A deep dive into Trader Joe — a decentralized exchange (DEX) that recently launched their V2.1 upgrade, enhancing their liquidity book model, introducing auto-pools and more.
Introduction to Trader Joe
In the heat of 2021’s Avalanche Rush, two decentralized exchanges (DEX) fought fiercely on the Avalanche blockchain for dominance as the chain’s top DEX. Pangolin had the lead early in the race, launching much earlier than their rival, Trader Joe. However, just two months after their launch in June 2021, Trader Joe had rapidly amassed a strong community and surged past Pangolin to claim the throne as the top DEX on Avalanche by total value locked (TVL). At its peak, Trader Joe held more than $2.59 billion on their platform, across their liquidity pools (LPs), staked assets and their money market platform.
Source: DeFiLlama
The bear market quickly consumed the crypto space not long after, but the Trader Joe team was not fazed. They kept their heads down to build and Trader Joe continued to ship new features for the platform, including revised tokenomics for the JOE token, their very own NFT marketplace, Joepegs, and their in-house NFT production studio, Joe Studios, in the first half of 2022.
The second half of 2022 came with much larger announcements, with the team introducing their omnichain vision and a unique Liquidity Book model for greater capital efficiency, which have now brought all eyes back on JOE in the last few months.
Source: Joepegs Twitter
Let’s take a closer look at what these two huge developments mean for Trader Joe.
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Omnichain Vision
Trader Joe embarked on their omnichain journey in late 2022, deploying their platform on the popular Ethereum layer two (L2) scaling solution, Arbitrum, in December. This marked a huge move for Trader Joe as they made their first move out of Avalanche, which had by then, lost most of its TVL and no longer saw much activity. Arbitrum was bustling with activity and new users at that point as speculation around the Arbitrum airdrop built up steadily into the new year. Arbitrum was also the destination of choice for fellow Avalanche decentralized application (DApp), GMX, which migrated to the L2 chain in 2021. GMX was, and still is, the largest DApp on Arbitrum today, making up more than 23% of TVL on the chain.
Source: Trader Joe Substack
Not long after the Arbitrum deployment, Trader Joe announced and subsequently deployed to the Binance Smart Chain (BSC) as well. As the 3rd largest chain by TVL, BSC is home to more than 1,400 DApps and over a million daily active users. Moreover, Binance had been consolidating market share significantly following the explosive collapse of FTX in November 2022. This strongly bolstered the position of BSC in the DeFi space. As another chain booming with activity, Trader Joe’s new target was another step in the right direction in their ominchain strategy. In this expansion, Trader Joe also brought their NFT platform, Joepegs, to BSC.
To tie all of their deployments together as part of their collective omnichain vision, Trader Joe partnered up with omnichain interoperability protocol, LayerZero, to turn their token, JOE, into an omnichain fungible token (OFT). This allows for 1:1 transfers of JOE across chains, without the security risks that traditionally come with bridging tokens. The integration also enabled seamless transfers of JOE, improving JOE liquidity across chains.
Source: Trader Joe Twitter
Liquidity Book Model
But perhaps, of all the features brought into DeFi by Trader Joe, the Liquidity Book model is the one that DeFi users are most excited by.
The automated market maker (AMM) model was first pioneered by Uniswap back in 2018, revolutionizing on-chain trading forever, with their famous x*y=k formula. This was, and still is, the model that most AMMs run on today in DeFi. It is simple to implement and convenient for users to swap their assets at any time. Using this model, assets in a pool are used for liquidity across all possible prices, from zero to infinity. Of course, this is capital inefficient as most tokens trade within limited ranges most of the time. This is especially so if we consider stablecoin pools, which rarely, if ever, trade outside of the 0.99 to 1.01 range, barring any black swan events.
Source: Vitalik Buterin
Uniswap V3 was launched to combat this, bringing the concept of concentrated liquidity to DeFi. Concentrated liquidity allows users to specify price ranges to provide liquidity for. For example, if a user expected ETH to trade between $1900 and $2100 in the near term, they can provide liquidity specifically for that range only. The catch is that if the ETH price moved out of the range provided, the liquidity provider earns no fees at all. This also made liquidity provision on Uniswap V3 a much more active strategy as users had to rebalance their positions and adjust their price ranges to stay in range constantly.
Introduced in their V2 update, Trader Joe’s Liquidity Book aims to improve on the foundation that Uniswap V3 laid for concentrated liquidity.
Uniswap V3 splits prices by “ticks” whereas Trader Joe’s Liquidity Book separates liquidity via what is known as “bins”. This creates a significant difference when aggregating liquidity, whereby Trader Joe aggregates liquidity vertically within bins whereas Uniswap aggregates horizontally. This enables zero price-impact trades as long as a single trade does not use up all the liquidity in a given price bin.
Source: Trader Joe Substack (link)
Moreover, the price bin system enables greater compossibility for liquidity on the platform. On Uniswap V3, LP positions are represented by NFTs and are hence non-fungible, making it a hassle to adjust positions or to build protocols utilizing Uniswap V3 LP positions. Using the price bin system, Liquidity Book positions are wrapped into much more fungible and flexible tokens, which are closer to the ERC-1155 standard. Due to this fungibility, Trader Joe also supports a range of custom strategies available for users. Furthermore, this enables customizable liquidity provision shapes for users, meaning that liquidity need not be uniformly provided across the specified range, allowing for more complex and unique strategies for advanced DeFi users.
Source: Trader Joe Support (link)
Additionally, such composability enables third-party protocols to build on what Trader Joe has already created, which could result in a healthy ecosystem built off the Liquidity Book model. This would be similar to what happened with GMX on Arbitrum, where protocols built around the GMX liquidity pool (GLP) and GMX tokens, leading to a symbiotic relationship for GMX and the protocols built on them.
Finally, Liquidity Book strives to reduce the impact of impermanent loss through the implementation of variable fees on pools. Trading fees on pools are adjusted based on the volatility of the pool, measured by the number of bins through which the price moves in a fixed interval. As such, the increased fees aim to counter some of the impermanent loss suffered by the user in liquidity provision. As volatility drops back to normal, fees are reduced over time to achieve equilibrium once again.
Trader Joe V2.1
Trader Joe sure has been hard at work, but they are nowhere close to done. In April 2023, Trader Joe deployed a slew of new features for the platform in their V2.1 upgrade, taking the Liquidity Book to the next level.
Auto-Pools
First on the list, auto-pools. Concentrated liquidity, while capital efficient, is still a difficult task for the average Joe, requiring active management and a great deal of knowledge on the mechanism behind it. Auto-pools work around that by managing the users position for them, essentially allowing them to passively provide liquidity and yet still benefit from the capital efficiency of the platform. This significantly democratizes concentrated liquidity strategies for the average user, hence, widening their user base and likely increasing liquidity in the Liquidity Book system.
Source: Trader Joe Twitter (link)
Permissionless pool deployment is also now available on all three chains, allowing literally anyone to deploy any asset on Trader Joe’s Liquidity Book, to be paired with any base asset. Permissionless pools make it easy for any new projects to quickly bootstrap a bespoke pool for their token on the Liquidity Book. Permissionless pools will likely result in a surge in new pools and increased volumes across the board for Trader Joe.
V2.1 also autocompounds fees for liquidity providers and saves users approximately 30% in gas fees.
That’s not all though. Trader Joe also intends to implement limit orders on Liquidity Book, effectively turning the platform into a native, on-chain, capital efficient DEX, enabling more flexibility for traders on Trader Joe.
What does this mean for JOE stakers though?
JOE Tokenomics
With the revised tokenomics from 2022, JOE stakers were granted the power to determine how they would like to be rewarded for staking JOE. Initially, they were split into veJOE, sJOE, rJOE, and xJOE, but over time, xJOE and rJOE were deprecated, leaving sJOE and veJOE. Of the two, veJOE will remain as an Avalanche-only option, whereas sJOE will be deployed on Arbitrum and BSC in the near future.
Staking as veJOE allows users to boost rewards on pools they had provided liquidity to, similar to how Curve Finance allowed CRV tokens to be locked as veCRV for boosted rewards. However, with JOE’s decreasing emissions schedule, the boost from veJOE has been less and less attractive over time, although the recent Liquidity Book incentives program have given a boost to the rewards.
Source: Trader Joe Staking (link)
Staking as sJOE, on the other hand, shares protocol fees from the platform with stakers. A percentage fee is taken from each trade on Trader Joe and is distributed to stakers in USDC. Initially, only fees from V1 LPs were distributed to sJOE stakers.
However, the V2.1 upgrade finally turned the fee switch on for the Liquidity Book, distributing a percentage of fees from Liquidity Book pools to sJOE stakers as well. Considering the capital efficiency of the Liquidity Book model and the fees it is generating, this new source of revenue is expected to be a huge boost for sJOE stakers.
Moreover, sJOE will be available across all three chains that Trader Joe is deployed on eventually, allowing stakers to decide where to stake, depending on where they expect the highest volumes to be.
Conclusion
Almost two years on from their initial launch on Avalanche, the Trader Joe team continues to build and push the limits of what is possible in DeFi. With the successful implementation of the Liquidity Book model and the recent V2.1 upgrades, the Trader Joe team is definitely one to watch going into Q2 2023.
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