DODO — A Deep Dive

All You Need to Know About DODO — A DEX for Web3

Published in

LI.FI Blog

11 min readMar 17, 2022

DODO is a decentralized trading protocol for Web3, powered by the Proactive Market Maker (PMM) algorithm. It is considered one of the best DEXs for trading assets across multiple chains.

This article will analyze what DODO is doing differently and how these innovative ideas can revolutionize your relationship with DeFi. We’ll also discuss how you can unlock the power of DODO and many other DEXs and DEX Aggregators by integrating LI.FI into your dApps, either with our SDK or with our widget.

Let’s dive in!

The Proactive Market Maker — Why DODO Stands Out

Most blockchains have no native means to communicate with one another. This makes swapping tokens trustlessly, that is to say, without the involvement of intermediaries, very difficult. As a result, traders have to use third-party services to exchange assets across chains. Moreover, the problems with swapping assets do not stop at multi-chain complexities. Other issues, such as slow transactions speeds, can cause huge losses for traders even if all transactions are made on a single blockchain. Centralized exchanges find a way around these problems by handling all transactions off-chain with proprietary protocols. However, their process is highly trusted, and thus, while it gets the job done efficiently, it does not match with the ethos of DeFi.

To offer a crypto native solution to this problem, many development teams have been launching and cultivating robust decentralized exchanges, also known as DEXs. These DEXs use decentralized liquidity pools and cross-chain bridge protocols to offer peer-to-peer crypto-asset swaps to users. They earn their profits by charging minor fees, sometimes deducting these fees when users profit from positive slippage thanks to their algorithms, and sometimes charging their users for every transaction executed with the protocol. However, these DEXs also face several issues such as:

Lack of Liquidity — Liquidity providers are always at risk of losing value on the tokens they lock into a DEX’s protocol due to impermanent loss, which occurs in pools that cover volatile asset pairs as well as pools that don’t accurately adjust their asset prices to match the market.
Slippage — Slippage is the difference between the price traders expect to get on the swaps and the price they actually get when their order executes. Traders avoid using DEXs that incur high slippage costs.
Lack of Arbitrageeurs — Since pools must maintain balanced asset pairs, a DEX that lacks arbitrageurs buying tokens to rebalance the pools will have a harder time reducing slippage and impermanent loss.

DEXs use smart contracts called Automated Market Makers to manage these three concerns, but not all AMMs are optimized with the best possible solutions for securing liquidity, mitigating slippage, and attracting arbitrageurs.

DODO’s DEX can address all these issues as it is a meta aggregator, which aggregates liquidity sources across multiple DEXs and its own liquidity pools. DODO’s protocol is built on capital-efficient liquidity pools optimized to reduce impermanent loss and slippage. Their Proactive Market Maker algorithm iterates on the Automated Market Maker paradigm to more aggressively adjust their liquidity pools to the needs of market makers.

How Does DODO Work?

DODO is a decentralized exchange platform that takes many unique approaches to asset swapping and liquidity pool provisioning. DODO’s protocol has much value to offer to traders, market makers, and arbitrageurs alike, from its single-token-provision pools to its Proactive Market Maker algorithm. Its decentralized exchange product suite includes the SmartTrade swap aggregator, a unique liquidity-offering protocol called Crowdpooling, a custom pool management interface, the Proactive Market Maker, and various forms of mining. Let’s examine these features in more depth.

SmartTrade — With their SmartTrade engine, DODO offers decentralized liquidity aggregation with smart routing that compares liquidity sources to find the best swap rate for any crypto asset pair. Their routing algorithm promises swaps of any arbitrary Ethereum or BSC tokens. Rather than only aggregating external liquidity sources, DODO’s algorithm also crawls pools users have created with its platform.
Crowdpooling — DODO’s platform enables users to initiate token offerings backed by highly liquid capital pools. It ensures that there is no front-running or bot interference. Combining the terms “crowdfunding” and “liquidity pools,” DODO’s innovative Crowdpooling functionality empowers users to distribute tokens, provide an initial supply and set a soft cap. Once the campaign ends, participants claim tokens based on the stake they put in at the initial offering price. DODO also automatically generates public liquidity pools supported by the capital raised in the campaign, creating a liquid market for the user’s token.
Pool Management Tools — DODO provides two tools for creating and managing liquidity pools: DODO Vending Machine and DODO Private Pool. Their Vending Machine enables users to create liquidity pools with price movements that follow a smooth curve, protecting investors from losing value and maintaining optimal capital efficiency. Their Private Pool is a more advanced approach to the same concept, allowing users to manually reconfigure their pool’s price curve at any time and enabling one-sided deposits and withdrawals from the pool. Both tools are permissionless, and the pools and tokens within are non-custodial, giving users full freedom to control their assets.
Combiner Harvest Mining — To incentivize projects to integrate with the DODO ecosystem and encourage liquidity providers to work with these new projects, DODO provides its Combiner Harvest mining program. Projects approved by DODO create liquidity pools, and liquidity providers who back these pools are given DODO rewards and proof of membership tokens.
Proactive Market Maker — DODO’s Proactive Market Maker algorithm is their proprietary iteration on the Automated Market Maker model. As the foundation for other features, such as their DODO Vending Machine, Private Pools, and Crowdpooling technologies, it is geared toward allowing liquidity pool creators to establish single-asset-provision pools, customize the prices of assets within their pools on the fly, and automate their price adjustments with data fetched from trusted oracles. The Proactive Market Maker algorithm is at the heart of DODO’s most innovative functionality.

How Does DODO’s Algorithm Work?

DODO’s unique liquidity management features are built on the Proactive Market Maker. Therefore, to better enhance your understanding of DODO’s inner workings, let’s look at how the PMM functions.

Market making is a sophisticated process, and whether it’s done successfully is dictated by many complex factors that can be hard to quantify precisely. Markets react to new information all the time, and when the amount of information is large, just processing that information can be a challenge, even for the most sophisticated software.

An existing solution is the Bonding Curve AMM algorithm, which adjusts token prices based on a value estimate that is automatically calculated as the supply ratio between two tokens in a liquidity pool’s pair changes. The downside is that price changes and market activities occurring outside of the pool can still affect the pool, and the Bonding Curve AMM doesn’t necessarily take these into account. As the price of an asset fluctuates outside of a pool, the impermanent loss can become a problem for liquidity providers if the asset’s price does not adjust fast enough within the pool.

Rather than passively waiting for market shifts and responding to them, DODO wanted a protocol for proactively seeking out data and adjusting liquidity pool parameters in time with market movements. Their approach was to prioritize different kinds of market information over other kinds to simplify the scope of the problem. For them, it was important to narrow down the “most important metric” for any market, and they decided that the most important metric was liquidity. Because any market’s liquidity can be measured with depth charts similar to the one shown below, they concluded that the number of base tokens sold had a linear relationship to the price of sell orders. As more base tokens are traded, the base token price rises linearly.

Although this linear model makes for clean mathematical calculations, it has two flaws:

Most market makers provide liquidity for assets at their lowest price to maximize their potential gains. This uneven distribution of liquidity is not cleanly represented by a linear model.
The linear model has certain thresholds that yielded unrealistic liquidity estimations once base token prices passed those thresholds.

The math they used to create a formula with a more curved graph is complicated, but as a result of their calculations, they had a new mathematical algorithm that could match the accuracy and price-setting abilities of the more popular bonding curve AMM algorithm, but with greater customizability.

DODO’s Proactive Market Maker uses this customizability in several ways, most notably by fetching market price data from decentralized oracle services and adjusting the mid prices of their asset pairs based on this information. This method of coordinating a pool’s token price with external information enables them to create single-asset provisioning for liquidity providers, removing the requirement for market makers to deposit an equal amount of both assets in the pool’s pair to maintain balance.

The high customizability also allows them to offer individual market makers total control over any liquidity pools they want to create. These users can withdraw or deposit as much as they want without affecting the price of the pool and can also adjust the price arbitrarily as they please. This gives the pool owners full power to protect investors from impermanent loss and traders from slippage.

What are the Best Use-Cases for DODO?

Those who stand to gain the most from using DODO’s protocol are as follows:

Investors — Because DODO’s target audience is market makers, investors on all sides of the asset-swapping equation will find using DODO highly beneficial.
Liquidity Providers — LPs are incentivized to contribute to DODO’s pools thanks to its generous rewards.
Market Makers — Market makers seeking to launch a new asset will find DODO’s tools invaluable, especially with all the control it gives them.
Swappers — Swappers will love the guaranteed liquidity and oracle-based price adjustments that minimize slippage and keep markets highly liquid.
Developers — Devs who want to enable cross-chain swaps via DODO can also pass these benefits on to their users, and there’s no easier way to enable DODO DEX in any dApp than with LI.FI SDK.

With the benefits of DODO understood, the most important questions to answer next pertain to the risk of using it. What should market-makers, investors, and developers alike keep in mind when participating in DODO’s protocol?

What are the Risks of Using DODO?

DODO’s exchange protocol is fully permissionless and highly decentralized, so the risk of asset loss while swapping is no greater than on any other decentralized exchange. Their liquidity pools are designed so the creators can manually control risks related to impermanent loss and slippage. This protective functionality also introduces an element of high centralization to the market-making process by leaving price controls entirely up to the creators. If your goal is to use DODO DEX to take advantage of the many liquidity pools built on their protocol, be aware that the creators of those pools in many cases can withdraw value arbitrarily at any time.

How Well is DODO Performing?

DODO has grown tremendously since its launch, garnering a TVL of $358 million at the time of publication. More than 60% of that value is in ETH, which is predictable given DODO started as an Ethereum DEX, but there is also strong growth in their BSC and Polygon deployments, each holding $59 million and $44 million in Total Value Locked (TVL) respectively.

DODO’s all-time TVL chart. Source: DeFi Llama

Who is Working With DODO?

Most of DODO’s partnerships are with organizations building DeFi infrastructure and compatibility. As a powerful Ethereum DEX, DODO deploys smoothly on EVM-compatible networks and brings its unique liquidity pools along with it. Given its innovative algorithms and features for liquidity pool management, platforms bullish on DeFi have shown tremendous interest in partnering with the protocol. In late December 2021, NEAR announced the deployment of DODO on their PoS blockchain via the EVM-compatible Aurora Layer 2 Network. Earlier that same year, deals with Arbitrum, O3Labs, and Boba Network were also announced, among other major deals.

Supported Assets, Networks, and Wallets on DODO

As a significant DEX in the Ethereum ecosystem, EVM-compatible chains have been eager to have DODO deployments on their chains. As a result, DODO’s list of supported networks is long, and their list of supported assets is longer. Almost any token available on the networks listed below can be traded on DODO’s DEX. Alongside multiple popular wallets such as Metamask, DODO is integrated with many mobile wallets, as noted on their list of supported wallets.

Learn More About DODO

The team at DODO Labs is led by experienced veterans in the DeFi world, such as co-founder and CMO Diane Dai, who started her journey into crypto in 2017, helping to build one of the earliest DEXs. Along with CEO Mingda Lei, an expert Solidity developer, and COO Qi Wang, who has technical experience from years working in silicon valley, Diane is pushing the message and vision of DODO and its PMM algorithm into the wider crypto world.

To learn more about DODO, check out:

Community

DODO has a huge following, especially on social media such as Twitter. You can join their community via the following links:

Closing Thoughts

DODO is one of the best DEXs in the ecosystem, and we’re glad to partner with them. Partnering with DODO to bring the power of their algorithms to our userbase was a no-brainer for us, and we think that, once you use LI.FI to initiate swaps powered by DODO, you’ll agree with us.

Developers looking to take advantage of DODO’s growing reach without developing a custom integration with the protocol will find immense value in integrating the LI.FI SDK. As the leading cross-chain liquidity aggregator protocol, we use our powerful API to enable any-2-any swaps of EVM-compatible assets across high-speed, highly secure bridges and through popular DEXs like DODO.

We are a cross-chain bridge aggregation protocol, serving as a 1inch or Paraswap for bridges. Through our API, LI.FI connects the fastest and most secure bridges to the most powerful DEXs to facilitate any-2-any swaps across chains, and dApp developers can easily integrate this functionality via our SDK. In addition to DODO, we have integrated 1inch, Paraswap, and OpenOcean, and our list of DEXs and DEX aggregators continues to grow. To learn more about LI.FI, read on to the bottom of the article, where we link to more information.

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