Astroport

Astroport is the central space station of the Terra solar system, where travelers from all over the galaxy (Mirrans, Terrans, Anchorians, and more) meet to trustlessly exchange assets. As a galactic public good, Astroport will be governed by the Astral Assembly, a council of cryptonauts representing all corners of the universe.

The design philosophy behind Astroport is simple: to enable decentralised, non-custodial liquidity and price discovery for any asset. To achieve this, Astroport prioritises flexibility above all else; combining various specialised pool types and routing seamlessly across them.

Astroport has been developed through a joint venture of builders made up of Delphi Labs, We3 , Attic Lab and Terraform Labs (the “Astroport Joint Venture”). The Astroport Joint Venture will deploy the initial Astroport smart contracts, Astroport web application and ASTRO tokens described in this Litepaper. See below under “Token Economics (ASTRO)” — “ASTRO Supply and Distribution” for some important additional context regarding the Astroport Joint Venture.

IMPORTANT: This paper is subject to, and should be interpreted in light of, important disclaimers which appear at the end of this paper. Please carefully review those disclaimers, use the technology at your own risk, and do not rely on this paper for making any decisions.

NOTE: If you are not already familiar with how AMMs work, you should read the Appendix, “A Primer on AMMs”, which will help you understand the terminology and concepts used in the remainder of this Litepaper.

The most important primitive of any DeFi ecosystem is asset exchange functionality. Automated Market Makers (AMMs) have emerged as the winning architecture to achieve this in a decentralised, non-custodial way. The liquidity and composability an AMM provides is a core building block for a wide range of other DeFi applications from money markets to yield farming. It’s crucial therefore for any DeFi ecosystem to have an excellent AMM at its core in order to thrive.

Compared to the order book architecture prevalent in traditional finance, AMMs trade off flexibility for scalability, decentralisation and composability. While a maker in an order book system has unlimited flexibility in expressing his views on a given asset pair, a liquidity provider (LP) in an AMM is constrained to the algorithm provided by the pool. Different asset combinations and market types have unique properties which LPs are therefore unable to cater to with a one-size-fits-all AMM design.

The Terra DeFi ecosystem is in its infancy but already has a wide variety of assets: cluster tokens, synths, governance tokens, native stablecoins and of course LUNA itself. With the emergence of asset bridges such as IBC, Axelar and Wormhole the diversity will increase as assets from the broader Cosmos, Ethereum and Solana ecosystems become available to Terra dApps.

To cater for this on Ethereum, different pool types have been developed, each with unique trade-offs that lend themselves to certain market types. However this causes fragmentation, decreasing capital efficiency and necessitating higher-level AMM aggregators.

Astroport empowers users to choose different pool types within a single AMM system. We believe this will enable Astroport to become the liquidity hub for the Terra DeFi ecosystem, with the built-in flexibility necessary to support all the asset types of Terra. It has permissionless asset listing, is community-governed and will launch with a non-exclusive, customized web interface we believe will provide best-in-class UI.

Pool Types

Each pool within an AMM system may use a different algorithm for determining token prices based on the ratio of the two tokens in the pool — thus, we refer to these different algorithms as determining different ‘pool types’. As DEXes have matured, many new AMM algorithms have emerged, each with its own set of tradeoffs. Different ‘token markets’ have different properties and characteristics; therefore, different pool types can be more or less appropriate for a particular token market. Choosing the appropriate pool type for a given token market can increase efficiency for both traders and LPs. Some factors that may affect pool type choice for a target token market include:

Pair correlation: How the fair market prices of the two target tokens tend to move relative to one another

Pair volatility: The magnitude and frequency of fair market price fluctuations in the two target tokens

Market locality: Whether there are similar token markets to the target token market, and their sizes relative to the target token market

Market maturity: How well-understood are the values of the two target tokens

Lifecycle stage: Whether the target tokens are are pre- or post-liquidity

Astroport allows for the following pool types, which enable Astroport to accommodate a wide variety of token markets:

Constant Product pools

Stableswap Invariant pools

Liquidity Bootstrapping (LBP) pools

In addition, Astroport has a flexible architecture that allows builders to create new pool types that fit seamlessly within Astroport, with minimal changes to core protocol code.

Constant Product Pools

Constant product pools were pioneered by Bancor[2] and Uniswap[3], and have become popular among decentralised exchanges due to their simplicity and versatility. They are straightforward to create, easy to incentivise, and require minimal active management. Despite their simplicity, constant product pools have proven they can achieve pricing that is competitive with centralised exchanges.

Constant product pools do have disadvantages. LPs are exposed to price risk in the form of impermanent loss[4]; thus, LPs must either receive sufficient fees or other incentives for liquidity-providing activities to be profitable. Additionally, most of the liquidity in constant product pools is not used to facilitate trades under normal conditions[5]. This capital inefficiency leads to relatively high slippage (i.e., difference between expected price and executed price) compared with other pool types.

Still, these pools are a good choice for pairs with high volatility (e.g. mBTC-UST), as they facilitate trading at all possible prices, even during large, sudden market moves. They are also well suited for primary markets, where traders are more likely to speculate and act on external information despite high slippage.