Automated Market Makers (AMM) have been a major force in fostering decentralized financial systems. By developing protocols that can effectively exchange priced cryptocurrency assets for users without a middleman, AMMs have shown how blockchains can be used for trading without a centralized system involved.
However, AMMs also come with two major problems – Slippages and Impermanent Loss. These are common problems that people face when trading using decentralized exchanges. With Beluga Protocol, slippage and impermanent loss are solved using some innovative techniques that would be discussed in this article.
To understand why a protocol like Beluga is needed in the first place, we need to understand what these problems really are and how they impact the current world of finance.
Impermanent Loss (IL) is the change in price of an asset that has been deposited in an Automated Market Maker. This can be a rise or decrease in the price of the asset being traded. The larger the change in the price of the asset, the larger the loss on the depositors (or liquidity providers).
Price slippage is a common phenomenon across blockchain networks in Web3. Price slippage is the difference between the expected price of a trade and the actual price at which the assets are exchanged.
Solving the Trading Problems in Solana
As explained in the docs:
Beluga aims to solve the problem of high impermanent loss and large price slippage across the Solana ecosystem, especially for bridged assets. Beluga will serve to enhance the overall capital efficiency on Solana by solving the above problems.Beluga Protocol documentation
Beluga Protocol has provided a way out for users in three innovative ways:
- Eliminating Impermanent Loss
- Concentrated and Aggregated liquidity
- Zero Opportunity Cost
With Beluga protocol’s solution for the Solana ecosystem, there is an ease of composability among Decentralized applications built on the blockchain. With this new platform, swapping of assets are at the best possible prices. This encourages many people to trade since they know they are getting the best value for the assets.
Beluga Liquidity Pool
Liquidity Pools are where deposits of tradeable tokens are made to facilitate trades easily for people. In pools, the liquidity provided for token pairs like SOL-USDC are locked in a smart contract that enables users to submit transactions to swap.
By providing liquidity in the Beluga pool, investors who have deposited tokens earn from the fees generated from the swaps that take place on the platform.
How to Provide Liquidity
Navigate to the Pools section and select the pool you want to deposit and click “Deposit”
You can select any pool of your choice to deposit your funds. Click on “Deposit” after selecting the right amount you want to add in the liquidity pool.
Yield Farming on Beluga
The Farm section is for depositors who wish to invest their LP tokens to earn the Beluga platform reward tokens. The reward token from the protocol is $BELA.
By staking your LP tokens in the Farm, you are eligible to earn reward tokens in time.
One of the most common features of Decentralized Exchanges are their swap features. Beluga also has its swap but it is with a more innovative design than the regular ones.
Tokens are exchanged easily at the best possible prices without the high price slippage problem.
BELA is Beluga’s governance token. Just as is common to blockchain-based projects, Beluga protocol has its own token for governing its operations. This BELA token gives holders the right to vote on proposals that can advance the protocol forward. This is a way to decentralize governance for the benefit of the community.
With veBELA token, holders can vote and are able to control the revenue that is being generated by Beluga Protocol. If a holder’s BELA tokens are locked, they receive veBELA in exchange for it. BELA can be locked for a minimum of 7 days and a maximum of 4 years. It is in the course of this period of having BELA locked that a depositor receives veBELA tokens.
Beluga DEX utilizes Pyth as its oracle base. An Oracle is an infrastructure used to relay data pertaining to the price of the assets being traded. The reason for using an Oracle like Pyth is because there would no longer be a need for quoting prices based on the pool’s assets balance but directly from the source. This is one of the ways in which Beluga helps minimize impermanent loss.