Although the DeFi market is growing rapidly, it is still considered to be in its infancy and developers in this space face some challenges. First, DeFi transactions tend to be slow and expensive: Ethereum’s blockchain, for example, is saturated, and if you deposit ETH into a liquidity pool, you’ll fall back above $100 again.
Second, liquidity pools are spread across different competing protocols. Finally, the trading experience without an order book is limited: you cannot place limit orders, but you are required to provide liquidity on both sides of the trading pair. Raydium was designed to provide an excellent solution to overcome these limitations.
In this article, we will be discussing what Raydium is and how it works.
What is Raydium?
Raydium is a decentralised AMM (Automated Market Maker) on the Solana blockchain. It operates its exchange system by drawing directly from the order book of Serum, the largest DEX (decentralised exchange) in Solana.
The main benefits of a Solana-based AMM are speed and affordability. In addition, Raydium interacts directly with the Solana ecosystem and Serum for increased liquidity.
The buzz surrounding DeFi shows a growing interest in DEXs with AMM models. DEXs like Maker, Compound, Uniswap, Aave, and SushiSwap are attracting more and more investors. Despite only launching in February 2021, Raydium has already been a huge hit and with good reason.
Automated Market Maker (AMM)
In the financial markets, liquidity is not only provided by dealers. Market makers are also responsible for making up for the lack of organic liquidity. They contribute to smoother transactions by dynamically providing liquidity.
An Automated Market Maker (AMM) is a protocol that ensures liquidity in digital markets, especially cryptocurrency exchanges. AMM is a decentralised exchange that automatically sets buy and sell prices for assets. AMMs are commonly used in prediction markets like Augur and Gnosis, as well as decentralised finance protocols like Uniswap. Depending on the type of market, different algorithms are used. In decentralised finance (DeFi), AMMs ensure liquidity through liquidity pools. In contrast to traditional trading, there is no order book. Instead, assets are traded via liquidity pools, the total amount of liquidity provided by protocol users.
Three agents are involved in these protocols:
Traders who want to trade assets with each other
Liquidity providers who make assets available to traders for fees
The arbitrageur is responsible for keeping the asset’s price on the AMM in line with the external market while making profits.
The maximum supply of RAY tokens is 555 million minted at launch. Most of these tokens are used for liquidity mining programs and ecosystem growth initiatives. The total allocation of the token is as follows:
Mining Reserve – 34% or 188,700,000 RAY
Partnership and Ecosystem – 30% or 166,500,000 RAY
Team (1-3 year suspension) – 20% or 111,000,000 RAY
Liquidity at the launch of AMM – 8% or RAY 44,400,000
Community Pool (locked up for 1 year) – 6% or RAY 33,300,000
Advisor (1-3 year vesting period) – 2% or RAY 11,100,000
RAY Liquidity Mining’s emissions will last for approximately 36 months, with emissions halving every six months. Once Raydium enables staking for RAY, holders are eligible for a 0.03% transaction fee.
How Does Raydium Work?
Traditional securities exchanges such as the Stock Exchange maintain a centralised record of all buy and sell orders called the order book. On one side of the order book are buy orders, which are the quantity of an asset that market participants wish to buy at a specific price. The other side of the order book contains sell orders, which are the quantity of an asset at a specific price that market participants wish to sell.
The order book serves as a central means of matching market makers (sellers) with market takers (buyers), thereby facilitating trading activity and ensuring liquidity in that particular market. The decentralised exchange Serum powered by Raydium uses smart contracts to implement this buy and sell order matching process.
- Liquidity Pools (LPs): The advent of blockchain technology, and more recently DeFi, has popularised a new and unique method of trading using Automated Market Makers (AMMs) and their liquidity pools.
Through AMMs like Raydium, users can buy and sell assets based on pools of assets provided by liquidity providers. The assets held in the liquidity pool serve as the counterpart of the transaction to execute buy and sell orders.
One of the first and most popular platforms to use the AMM model is Uniswap on the Ethereum network. Raydium said they decided to build their solution on the Solana blockchain to address the high gas fees, slow execution times, lack of limit orders and lack of overlapping liquidity of existing AMM platforms on Ethereum.
In addition to the core exchange product, Raydium also offers “Dual Reward Farming”, which allows liquidity providers to generate additional revenue from the LP tokens they earn as a reward for providing assets to the liquidity pools that power the exchange. Raydium also allows its users to redeem their RAY tokens for additional rewards collected from platform transaction fees.
- Raydium and Serum Integration: Raydium integrates its AMM mechanism with Serum’s order book functionality to address the strengths and weaknesses of order books and AMM-based exchanges. The ability to leverage the liquidity of Raydium’s AMM or Serum order books should offer traders a more efficient and cost-effective decentralised exchange trading experience.
When users contribute to one of Raydium’s liquidity pools, AMMs convert their tokens into limit orders in the serum order book that anyone can trade. When a user trades, Raydium compares prices between Serum’s order book and Raydium’s AMM to execute the most cost-effective trade for the user.
- AcceleRaytor: Besides the exchange and earnings platform, Raydium has also created a fundraising platform called AcceleRaytor. This can serve as a launchpad to help new projects raise funds and build within the Solana ecosystem.
What is a Raydium Token (RAY)
Raydium Token (RAY) is an SPL token running on the Solana blockchain. It collects part of the transaction fees charged by the exchange from the holders. Each transaction or swap fee on Raydium is 0.25%, of which 0.22% goes to LPs (Liquidity Providers), and 0.03% rewards users for staking their RAY tokens on the protocol. RAY tokens have the following use cases:
- Staking: RAY holders can stake RAY tokens to generate additional income.
- Limited Governance: Allow RAY holders to participate and vote on community proposals and changes.