CoFiX2.0 AMA Recap

Topic: CoFiX 2.0 has launched on Gate Exchange to boost the computable finance ecosystem — CoFiX 2.0 has completed 5000 ETH sellback

Time: July 14th, 2021 11:00 AM UTC

Host: JoJo

Guest: YT

AMA Planning: Zhiyu

Purpose: To mobilize the enthusiasm of community members, cooperate with the Gate Exchange, and let everyone know more about the V2 version

Opening remarks: CoFiX V2.0 has been running smoothly for two months. There are three trading pairs for CoFiX V2.0 mining: NEST/ETH, USDT/ETH, HBTC/ETH. In addition to market-making mining, it also introduces arbitrage hedging mining. The mechanism innovation also ushered in cooperation with the well-known exchange Gate.io, and provided some activity rewards, because the name of all tokens in the Gate transaction overlaps with CoFi, so CoFiX is used as the token name. The specific details need to be explained by our guest — -YT.

JoJo: Could you briefly introduce yourself and CoFiX?

YT: Hello, everyone. I am YT. I’m a fan of the NEST ecosystem, and I’ve been following it from its oracle protocol to the decentralized exchange CoFiX to the collateralized lending synthetic asset platform Parasset. I was impressed by the concept of CoFiX when I first came across it, and I am fortunate enough to have this opportunity to share some of my understanding and thoughts on CoFiX with you guys today.

CoFiX was invested by Coinbase Ventures, Dragonfly Capital Partners, and Huobi Capital, and is now a part of the NEST ecosystem. It is a computable financial transaction model that enables the quantifiable and computable risk of other protocol layers (mainly brought about by volatility and block latency) and accurately prices risk-based financial protocols on the blockchain. CoFiX chooses to run on the decentralized smart contract platform of Ethereum, while using the truly decentralized NEST oracle, maximizing the advantages of no counterparty risk, no liquidity risk, high interoperability, and other advantages.

JoJo: What is CoFiX’s innovation from the current market?

YT: CoFiX has many innovations, which I think can be divided into the following three aspects:

1. Use the decentralized NEST oracle to maximize the advantages of no counterparty risk, no liquidity risk, and high interoperability.

2. Computable finance: All risks at the protocol level can be accurately calculated and quantified by algorithms, accurately priced, and compensated, so as to design the most efficient financial protocol and application on the chain.

3. The CoFiX economic model reshapes the balanced relationship between market makers and traders through CoFiX tokens instead of handling fees, giving the system self-enhancing properties that lock in value for Token. Both trading and liquidity providers can participate in mining, and they are related to each other through algorithms. Of course, there are many CoFiX innovations and they are still iterating and need to be compared and discovered by each and every one of you.

JoJo: CoFiX V2.0 has been online for two months. What are the highlights? What are the improvements compared to V1.0?

YT: Version V2.0 has many improvements compared to 1.0, mainly in the following two aspects:

1. Market-making requirements: V2 version of market-making mining, updating V1 unilateral funds market-making to bilateral funds market-making. That is the market maker through a given initial ratio to deposit bilateral assets into the liquidity pool through a given initial ratio and is required to maintain the ratio during the operation process. Although this will lead to an increase in the cost of market-making capital, it effectively avoids the problem of depletion of the capital pool and virtually protects the market-making capital of market makers.

2. Arbitrage hedging: Arbitrage hedging requires the asset ratio of the trading pair to remain constant. For example, the initial asset ratio of the trading pair ETH/USDT is 1:3000, that is, 1ETH=3000USDT, and the entire pool is required to maintain this ratio during operation. If a trader breaks this ratio, the trader who reverses the trade to the initial ratio is given a certain incentive, and the incentive is increased over time until these traders are able to cover the cost of hedging. The introduction of arbitrage hedging perfectly solves several problems in the V1 version that require market makers to perform perfect hedging: first, most market makers don’t know how to hedge, or can’t do automatic hedging. Secondly, the hedging is still there. There are certain costs, such as a handling fee of 0.002, etc., and hedging requires additional preparation of certain assets in the exchange or hedging channel. This poses a certain challenge to market makers, and the implicit cost of hedging is not low when the market is not so efficient.

3. K-value optimization: The new version optimizes the risk calculation algorithm, proposes a dynamically calculable K value, compensates for risks more accurately, and encourages LPs to continue to provide liquidity.

4. Added mining trading pairs: Added NEST/ETH trading pairs on top of ETH/USDT and ETH/HBTC market-making pairs so that LP providers can have more market-making options. Where the NEST/ETH pool, 0.9 CoFi for each block, 0.45 CoFi for ETH/USDT, 0.45 CoFi for ETH/HBTC, 10% of the market-making output goes to the cn node, and the other is distributed to the market makers.

JoJo: CoFiX DAO has completed 5000 ETH resale. What will happen?

YT: The 5,000 ETH of CoFiX is completed through the CoFiX DAO resale, which is the fee income accumulated since CoFiX v1. This income belongs to all CoFi holders and is used to sell back CoFi as decided by the community. The CoFiX DAO itself is a contract that enforces DAO governance, which is the beauty of decentralization. Since the opening of the DAO resale, more than 10 million CoFi have been mined and most of them have been sold back. Current circulation is more than 5 million, which is half of the deflation in two months, increasing the value of CoFi tokens and system value.

The CoFiX DAO has a constant stream of revenue deposited, and the DAO’s revenue comes from the system’s transaction fees, so the resale will continue without the need for permission, as long as you are holding CoFi or mining CoFi, you can sell it back to the DAO. This means that with the continuous expansion of CoFiX’s market capitalization and influence, the inclusiveness and market ceiling of the decentralized exchange market can be infinite. Therefore, CoFi will continue to be in a state of deflation in the future.

JoJo: How do users engage in the CoFiX experience?

YT: CoFiX Official Website: https://cofix.tech/

Users who hold ETH, NEST, HBTC, USDT can participate in CoFiX market-making, become market makers in each pool, get XToken, pledge XToken to the CoFi mining pool, and receive CoFi rewards based on the deposit ratio and duration.

Professional hedge traders or hedge funds can choose to trade in CoFiX at the best price when the market is volatile, and when trading occurs resulting in a change in the size of the market-making pool, CoFi tokens will be used to incentivize the hedger traders. The size of the pool is pulled back to the initial size, which is the hedge transaction mining mentioned earlier.

General traders can choose to buy or trade ETH, NEST, HBTC, USDT, all four assets on CoFiX because CoFiX uses the NEST oracle, which gives timely prices, so the price is more dominant, and cryptocurrency traders, also known as value traders, can do this.

All the mined CoFi can be directly sold back to DAO or traded in the secondary market. The latter can also participate in the future mining of CoFiX itself, Parasset, and other protocols, as well as NEST labs to continue to follow up on the cross-chain cooperation, which is empowering the asset properties of CoFi tokens.

JoJo: CoFiX’s partnership with Gate Exchange proves that CoFiX’s protocols and mechanisms are becoming more and more recognized. What follows next?

YT: After the community voted on Snapshot, CoFiX’s plan to start listing on more exchanges was approved. The partnership with Gate is also a recognition of the strengths, mechanisms of each exchange, the future of each exchange, and a consensus was reached.

Participate in the vote for listing, and will airdrop 10,000 US dollars of CoFi tokens.

Recharge can evenly split the 3000 USD CoFi token reward.

CoFiX tokens are now available for market-making and hedge mining on the Matcha Exchange and CoFiX protocol.

With the help of Gate, CoFiX will be able to educate more users about computable finance and engage more users in real computable finance protocol interactions, and CoFiX will work closely with the Gate ecosystem in the future, where there is a strong consensus on computable finance.

In the future, CoFiX will continue to deepen its community governance, optimize and upgrade the future CoFiX by voting, attract more users and professional institutions to participate, and prepare for deeper cooperation with more major exchanges.

JoJo: What is the most important core philosophy of CoFiX and risk management?

YT: The core concept of CoFiX is different from AMM in that the EPM model uses market just-in-time prices when trading, while pricing and trading are separate.

In traditional exchanges, pricing and trading are always together, but they do not have the same functionality and cost. Pricing requires a much higher infrastructure than trading, which is difficult on the chain. We will discuss the performance of the NEST oracle in a separate article.

As you can see, the current pricing model used by AMM is far less efficient and secure (for the seller) than aggregated transactions, but the pricing cost (the cost of being forced to accept arbitrage to correct the price) is much higher than EPM, which only requires targeted compensation at each transaction.

At this level of risk management, the idea of risk management is also different between EPM and AMM in terms of trading. AMM’s risk management is mainly implemented through changes in volume: when the volume is higher in a certain direction, it means that the price information is in favor of the direction of the transaction, so it is necessary to allow such traders to make some compensation, which is done by using a functional relationship like xy=k to fit the actual risk.

It is worth mentioning that price is a stochastic process and cannot be well fitted by a simple function. In the case of EPM trading, the direct risk compensation is done mainly through the stochastic process property of the price, where the compensation is R(SIGAma, D), where sigma is the volatility of the price and D is the latency of the trade (the time difference between the trade and the actual price used). The compensation is chosen in the sense of a confidence interval and therefore has a certain degree of freedom. When making a certain amount of compensation based on the deviation and delay risk actually taken by each transaction, thus ensuring that LPs are relatively fair and reasonable in terms of the risk of price changes.

Of course, in actual operation, this price compensation design needs to be dynamically adjusted to make it adaptable, because the price risk compensation design is too high, which will lead to unfairness to the transaction parties, thereby reducing transaction demand.

JoJo: How do you think CoFiX should attract more market makers and institutions in such a competitive environment?

YT: There are two core aspects that need to be optimized in order to attract a larger volume of market makers and institutions.

The first one is risk management, and I will briefly elaborate on the risk management part: smart contracts based on decentralized blockchain platforms can largely remove counterparty risk and liquidity risk from the financial system. CoFiX is such an on-chain market-making protocol designed based on the concept of on-chain computable finance.

The second is the efficiency of the use of funds: just the absence of risk is not enough, the same cost of funds, at the same time, to bring a maximum return. CoFiX, as an on-chain market-making protocol, optimizes the efficiency of capital use in two ways:

1. integrate more smart contracts that need liquidity, we expect that 80% of the transactions on CoFiX will be generated by other contracts calling CoFiX, and the data shows that the growth rate of this part of the transactions is much faster than just users trading directly with the pool, which is also a major advantage of blockchain products (open and free “API”).

2. Realize system revenue through the Token model to achieve a new balance between market makers and traders, while precipitating the value of tokens, and incentivizing traders to promote trading volume.

JoJo: Can you share the follow-up positioning and future planning of CoFiX 2021?

YT: For high liquidity assets, CoFiX is positioned primarily as: contract settlement trading.

For low liquidity assets, the main positioning is: fast pricing trading.

For any high liquidity assets held by users, the optimal asset allocation management can be automated.

In terms of future planning, the first phase focuses on the settlement transactions of highly liquid assets, especially the internal demand of the NEST system, and gradually covers more assets within the ecosystem, and then cooperates with external communities to move into the community expansion phase.

The product direction is mainly to gradually transition from settlement demand to fast pricing demand, and from internal transactions between contracts to the user’s asset management.

A brief explanation: you can extend a simpler automatic hedging mechanism than quoting oracles for pricing, which is to trade stablecoins. There is no need to make a detailed distinction between the prices of stablecoins, but the default is 1:1. However, the price difference can be compensated by the mining income of the fund provider of the stable pool. The higher the value, the higher the value compensation (although the deviation is very small). The automatic hedging is based on the LP share to guide the hedger to complete the balance transaction. This model will appear in the upcoming CoFiX 2.1, and will be especially effective when the stablecoin and the parallel asset Parasset are combined.

Thanks to the invention of automatic hedging, CoFiX can also implement another model in the future: automatic asset management, through a game structure, enables LP to achieve the risk and return of the target without any operation. This will be the key direction that CoFiX 3.0 going to explore.

End: Thank you YT for sharing, and thank you all for participating. This is the end of our AMA event.