XFai Deep Dive —XFIT Burning

Introduction

“Burning” in the cryptocurrency space is the permanent elimination of existing tokens from circulation. That is, the burned tokens are removed from circulation, making the overall circulating amount of tokens smaller in the system. Burning tokens usually does not have a functional purpose, besides making the token or coin in question gradually rise in value over time, due to the decreasing circulating supply.

XFai’s burning mechanism, however, besides increasing the token price, fundamentally has a functional purpose.

XFit Burning — how does it work?

The development team is currently working on the burning mechanism of the XFAI DEX.

Burning on DEXFai works very differently from conventional burning strategies. It is an inherent mechanism for how the DEX manages to reduce slippage for all swaps and trades happening on the DEX.

Architecturally speaking, XFIT serves as the bridge token that enables the swap of any asset on the DEX with any other asset. Each asset on DEXFai has its native pool, as well as a token pair to XFIT. This design is however not unique, Uniswap V1 followed a similar approach, where ether was used as a “bridge token” between the pools. Uniswap then ditched this design in their V2, because of double slippage problems.

Uniswap V1

To better understand what exactly our burning mechanism is solving, let’s first look at the shortcomings of the V1 design:

As shown in the previous post, slippage happens when there is a difference between the spot price of an asset and the actual price offered by an AMM. This leads to either significant losses or gains due to market volatility.

Slippage highly depends on the amount of liquidity within a pool, as well as the swap size. In the case of Uniswap V1’s design, there were two instances in which slippage would occur. Once when swapping e.g. DAI with ETH (the bridge token), and then again when swapping ETH to USDC.

Uniswap V2 — but still cannot solve it entirely

That’s why Uniswap V2 ditched this design with a more elegant solution in which every token can have a token pair with every other token. In V2, instead of having to swap DAI with ETH, and then ETH with USDC, one can swap DAI with USDC directly.

Slippage occurs therefore only once in V2’s design. Uniswap’s V2 solution however comes with its drawback: liquidity fragmentation.

Instead of having a single DAI pool, we end up with a design where there are as many DAI pools as there are token pairs with DAI. Less overall liquidity means higher slippage.

XFai Burning / Reducing Slippage

Now that we understand some of the shortcomings of Uniswap’s V1 and V2 design, let’s see how XFai’s DEX solves the described problems through 🔥 Burning 🔥.

We’ve decided to go with a Uniswap V1 design in which XFIT facilitates any asset swap. This way pools can get deeper, and new projects have it easier to bootstrap their token, as they need liquidity only with one token — XFIT.

To solve the original problem of double slippage, we have come up with a novel burning mechanism:

  1. Every token pair with XFIT uses a constant product function, a common function used within DEXs.

* Note: Constant product functions cause slippage, but their advantage is that pools remain protected from being drained out by arbitrageurs.

2. Whenever a trade is performed, a given amount of XFIT tokens flows out of the given pool, according to the constant product functions.

3. The computed XFIT amount will suffer from slippage, however.

4. To prevent this, a slippage optimizing contract gets called, which contains an XFIT pool.

5. When called, the slippage optimizing contract adds a given amount X to the already outflowing XFIT amount of a pool.

6. The amount X is equal to the difference between the constant product function and the result that a constant sum function would provide.

7. That way, the outgoing XFIT of a pool has zero slippage while remaining protected against liquidity loss.

Some of the readers might already wonder “but what if the slippage optimizing contract has no XFIT left anymore?”, and “but there’s no burning happening so far?”. This is where the clever part comes in!

Once the swap with the slippage optimized XFIT amount is performed, we remove the same amount X across all DEX pools and add that amount to the slippage optimizing contract.

This has three amazing effects on the system:

  1. We’re always able to minimize slippage for the bridge swap.

Conclusion and effect on the token price

XFIT, therefore, is not burned from the system, but for all practical matters, it is removed from the DEX system. As far as we are aware, XFai’s DEX is the first DeFi contract in which burning plays a crucial role within the contract design. It solves Uniswap’s V1 problem of double slippage.

Furthermore, it enables deep liquidity pools, unlike Uniswap’s V2 design, where liquidity fragmentation is the norm. Deeper pools also mean larger flash loans. Besides becoming the default DEX for farming and small-cap tokens, we also expect XFai’s DEX to become the default flash loaning platform in the DeFi space.

All these advantages are only possible because of a simple, yet effective burning mechanism 🔥

About XFai

XFai develops tooling for the DeFi space, graphing it to build game-changing products. The XFai DEX is set to invite mid and small-cap tokens to start earning APY on their token holdings, while the XFai LGE is set to become industry-first in providing a more efficient, transparent, and fairway for everyone to get involved at an early stage. The LGE for XFai’s native token, XFIT, was launched on 16th April 2021. We invite everyone to join the DeFi revolution, spearheaded by XFai.

Reach XFai

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XFai develops tooling for the DeFi space – we graph the DeFi space to build game-changing products. Starting with the DLO: the DEX Liquidity Oracle