Cardano AMM DEX protocol. Powering Cardano DeFi with Transparency

7 min readJul 24, 2023

We are proud to introduce the Spectrum Finance Cardano Automated Market Maker (AMM) protocol, a beacon of transparency, openness, and decentralization in the world of Cardano DeFi. This protocol isn’t just a new tool; it’s a paradigm shift, offering numerous intrinsic benefits to the Cardano DeFi ecosystem.

Spectrum Finance stays true to Cardano’s ethos of open and auditable code, ensuring a highly transparent and trustworthy platform. Its promise of decentralized off-chain execution boosts resilience, presenting a robust and reliable solution for the community. Coupled with a design focused on efficiency, this protocol reduces transaction fees, paving the way for cost-effective Cardano DeFi operations.

Join us as we enter a new era of DeFi on Cardano, powered by Spectrum Finance — an embodiment of our commitment to a more democratic, efficient, and transparent financial future.

Protocol

Spectrum Finance’s Cardano AMM protocol, also known as a decentralized exchange (DEX), is a sturdy and straightforward AMM protocol. Rooted in the Uniswap V2 white paper, it employs the constant product formula as its cornerstone. For those unfamiliar with DeFi, we recommend this video to grasp the workings of AMM protocols and their purpose in the DeFi landscape:

The Spectrum Finance AMM smart contract on Cardano is a port from our initial Ergo AMM contract (ErgoDEX), the pioneering AMM DEX protocol on the eUTxO blockchain, Ergo. The Ergo contracts have already proven their safety and resilience, having been operational in production for more than two years.

The Cardano AMM protocol includes default functionalities such as:

Swap: Allows the exchange of an asset X for an asset Y, whether it be a network asset to token or token to token swap.
Deposit: Enables liquidity provision to a liquidity pool.
Redeem: Facilitates liquidity withdrawal from a liquidity pool.

The operational logic of the Cardano AMM protocol is quite straightforward. However, some nuances differentiate it from EVM-based AMM protocols. Let’s delve deeper into these differences in the following sections.

Off-chain Execution (Batching)

The operational framework of most DEX actions is partitioned into two distinct stages: 1) order creation and 2) order execution.

Once an order is submitted to the network, off-chain bots come into play for execution. An off-chain bot, a software entity, is responsible for tracking orders and converting them into transactions. It performs all necessary state transitions that follow an order submission.

It’s worth noting that all transitions made by the bot are subject to on-chain validation by scripts, ensuring legitimacy in all operations. These off-chain bots can be operated by anyone willing to support Spectrum Finance Cardano AMM and earn execution fees in return. This system ensures a balanced workflow that combines on-chain security with off-chain agility.

In the subsequent scheme, we present a detailed visual representation of how Spectrum Finance’s off-chain execution bots function within the Cardano AMM protocol:

For those interested in running an off-chain execution bot and becoming an integral part of Spectrum Finance’s Cardano AMM, you can do so by following the guidelines provided in this GitHub repository. Your active participation brings us one step closer to realizing our vision of a truly decentralized and open Cardano DeFi ecosystem.

Fees Structure

A key benefit of the Spectrum Finance Cardano AMM protocol lies in its low fees. But before we delve into the specifics, it’s essential to understand the typical fee components in DEX protocols within the Cardano ecosystem.

The most evident fee is the network fee, payable to validators in ADA. As this fee is dictated by the network itself, we, as dApp developers, have almost no control over it.

Users also encounter a ‘refundable ADA deposit,’ which may initially appear as a fee. This ADA amount is held temporarily to build a transaction and is returned once a user’s order is executed or canceled. This is how Cardano contracts work.

Thirdly, there’s an execution fee, levied by operators of off-chain execution bots (batchers). This fee is crucial for incentivizing individuals to run these bots for order execution.

The next type of fee is the ‘LP fee’ or ‘liquidity provider fee’. This is a fee that incentivizes liquidity providers to add liquidity to the protocol. This fee is set during the liquidity pool creation and can be even 100%. But usually, it is set to 0.3% in AMM protocols.

The ‘protocol fee’ or ‘fee switch’ is another typical charge, generally directed towards a DAO treasury for community allocation. It’s often embedded in each liquidity pool, with a part distributed to the liquidity provider and a smaller fraction to the DAO treasury. The exact percentages can vary across protocols. However, in Spectrum Finance Cardano AMM, this fee is completely absent, with no provision for future addition or alteration.

Lastly, some platforms may include additional fees, such as user interface fees. Spectrum Finance user interface fee is set to 0.

With a solid understanding of a typical Cardano DEX fee structure, let’s draw a comparison across different structures. To simplify the process, we’ll base our assumptions on swapping 1,000 ADA for a hypothetical TOKEN_X. The table below provides a detailed comparison of fee structures across leading Cardano DEXes:

From the comparison, a few key takeaways emerge:

Spectrum Finance maintains the standard level of rewards for liquidity providers, ensuring fair benefits for participants.
Users require significantly less ADA for the refundable deposit when interacting with Spectrum Finance, enhancing cost efficiency.
Across the board, the fees per swap on Spectrum Finance are lower than other Cardano AMM DEXes. This results in total fees that are 10–20% lower, marking a clear win for users looking for cost-effective options in the Cardano DeFi space.

This comparison underscores Spectrum Finance’s commitment to offering a more affordable and efficient trading experience in the Cardano ecosystem.

Accessibility for Developers

We extend a special focus on our developer community in this section. To guarantee the seamless accessibility and integration of our protocol across diverse applications and frontends, we have developed a TypeScript SDK. This tool equips developers with all essential methods required to execute fundamental AMM operations programmatically.

We encourage you to actively participate in refining this development tool. Please feel free to flag issues in the repository or contribute to its ongoing development and documentation. Your involvement is not just appreciated, it’s essential for fostering the open-source spirit that drives the continuous evolution of Cardano and Spectrum Finance.

Repository

NPM package

Liquidity Bootstrapping

Spectrum Finance stands as a truly open protocol that invites everyone to participate, whether it’s about creating liquidity pools, adding liquidity to existing pools, swapping Cardano native assets, or even launching off-chain execution bots (batchers).

However, it’s not possible to stably function for an AMM protocol without deep liquidity. To attract liquidity providers to the protocol, the Liquidity Bootstrapping Stake Pool (LBSP) incentivization program was established. The program operates as follows:

Liquidity providers deposit ADA and TOKEN_X into a liquidity pool as usual.
All deposited ADA from the liquidity pool is delegated to a Liquidity Bootstrapping Stake Pool.
Liquidity providers receive Spectrum Finance utility tokens (SPF) as rewards.

For more information on the LBSP incentivization program, you can refer to this link.

Airdrops

Testnet airdrop

We thank all the participants who joined our Cardano AMM protocol launch in the preview testnet and investigated the interface and the protocol for bugs and issues. Each participant will be rewarded with 500 SPF for their support. Those addresses that performed at least one Swap, Deposit, and Redeem operation will be considered. The airdrop will occur in epoch 436, alongside the initial distribution of LBSP rewards.

Early users airdrop

To generate enthusiasm and foster a sense of competition, extra rewards have been implemented. The initial 1000 addresses that engage with the protocol will receive a to-be-specified quantity of SPF tokens, details of which will be disclosed at a later time. The sole requirement is to be an OG Cardano user, meaning your active wallet must have been established a minimum of one year ago. This safeguard is also enforced to discourage an influx of bots from claiming all the rewards.

Conclusion

As we unveil Spectrum Finance’s Cardano AMM, we find ourselves on the cusp of a new era in DeFi. Our protocol, which embodies the ethos of openness, transparency, and inclusivity synonymous with Cardano, introduces a robust and cost-effective solution to the DeFi landscape.

While Spectrum Finance Cardano AMM doesn’t provide any “revolutionary” functionality, it introduces unparalleled benefits including an accessible and auditable codebase, decentralized and accessible for everyone order execution, reduced fees per operation, and more. These advantages, coupled with our unwavering commitment to the community and to decentralized principles, propel us closer to a democratized and inclusive financial future.

However, this launch signifies only the beginning of our journey. We are continuously innovating, refining, and expanding our reach. The next step in our roadmap is to connect Cardano with other ecosystems such as Ethereum (and other EVM-based chains), TON, Mina, Ergo, and more, fostering an unprecedented era of cross-chain DeFi. We aim to achieve this pure programmable interoperability with the disruptive cross-chain messaging protocol — Spectrum Network. Its White Paper is already accessible for reading.

As we venture forth, we invite you to join us on this exciting journey. Whether you are a developer, a liquidity provider, or a passionate DeFi enthusiast, there is a place for you in the Spectrum Finance community. Together, we will shape the future of DeFi, fostering a more interconnected and vibrant DeFi space, one block at a time.