SaucerSwap is a fork of Uniswap v2 — an on-chain system of smart contracts on the Ethereum blockchain — that leverages the Hedera Smart Contract Service (HSCS) to include Solidity smart contract integration with the Hedera Token Service (HTS). These smart contracts implement an automated market maker (AMM) protocol based on the constant product formula "XY=K".
Here, liquidity is derived from pooled reserves, x and y of any two HTS tokens, such that the product of the reserves, k, remains constant while traders swap in the pool. Compared to other DEXes, swapping tokens on SaucerSwap is safer and affords an overall better user experience. This is in part due to the fast finality, low fees, and unprecedented speed of the Hedera network. Furthermore, given that Hedera has no mempool, there is no risk of being frontrun. As of June 14th 2022, the total miner extractable value (MEV) on Ethereum is $652,952,888, with Uniswap accounting for the highest percentage of transactions.
SaucerSwap differs from Uniswap v2 in many fundamental ways. For example, the Ethereum network uses the ERC20 and ERC721 standards for token operations, meaning tokens are themselves contracts. On Hedera, however, token operations are performed on HTS. This is made possible by recent HSCS upgrades allowing smart contracts to use HTS through EVM precompiles. It must be stated that, while it was always possible to create a DEX on Hedera using the ERC20 standard, the network can now fully support tokens created by and controlled through HTS, representing the novelty of SaucerSwap. This is a significant differentiating factor, as SaucerSwap is positioned to take advantage of the network’s consistent and predictable fee structures for token operations.
Like any DEX, users are the ones providing liquidity. They do so by providing equal value parts of two HTS tokens to a pool in exchange for LP tokens, representing their share of the pool. Furthermore, with the advent of HIP-329 — which introduced the CREATE2 opcode to the Hedera mainnet — anyone can create a liquidity pool. The incentive for liquidity provision arises in part from the 0.30% swap fee. 5/6 of these fees are aggregated and redistributed back to all liquidity providers on a pro-rata basis based on the amount of LP tokens they hold.
A further incentive to provide liquidity lies in a staple of most DEXs, which is yield farming. SaucerSwap is no exception and gives users the ability to stake their LP tokens in crop circles. Each crop circle on the protocol corresponds to a liquidity pool (e.g., HBARX/DOV) and receives a weight of SAUCE emissions from the farm smart contract. It follows that users are still collecting fees whenever someone swaps between the pair they have provided, in addition to receiving farming rewards. It is worth noting that both crop circle and single-stake pools (explained later on) will have an additional feature, that being game-theory incentivized staking. For the sake of brevity, a link to GTIS can be found here. Back on topic, the rate of emissions is constant and 800M SAUCE will be released over a 3-year period. This release schedule is different from many protocols, who instead opt for a linear decay model where the rate of emissions decreases over time. They do this to compete in saturated markets, as it affords them the ability to offer higher APRs in their infancy, and in turn, bootstrap liquidity. The downside to this is that it lacks longevity, as yields dry up much more rapidly.
SaucerSwap will offer a full-suite of DeFi services and aims to be a one-stop-shop on Hedera. Shortly after launch, a bridge integration, single-sided staking, community pools, and a DAO-based governance model will be implemented.
In terms of a bridge, SaucerSwap will integrate a third-party cross-chain router protocol on its site. This bridge will be similar in nature to Multichain, which allows almost all blockchains to inter-operate. As it relates to the DEX, users will be able to seamlessly bridge to and from Hedera, with SaucerSwap serving as the endpoint for this cross-chain liquidity. The inflow of new tokens (e.g., DAI, USDT, BTC, ETH) will undoubtedly have a profound effect on the network and its TVL.
Single-sided staking requires only one type of token. By staking SAUCE in the Infinity Pool, a user immediately receives SAUCEr tokens as receipt of the liquidity they provided. The Infinity Pool then automatically compounds via SAUCE buybacks. Similar to Stader, the ratio of SAUCE to SAUCEr is always increasing, thus SAUCEr is perpetually increasing in value relative to SAUCE. It is also worth noting that there is no risk of impermanent loss within single-stake pools.
This leads us to Community Pools, which are complementary to single-sided staking. Once a thoroughly vetted project has completed their IDO on HeadStarter’s launchpad, they will have the option to be fast-tracked onto SaucerSwap with a Community Pool, and subsequent supported pool with a corresponding yield farm. The community will then vote on a core proposal as per the DAO-based governance (explained later on). If this proposal reaches a passing vote by quorum, the HTS project will be listed on the platform and subsequently emit their token to a single-stake pool, aka Community Pool. Users who have staked SAUCE for SAUCEr can then stake SAUCEr in these Community Pools to receive both SAUCE and the HTS token in question for multiple streams of income (sum of APRs). After the HTS token emission runs out, the pool will become inactive, however, a liquidity pool with corresponding crop circle will follow.
Next, we will discuss SaucerSwap’s unique approach to governance. A decentralized governance model will be gradually phased in, with the team initially controlling the protocol such that core features can be implemented. Once this is completed, governance will transition to a DAO. To ensure true decentralized governance, SaucerSwap will leverage an HCS-based ballot and token-weighted voting architecture. An example of this is CGIP-4. SaucerSwap’s governance model is inspired by Hedera’s path to decentralization; namely, how their nodes are operated by governing council members but will grow to include permissioned community nodes, then anonymous nodes. Similar to how Hedera will open node operation to more entities and individuals as performance, security, stability, and incentives of the network mature; SaucerSwap’s DAO-based governance model will become more decentralized as core features are added to the protocol.
At this stage of SaucerSwap’s life cycle, the DAO is phased in, and as such, the community will steer the direction of the protocol. Possible future implementations include gamification (e.g., lotteries and prediction markets) akin to PancakeSwap, a lending protocol enabling non-custodial leveraged trading on the DEX, social functionalities leveraging Hedera’s microtransaction capabilities, liquidity bootstrapping pools offering the ability to launch tokens with low capital requirements, and more. Given Hedera’s outstanding advantages above other L1s, the prospects for DeFi on the network are bright, and SaucerSwap intends to lead the new wave of innovation as the pioneering DEX on Hedera.
