalty fee from secondary sale of NFTs plus trading fees.

Lifinity also releases buyback stats every week and a monthly update on their medium page. Lifinity has attracted 13.9k followers on Twitter and 9k “Liffies’’ on discord. It also surpassed $2B in trading volume. The deployed FOL has earned 11,622 SOL and has caused the buy back bot to buy back 684 Flares.

One of the prominent benefits of De-Fi relies on its permission-less nature. But permission-less pools are more vulnerable to fraud, putting users at risk of losing money and data. Oracles are also vulnerable to manipulation by bad actors, creating a central point of failure. Permissioned pools have higher KYC requirements adding extra security and control that comes at the cost of limited accessibility, pool’s size and liquidity. It also does make permissioned pools less decentralized as they rely on a central gatekeeper to control participation. Both permissioned and permissionless pools have their pros and cons and picking one over the other depends on specific context and use case.

Liquidity providers receive 85% of the trading fees and 15% is retained as protocol fee. Since Lifinity pools have protocol owned liquidity(POL), to optimize profitability the trading fee will be adjusted dynamically(rolled out in Oct’22). The further the current liquidity is from the target liquidity of the pool, the greater the trading fee for the LPs. This will be useful to bootstrap liquidity in early stages of pool creation. As the protocol owned liquidity increases, LPs will be incentivised to withdraw their liquidity by lowering the trading fees. The above change won’t be applied to any liquidity provided by Lifinity Flares. In cases where the trading fee doesn’t go to an LP, it will be retained as protocol fee.LPs can earn yield even when there are no trading fees because of market making. The value of pooled assets is compared to the value of assets if they would have not been traded. If the former is higher, then Lifinity has made a profit.

Tokenomics

Lifinity has two types of tokens, LFNTY the governance token and veLFNTY that grants users voting power and access to protocol revenue. LFNTY can only be earned by participating in the veIDO or buying it with USDC.

LFNTY can be locked anywhere between a period of 7 days to 4 years to receive veLFNTY in exchange. The longer the locking period, the higher veLFNTY one gets.
The stablecoins are the buy back tokens which can be used to buy back LFNTY. The reward tokens(ETH, SOL, etc.) are distributed pro-rata to veLFNTY holders on a monthly basis.
Lifinity’s revenue = protocol fees + trading fees generated by protocol owned liquidity + market making profit.
Half of this revenue is used for LFNTY buybacks and the other half is distributed to veLFNTY holders.
xLFNTY is a tokenized version of 4-year locked veLFNTY. It can be swapped with USDC incase on wishes to exit veLFNTY.

Lifinity raised 9.6 USDC in their veIDO by selling both LFNTY and veLFNTY. Lifinity doesn’t have any liquidity mining.

Market making and Liquidity as a service:

Lifinity also offers Market Making (MMaaS) and Liquidity as a service(LaaS). MMaaS involves providing liquidity to a market by continuously buying and selling a particular asset which maintains a stable price as well as facilitates trading. Lifinity keeps all the trading fees while the project retains the Market making profit. Here the project takes the price risk of the assets.

LaaS encompasses other liquidity provisions like AMM or liquidity pools and is not limited to just MMaaS. Lifinity provides the assets used for market making and takes on the price risk and gets a commission in return from the project.

Delta Neutral Market Maker

To improve profitability, the Lifinity team has made a major update to Lifinity’s market making algorithm. While the trading fee part of profit was doing well, the market making profit was affected by the increase in number and aggressiveness of arbitrageurs. Earlier, the pool’s aim was to maintain a 50/50 balance of assets but since the value of assets can fluctuate, the amount depends on its price, which results in impermanent loss. Essentially, the rebalancing happened for every little change in price.

In the new approach, when the price of the asset changes by a predetermined amount, the target amount of the base asset(SOL, ETH, etc.) is adjusted and the pool rebalances to a 50/50 ratio at the new price. Now the base asset makes a greater portion of the pool, as its price increases and vice versa. The rebalancing happens at a delay.

Tests claim that if the size and timing of trades are identical, V2 will outperform a constant product market maker and V1 in terms of MMP. The V2 SOL-USDC pool with ~$140k liquidity went live on JupiterExchange in Nov’22 and will be monitored closely before adding more liquidity and expanding it to other pools.

To summarize, Lifinity has made the following innovations: offering MMaas, Laas, implementing dynamic trading fees for LPs, building custom oracles and revamping their market making algorithm (DNMM)

Community building and governance:

The Lifinity team doesn’t consider itself to be fully decentralized but wants to move gradually towards that. This means putting to vote only the decisions that affect veFNTY holders or where their input may be extremely valuable. Addition of which new pools, concentration and rebalancing factors, emission schedules are examples of where inputs are not seeked. veFLNTY holders do decide which pools receive the LFNTY emissions and can be bribed by other protocols to vote for their pool.

The community voted to not convert assets to USDC before distribution

The community voted to take down the SRM and RAY pools.

The governance proposals come from Flare holders and are voted on Discord. The roadmap does include building governance on-chain for veLFNTY holders. There are community AMAs on Discord as well as Twitter Spaces. They also have a monthly newsletter called The Beacon.

Lifinity has now grown to 19 pools and crossed $2B in all-time volume in November. They earned $952,756 in revenue.

Source: Balance sheet updates shared on Discord

Conclusion

Lifinity is an exciting project which without getting bootstrapped from VC money has been able to tackle some of the most challenging problems in DeFi such as high fees, and capital inefficiency. It has been able to sustain its revenue even in the harsh bear market though it is leveraged bet one will take on the Solana ecosystem.

While the community support does seem to sway in Lifinity’s favor, whether it will be able to replicate its success with other pools is something to keep an eye out on.