CoFiX V2 Upgrade & Launch Mining
The concept of CoFiX: Computable Finance
Over the past decades, various financial experts have been researching computable finance with the expectation of quantifying all financial risks and designing the most efficient financial system. However, before the availability of blockchain, counterparty risk and liquidity risk could not be quantified and thus plenty of very excellent Quantitative Funds would fall on these two risks.
With blockchain, smart contracts replacing centralized reliable third parties to execute various agreements effectively prevents counterparty risk, and the interoperability of smart contracts effectively removes liquidity risk. Liquidity can be transferred freely between different contracts according to the blocks, and other risks could be accurately quantified by algorithms.
The idea of computable finance is that risk can be efficiently calculated and can be priced and managed based on algorithms so that financial systems can run automatically without custody.
CoFiX is designed as a computable financial product based on the idea that market makers and traders trade at the price from the NEST oracle, and both parties price the NEST price risk to ensure the incentives for market makers as well as minimal bid-ask spreads and no slippage for traders. It is called CoFiX because all the above parameters are calculable.
CoFiX V1.0 Advantages and Disadvantages
The advantage of CoFiX is the no-slippage design. Slippage means the difference between the expected trading price and the actual traded price. Slippage is not a new concept since the introduction of AMM but a problem that has existed in traditional trading markets. For traditional exchanges which use the order book, the higher liquidity and deeper quoted depth, the lower slippage. Simply put, the more assets sold, the lower the price and the more assets bought, the higher the price.
CoFiX price calculation: CoFiX eliminates algorithmic pricing directly and gets quotes by using the nest oracle. Prices are determined by supply and demand in the external market and slippage can be eliminated in this model.
Since there is a certain deviation and delay between the NEST price and the equilibrium price (which can be interpreted as the cost of decentralization), CoFiX introduces a risk compensation factor K which is mainly related to the volatility σ, the delay variable T and the impact cost. When traders execute transactions, rather than using the NEST price P directly, they use:
When buying:
or:
When selling:
The introduction of K completely avoids the loss caused by slippage, but with that comes the risk of one side of the assets in the pool being consumed and the pool being depleted in the CoFiX V1 design where market makers only need to deposit one side of the assets. Then some of the liquidity-providing LP will experience losses, which is why V1 has been emphasizing the need for LP to hedge their transactions over-the-counter to avoid risk. The professionalism and risk awareness of LP directly determines whether or not it will be profitable.
Although V1 eliminated the impact of slippage, the depletion of the pool also resulted in significant losses for many unhedged LP. To eliminate the impact of losses caused by unhedged LP over-the-counter, we designed and opened the new version V2.
V2 solves two problems in V1
1. The problem of the depleted pool
We set a fixed pool ratio for pools that can be used for hedging transactions. LP needs to send bilateral assets when providing liquidity. For example, the initial asset ratio for trading pairs ETH/USDT is 1:1000 (1ETH=1000USDT) It is required that the whole pool maintain this ratio all the time during operation (market makers need to send bilateral assets according to the initial ratio when participating) This will lead to an increase in the cost of market-making funds, but arbitrageurs still need to send bilateral assets when they take arbitrage regardless of market price fluctuations. It avoids the depletion of the pool caused by unilateral asset market-making and improves stability.
2. The problem of losses caused by unhedged LP
If the market price fluctuates and someone breaks the equilibrium, a certain amount of token incentive will be given to the trader who pulls back or tries to pull back to the original proportion of the reverse trading operation. The amount of token will increase positively with the block height difference until it can cover the cost of the reverse trading, and the whole process of this operation is called hedging trading. In the whole process, it solves the problem of loss caused by some LP not hedging and also reduces the cost of self-hedging.
The upgrade of V2 not only solves the problems left in V1 but also attracts professionals to hedge mining and improves liquidity.
CoFiX feature refinement
1. K-value optimization
Optimize the risk calculation algorithm in the new version, propose dynamically calculable K-value, more accurately compensate for risk and encourage LP to add liquidity.
2. Market Making Mining & Hedging Mining
Market-making mining: CoFiX uses the pool for market-making. Market-making mining in V2 replaces unilateral assets market-making in V1 with bilateral assets market making. The market makers inject bilateral assets into the liquidity pool based on a given initial ratio and this ratio is required to be maintained throughout the operation of the pool.
Hedge mining: If there are traders who disrupt the balance of the initial ratio in the market-making pool, traders who reverse trade to the initial ratio will be given a certain amount of incentive (COFI mined). The incentive will be strengthened over time until these traders can cover the cost of hedging.
3. Add trading pairs of mining
Add NEST/ETH trading pairs to ETH/USDT and ETH/HBTC market-making trading pairs so that LP providers can have more options for market-making. 0.9 CoFi will be mined in each block by NEST/ETH, 0.45 CoFi by ETH/USDT and 0.45 CoFi by ETH/HBTC. 10% of the mined token by market making will be transferred to cn nodes and the rest will be divided to market makers.
4. Implement a new governance scheme for DAO
DAO account removed from dividend to repurchase model so that anyone can sell CoFi to DAO under the price quoted by NEST oracle (It can’t be repurchased when the difference between the current price quoted by NEST oracle and the average price is more than 5%) and get ETH. 50 CoFi could be repurchased for each block, the amount will be increased within 300 blocks. The repurchased CoFi will be temporarily stored for destruction. It should be noted that each resell operation requires the oracle data and the seller needs to pay for the call.
Reasons for changing dividends to repurchase
Compared with the repurchase, the dividend model has a free-rider problem: a decentralized system is essentially a game system, and there may be different rounds of game participants. For example, the number of COFIs obtained by the first round of participants through mining is X1 and the contribution of ETH is Y1. Under the repurchase model, X1 can be sold to the system and destructed if it is not optimistic (long-term holders are not considered for the time being). Since the repurchase amount and the mining cost are equivalent, the total value will not be spilled out of the system. It is just that different people get different repurchase prices. After the repurchase is completed, the second round participants will obtain X2 COFI through mining and contribute Y2 ETH. They can sell COFI to the system as in the first round with little confidence. Since the long-term holders in the first round are not considered, the repurchase amount is still equal to the cost of mining. While in the dividend model, regardless of whether the first round gamers hold COFI or not(such as selling through the market) when the second round participants enter, they have to allocate the earnings to the COFI already mined which means Y2 needs to be allocated to X1+X2. It is not friendly to the new gamers because a part of the value is delivered to the previous participants who have quit.
The fact that users need to deposit COFI to smart contracts to receive dividends and earnings are calculated according to time. It means that the COFI assets are subject to yield loss in the DEFI space.
The dividend model is useful to attract non-community participants but has some negative effects, such as being easily misunderstood as security or holders pursuing the illusion of yield more than the intrinsic value of the system, etc. Repurchase means a requirement for holders to make decisions: either choose to sell COFI to the system without dividend returns or hold for the long term based on intrinsic value.
In addition, it should be noted that after the upgrade, v1.0 will not be available and users will need to manually withdraw funds from the old contract to participate in the marketplace again. v2.0 does not support repurchase currently but the team will support the CoFi token repurchase feature in subsequent versions as soon as possible.
In summary: The emergence of CoFiX started the trend of professional market making because the risk of market making is controlled and calculable and also improves capital utilization. V2 makes the idea of computable finance more implemented and less risk of LP. These will attract more professional arbitrageurs and value explorers.
