Maladex White Paper v1

1 Maladex Research-Driven Cardano DEX. White Paper v1. Jarek Hirniak 21 October 2021. Abstract Maladex 's goal is to revolutionize the Decentralized Finance (DeFi) ecosystem by application of research rigour and quantitative modelling expertise from Tradi- tional Finance (TradFi). In doing so, we are going to make the entire ecosystem more efficient and provide novel revenue generating streams. We propose a rev- olutionary execution model based on the concept of programmable swaps. The proposed approach completely eradicates impermanent loss, significantly increases capital efficiency, and is poised to render market making and price discovery much more efficient. Building on the foundation of programmable swaps and on-chain autonomous code, we're developing a platform which enables a multitude of alpha generating products. These products could include passive investments such as crypto indexes, through synthetics, and financial derivatives, to programmable trading strategies akin to those employed by top performing market makers and hedge funds in tra- ditional finance.

2 The platform not only connects investors with a wide range of investment prod- ucts, but does so while enabling risk control, dynamic hedging, and adaptability to market conditions. Maladex intends to provide high-frequency on-chain data streams, data warehouse and tooling for backtesting. Finally, we intend to engage in research and education to move DeFi forward. The Maladex platform is going to decentralize and democratize access to be- spoke trading tools and investments for the entire world. The platform will use a decentralized liquidity provisioning protocol which forms the foundation on which highly efficient blockchain based crypto markets can rest. It enables protocol participants to create a variety of financial products from index funds, options, synthetics, hedge funds all the way to insurance products. In this document, we introduce all the concepts outlined above and the intrica- cies of financial markets.

3 We invite you on the journey with us via this White Paper and the tools we are going to build. 2. 1 Disclaimer Cardano is a new, third generation blockchain, with a novel Extended Unspent Transac- tion Output (EUTxO) model and the Plutus smart contract programming language under active development. Maladex is a platform proposing a series of innovative and revolution- ary concepts. Therefore, matters described in this White Paper are subject to potential change in the future, carry unknown risks that might impact parts of the project, and create opportunities for new discoveries that could require rethinking some of the initial assumptions. We reserve the rights to adjust the plan. Any new endeavours are filled with discoveries and novel ideas, and we plan to capitalize on them and adjust to them. Below is the vision of the Maladex platform in the long term and does not represent a feature list planned for launch.

4 3. Contents 1 Disclaimer 3. 2 Introduction 9. Market participants .. 9. Liquidity .. 9. Efficient Market Hypothesis .. 10. Automated Market Makers & Decentralized Exchanges .. 12. Constant-Function Market Makers .. 12. Concentrated Liquidity .. 14. Capital Efficiency .. 15. Impermanent Loss .. 15. Risk Control .. 16. Cardano Blockchain & EUTxO Model .. 17. What's Next .. 17. 3 Maladex Protocol Mission & Objectives 18. Providing the Building Blocks of Sound and Efficient Ways of Investing to Everyone .. 18. Increase Market Efficiency .. 18. Build the Foundations for the Future Financial Markets .. 19. 4 Programmable Swaps 20. Architecture .. 21. Commit Phase .. 22. Execution Phase .. 23. Maladex Execution Pipeline .. 24. Scalability .. 25. Memory Requirements .. 26. EOL of Programmable Swaps .. 26. NFT Receipt .. 26. Theoretical Model Performance Characteristics.

5 27. Fragments Matching .. 27. Market Order Matched by Limit Order .. 28. Market Order Matched by AAMM -LP .. 30. Limit Order Matched by the Order Book .. 32. Programmable Swaps Domain-Specific Language .. 35. 4. User Interface .. 36. Fundamental Building Blocks .. 36. 5 Maladex Order Matching Engine 38. Architecture .. 38. Routing Rules and Fairness .. 38. Security .. 39. Scalability .. 39. Decentralization .. 39. 6 Algorithmic Automated Market Making (AAMM) 40. Impermanent Loss & Constant-Function Market Maker .. 40. Reducing Impact of Impermanent Loss .. 42. Programmable Source and Target Asset Ratios .. 43. Realistic Liquidity Supply Curve .. 44. Algorithmic Liquidity Pool .. 46. Offsetting Internal Risk with External Liquidity .. 47. Minting Sound Liquidity Pools .. 47. Fragmented Liquidity of AAMM .. 48. 7 Yield Curve 49.

6 Yield Farming .. 49. ADA Staking Rewards from Smart Contracts .. 49. 8 Emerging Properties of Programmable Swaps and AAMM 50. 9 Indexes 51. Index Balancing .. 51. Index Categories .. 52. Cryptocurrency Index .. 52. 10 Synthetics 53. Advantages of Using Synthetics .. 53. Synthetic Token Interface .. 54. 11 Financial Derivatives 55. Options .. 55. Advantages of option trading on the blockchain .. 56. Option Trading Strategies .. 57. 5. Bull Call Spread .. 57. Bear Put Spread .. 57. Long Straddle .. 58. Long Strangle .. 58. Other Option Strategies .. 59. 12 Arbitrage 60. 13 Oracles 61. 14 Risk Control 62. Why do people take risk? .. 62. Market Maker Risk Compensation .. 62. Dynamic Risk Compensation .. 62. Token Trust Scores & Whistleblowing .. 63. Quantification of Risk .. 63. Moment Indicators .. 64. 15 Maladex Protocol Settlement Layer 65.

7 Maladex as Scaling Layer for Cardano-native Projects .. 65. 16 High-Frequency Data Lake & Lab 66. 17 On-chain Hedge Fund 67. On-Chain Portfolio Managers .. 67. 18 DeFi Education Portal 68. 19 Tokenomics 69. MAL Token Distribution .. 69. MAL Token Vesting Schedule .. 70. MAL Token Utility .. 71. Maladex Treasury .. 71. Acronyms 72. Glossary 73. 6. List of Figures 1 Constant product Automated Market Maker (AMM) formula (Uniswap's model).. 13. 2 Constant mean AMM formula (Balancer's model).. 13. 3 Hybrid Constant-Function Market Maker (CFMM) of Curve's stableswap vs constant-product CFMM comparison.. 14. 4 Convergence onto geometric price distribution of concentrated liquidity model.. 14. 5 Percentage Divergence Impermanent Loss (Duplicate of Figure 17 for Eas- ier Reading).. 16. 6 Maladex programmable swap protocol execution stages.

8 22. 7 Active and inactive frontiers.. 24. 8 Maladex protocol (off-chain order matching engine) execution pipeline.. 25. 9 Fragmented (virtual) liquidity pool's initial state S0 .. 28. 10 Transaction executing M0 using LS,1 .. 29. 11 State of the fragmented liquidity pool after executing T0 .. 29. 12 Transaction executing M1 using A3 .. 31. 13 State of the fragmented liquidity pool after executing T1 .. 31. 14 Order book crossover.. 33. 15 Transaction matching 3 order book transactions: LB,1 , LB,2 , and LS,1 .. 34. 16 State of the fragmented liquidity pool after executing T2 .. 34. 17 Percentage Divergence of Impermanent Loss on Initial Investment of $1, at valuation of $ and 1 Token X at valuation of $1, .. 41. 18 Divergence of Impermanent Loss in USD on Initial Investment of $1, at valuation of $ and 1 Token X at valuation of $1.

9 41. 19 Liquidity Provision Asset Ratios Impact on Impermanent Loss .. 43. 20 Stochastic Price Model.. 45. 21 Stochastic Process Reversal to the Mean.. 45. 22 Bull call spread with strike prices K1 (low strike price) and K2 (high strike price).. 57. 23 Bear put spread with strike prices K1 (low strike price) and K2 (high strike price).. 58. 24 Long straddle with strike price K.. 58. 25 Long strangle with strike price K.. 59. 26 MAL token allocation.. 70. 27 Plutus Application Back-end schematic.. 79. 7. List of Tables 1 Exchange Amount of Transactions per Day, Week, and Month.. 65. 8. Maladex : Research-Driven Cardano DEX 9 of 88. 2 Introduction In this section, we lay the foundations for the rest of the Paper , introducing fundamental financial engineering concepts, with a focus on their application in DeFi. We firmly believe that DeFi is a young ecosystem that can benefit in a significant way from the application of a wealth of existing knowledge in Quantitative Finance (QuantFi) and the discovery of financial engineering concepts unique to the nature of DeFi and blockchain.

10 Let's start at the beginning agents who create the market. Market participants In the context of exchanges, market participants are classified into: (market) takers are agents who wish to exchange assets. They take liquidity away from the market by exchanging one asset for the other. They need the market to be liquid in order to guarantee that they can both exchange the assets (immediately). and at the same time that the asset price is not significantly affected by the mere fact of the exchange. (market) makers are agents who provide liquidity to the market. In TradFi, mar- ket makers profit from excellent market price predictions and providing liquidity at small profits ( , a cent on each share). When applied to as many market partici- pants as they do, it guarantees them a significant over day profit. In DeFi, this role is often deferred to the algorithm that models the liquidity curve, automatically updates the price, and distributes market maker rewards to the liquidity providers.