Upstart market maker Swaap goes live with new version on Ethereum, Polygon

Swaap protocol has launched the v2 of its non-custodial market making infrastructure on Ethereum mainnet and Polygon.

As of May this year, the protocol had just over $2 million total value locked in its contracts, with majority of the tokens denominated in wETH, wBTC and USDC. Swaap’s second version officially went live on July 10 and drew over $1 million in pool liquidity within the first day.

Balancer, the dominant protocol in the automated market maker (AMM) space, boasts $1.1 billion in total liquidity.

Swaap itself is a fork of Balancer v2, but with a twist. Swaap’s quotation model — which checks the recent sale price of any traded assets — is run off-chain, and there is an additional settlement module that has been added to run authenticity and performance checks on quotes.

For users, this means that it is cheaper to use Swaap than other market makers, as its AMM strategies are not dependent on on-chain networks such as Ethereum, Cyrille Pastour, co-CEO and cofounder of Swaap Labs told Blockworks. 

That’s a potentially notable development given the long-standing issue of transaction costs on networks like Ethereum, particularly during periods of heavy activity. 

Pastour said that running off-chain quotes improves the performance of market making strategies. 

“Oracle data are updated several times per second compared to once every 27s at best on-chain,” Pastour said. 

This means that it will be possible to run more complex computations and adapt to market conditions in real time.

Of course, there are always risks involved with off-chain management. Pastour acknowledged three in particular: corruption of price data sources, so-called “fat-finger” errors in models, and malicious actors who could seize control of the quotation module. 

To mitigate these risks, Pastour said Swaap has a rigorous internal control system and follows strict cybersecurity practices. It also utilizes on-chain safeguards that help mitigate risks and limit LP exposure to unforeseen events.

“Swaap v2 employs several pioneering on-chain safeguards, including max imbalance, last look, and max drawdown mechanisms. These protections shield LP funds during extreme market conditions and potential malicious attacks,” he said.

Max imbalance relies on a mechanism that reverts trades which imbalance a pool, and LPs can easily check their imbalance risk exposure. Last look is a tool that is used to reject trades that have quotes which deviate too far from on-chain prices. 

“Max drawdown is our most innovative mechanism,” Pastour said. “It’s a pool-level stop loss. If a trade causes a loss for LPs of more than x% of the pool value in a given time duration, the transaction will be reverted. The x% is an immutable parameter, deployed in the smart contract of the pool. It has been fixed at 4% every 24 hours for the first pools deployed on Swaap.”

Max drawdown is also used as a defense layer from exploitation of the trading function, Pastour explained. Setting a percentage limit on the total amount of funds an attacker can drain. 

“These pioneering mechanisms enable v2 to ensure pool security even amid highly volatile market conditions. It provides robust defense against malicious attacks and extreme scenarios,”  Pastour said.

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