According to Evan Deutsch, a core contributor and co-inventor of Clone, cloned assets, perpetual contracts, and bridged tokens are two tools that can bring liquid spot markets to non-native assets on Solana. Deutsch, who is better known as Mark to many in the crypto space, cautions that the latter two tools have their drawbacks which makes them less ideal solutions.
Liquidity Fragmentation Problem
In his written answers to Bitcoin.com News, Deutsch asserts that perpetual contracts or perps are best suited for short-term but high-leverage strategies. However, in the longer term, perps are expensive to hold, making them less ideal, Deutsch explained. This is further compounded by the fact that perpetual contracts “have no potential for utility across the broader Solana defi ecosystem.” Bridged tokens, on the other hand, suffer from what Mark calls a “liquidity fragmentation problem.”
The co-inventor also highlighted the factors that distinguish a concentrated liquidity market maker (CLMM), which was pioneered by Uniswap, from the so-called Comet automated market maker. He identified some of the standout advantages that CAMMs possess, which make them a more sophisticated and capital-efficient system.
Deutsch meanwhile also explained why his team at Clone chose to build on the Solana blockchain and how the new defi asset class known as cloned assets are primed to enrich the latter’s ecosystem. Below are Deutsch’s answers to all the questions sent.
Bitcoin.com News (BCN): It has been said that Solana needs innovations to bring liquidity to non-native tokens. Why is it so difficult to trade non-native assets on Solana and what are the biggest roadblocks to making the trading of non-native assets capital efficient?
Evan Deutsch (ED): Let’s start by understanding what non-native assets are; tokens that come from a blockchain different from the one they are being traded on. On Solana, options for trading these non-native assets are quite limited.
Perpetual contracts, or ‘perps,’ are one of the few tools available. They offer a way to trade non-native assets with high leverage. Although perps are powerful tools, funding rates make them complicated for novice traders and often result in them being expensive to hold over time. Perps are sophisticated financial instruments best suited for short-term, high-leverage strategies. They are also contracts, not tokens, so they have no potential for utility across the broader Solana defi ecosystem.
Blockchain bridges make it possible to introduce a token for any non-native asset to Solana, but there is very little liquidity available to actually trade these bridged tokens. They face what I term the ‘liquidity fragmentation problem.’ The “liquidity fragmentation problem” arises from the multiple decisions and significant initial investment required for a Liquidity Provider (LP) to introduce liquidity for a new bridged token to the Solana ecosystem. First, the LP faces a choice among various bridges, each with its unique features and user base.
They must then select a Decentralized Exchange (DEX) to establish their liquidity pool. This process involves considerable initial costs, and even after setting up, there’s no guarantee that traders will prefer the specific bridge and DEX combination the LP has chosen. This process is too risky for any rational individual or entity to undertake. If we want a scalable solution for onboarding non-native token liquidity to Solana, there has to be another way.
BCN: Can you briefly talk about cloned assets and how these differ from bridged tokens?
ED: Of course. Cloned assets are a brand new defi asset class pioneered by Clone Protocol for optimizing the onboarding of non-native token liquidity to a new chain. Cloned assets can be thought of as bridged assets with superpowers, with their capital efficiency and scalability being the main weapons in their arsenal. Cloned assets holders are actually able to swap these for bridged assets, a critical characteristic that ensures cloned assets will always remain pegged to their non-native counterparts. While cloned assets and bridged assets are, in a way, one and the same, cloned assets give bridged assets a liquidity boost that actually allows them to be traded, utilized, and scaled quickly within any DeFi ecosystem.
BCN: What is the Comet Liquidity System (CLS) and how does it bring non-native tokens with deep liquidity on Solana?
ED: If cloned assets have superpowers, the Comet Liquidity System can be thought of as the laboratory in which they were created. At its core, the CLS is a refined version of what’s known as an automated market maker (AMM). However, our version—the ‘Comet AMM’—is much stronger. The entirety of the liquidity backing CAMMs is in USDC. This makes things simple for LPs because they only need USDC to get started.
The CLS isn’t just about convenience; it’s about pushing the boundaries of AMM efficiency. What really sets it apart is its unique leveraged, cross-margin approach. This approach allows LPs to provide more total liquidity than the amount of USDC they deposit, and that liquidity can be spread across multiple CAMMs. We call this type of position a ‘Comet’, and each Comet is characterized by an amount of deposited USDC backing liquidity positions across multiple cloned asset pools simultaneously. The CLS offers the first solution to the persistent ‘liquidity fragmentation problem’ that has plagued non-native token liquidity on Solana, ensuring efficiency, scalability, and security in the process.
BCN: Can you distinguish a Comet automated market maker (CAMM) from concentrated liquidity market maker (CLMM) in terms of liquidity provision and price determination?
ED: The CAMM is a revolutionary approach to liquidity provision, differentiated by its cross-margined nature. The CLMM, pioneered by Uniswap v3, requires LPs to commit both sides of a trading pair—for instance, they would need both USDC and Arbitrum (ARB) to provide liquidity to a USDC/ARB pool. The amount of provided USDC dictates the lower price boundary, while the amount of ARB sets the upper price limit. Now, suppose an LP wants to provide liquidity to a CAMM pool for USDC/Cloned Arbitrum. The CAMM allows USDC to support both positive and negative price movement at the same time, effectively cutting in half the capital necessary to achieve the same price range as LPs using CLMM.
Another standout advantage of CAMMs is their cross-margin capability, which enables USDC to concurrently support multiple positions simultaneously. This is a stark difference from CLMM, where each position is independent and managed separately.
When it comes to price determination, both CAMMs and CLMMs usually rely on the ‘x*y=k’ constant product formula. However, CAMMs have an additional layer. They incorporate the total cloned assets debt in the pool and real-time oracle prices to calculate quotes, since they’re facilitating trades with USDC alone. Overall, this allows for a more sophisticated and capital-efficient system, maximizing the scalability of any cloned assets.
BCN: What makes Solana the primary choice of blockchain for your protocol and do you believe that the cloned assets can help Solana defi boost token diversity?
ED: My team and I have been champions of Solana for quite some time now. In defi, three principles are king: efficiency, scalability, and innovation. Solana reigns supreme in all three, boasting unparalleled speed and cost-effectiveness. When you aim to create products that embody these qualities, Solana becomes the clear choice.
Our decision to build Clone on Solana stemmed from recognizing a pressing need for better integration of non-native token liquidity. The token diversity on a blockchain is crucial, without it, It’s like having a state-of-the-art sports car but no roads to drive it on. Solana’s efficiency is undisputed, but we sensed the hunger for a richer variety of tokens to truly unlock its potential. Indeed, the rise of meme coins and recent projects’ Token Generation Events (TGEs) have started to populate the landscape, but we’re far from saturation.
Cloned assets are about enriching the ecosystem with more trading options for existing users and, even more importantly, creating bridges for users from other blockchains. Cloned assets will offer these users familiar opportunities, inviting them to experience the advantages of Solana through the assets they already know and trust. It’s this fusion of familiarity and innovation that will catalyze a new wave of growth within Solana’s defi space.
Do you agree with Mark’s assertions on Solana? Let us know what you think in the comments section below.