Splash DEX AMO
Last updated
Last updated
The Splash DEX AMO is one of the core components of the OADA system. It's utility is threefold in that it maintains a strong peg, provides users with the mechanism to exit their OADA positions, and generates yield for sOADA holders.
The Splash DEX AMO maintains its peg within a one percent range (0.99-1.01) by buying OADA with ADA reserves, or minting OADA and selling it. As users buy or sell OADA into the pool, the price will fluctuate and the system will respond to any depegs accordingly.
If OADA is trading below the peg, the system can swap 1 ADA from reserves for slightly more than 1 OADA due to price discrepancy, thereafter burning the excess OADA. This transaction results in balancing of the peg higher and OADA exiting the system, increasing the ratio of assets to liabilities and thereby increasing yield for sOADA holders.
Conversely, when OADA trades above the peg, the system can mint new OADA to sell into the pool and balance the peg lower. This is possible as long as the amount of ADA coming in is greater than the amount of OADA minted. The difference between those two is the system profit. This can be thought of as a round-about way to mint OADA. Periodically, the system will also rebalance the pool ratio to maintain peg by adding and removing liquidity. The system adds liquidity by freely minting new OADA to pair with ADA reserves, resulting in a ~2x leveraged liquidity position at no cost to the system. Eventually the system will remove this liquidity, burn the excess OADA, and tally profits from the pool before deploying liquidity again.
Users exit their OADA position by swapping back to ADA on the Splash OADA/ADA Stableswap.
A simpler redemption mechanism would merely unwrap OADA back into the underlying ADA component while charging a flat fee for the service. While this approach might suffice, it requires manual governance updates and makes it difficult to find a consensus on a fee structure that is fair and equitable to positions of all sizes.
Accordingly, the DEX AMO can be conceptualized as a price discovery mechanism for the cost of exiting the system. The price impact of performing a swap represents the market value for exchanging the two assets and can be thought of as the fair price for exiting the system at any given size. This means that the "fee" to exit the system is minimal for small positions and greater for larger ones.
By leveraging the DEX AMO, the system benefits from a market-driven approach to managing exits, which is both efficient and fair. This mechanism ensures that small transactions remain low-cost while larger transactions bear higher costs, proportionate to their impact on the liquidity pool. This structure not only maintains the peg but also contributes to the profitability and stability of the OADA ecosystem.
