In this article, we will go over the basics of the up-and-coming GalaxySwap exchange: how it works and why it’s exciting.
Decentralized exchanges explained
For centralized exchanges (CEXs), a single entity like Binance or Kraken matches buy orders to sell orders. To do this, they need to have control over all the money deposited onto their exchanges, taking both agency and safety away from retail investors. Decentralized exchanges (DEXs) are marketplaces where users can buy and sell coins directly from their wallets using Automated Market Makers (AMMs). Users thus benefit both from the safety of keeping their funds in cryptographically secured wallets and greater control over how their assets are used.
Liquidity pools and AMMs explained
Let’s say a user wants to trade coin A for coin B on a DEX. In order to do this, there needs to be a reserve containing both coin A and coin B. The user can then deposit his coin A into the reserve and withdraw a proportional amount of coin B based on the pricing between them. This reserve is called a liquidity pool (LP).
How is the price between coin A and coin B determined? That’s where the AMMs come in. AMMs are basically just a simple formula that used to track the price between two assets. In the case of GalaxySwap, the formula is going to be: AB = k, where A is the amount of coin A in the LP, B is the amount of coin B in the LP, and k is just an arbitrary constant number. This equation is what determines how much of coin B you can take out based on how much coin A you put in. For example, if you deposit 1 coin A into the LP, then you can take out w coins: (A+1)(B-w)=k. Solving this equation for w will tell you how much of coin B you can get with 1 coin A. Because this equation always equals a constant, selling coin A for coin B will always decrease its price relative to coin B. In future trades, because the LP now contains more coin A and less coin B, more of coin A would have to be used to get the same amount of coin B. For a much more technical deep dive into this so-called “XYK” model of pooled liquidity, check out this article.
To provide liquidity to an LP, a user would have to put a proportional amount of coin A and coin B in order to satisfy the AB=k equation. The exchange will ensure that users provide the correct amount of each token.
Yield farming explained
But why would users put their money into LPs? A small percentage of every transaction is withheld and kept in the LP. For GalaxySwap, this fee is 0.17% of every transaction. For DEXs with high trading volume, the amount of money in the liquidity pool can grow quite significantly. If a user owns 10% of the liquidity pool, they get 10% of the accumulated trading fees when they withdraw their liquidity. This is called yield farming.
Impermanent loss explained
What are the dangers of providing liquidity? If the price changes significantly between A and B, liquidity providers are exposed to something called impermanent loss. Let’s say a user puts 10 coin A and 100 coin B into the LP. The price of coin A then doubles relative to coin B. When withdrawing liquidity, the user will thus withdraw less of coin A and more of B. Depending on how much yield was accumulated, it could have simply been more profitable to just hold coin A. The risks of impermanent loss is much greater for pairings between coins that are highly volatile.
Okay, so providing liquidity can be quite risky, especially for volatile assets, but it’s extremely important for the DEX to function. What’s the solution? Users who provide liquidity will be awarded a new token associated with that LP. This is called an LP token. So, if users provide liquidity to the A-B LP, they will get A-B LP tokens. The amount of LP tokens given is proportional to the fraction of the LP owned. These LP tokens can then be staked into farms, which mint yet another token called the reward token. For PancakeSwap, it’s CAKE, and it’s Galaxia for GalaxySwap. Staking more LP tokens into the GalaxySwap farms will increase the rate at which Galaxia is awarded.
At the end of the day, the risks of providing liquidity can be offset both by the accumulated yield and by the reward token.
So what is staking, and why should it be rewarded? Staking generally refers to the holding of cryptocurrency funds in a wallet and hence supporting the functionality of a blockchain system. As new blocks in the blockchain are produced (blocks are basically lists of transactions), they need to be validated. Users with more coins staked are more likely to be selected as the next block validator. The blockchain rewards validators with the right to create new blocks (this is called proof-of-stake) and thus mint new tokens. A staking pool is formed when many users combine their coins to further increase the chances for the resulting pool to receive proof-of-stake. Because there are many more coins in the staking pool than there are in individual wallets, it is much more likely to be rewarded for validating blocks. The proof-of-stake is then used to mint new Galaxia, which is proportionately distributed to all the participants in the staking pool.
There are two kinds of staking pools in GalaxySwap: farms and pools. In farms, users stake their LP tokens to earn Galaxia, and in pools, users stake their Galaxia or SafeGalaxy to earn Galaxia. Both generate Galaxia by the same mechanism. Because staking LP tokens is much riskier than staking individual tokens, farms have much greater reward rates than pools.
The expected annual rate of return for your staked assets (APY) is a function of many different factors:
(1) How much Galaxia we will mint per validated block. This will be decided to mitigate inflation while still providing high rates of reward. Inflation of Galaxia will be mitigated by buyback-and-burn programs.
(2) The rate at which the staking pools are rewarded with proof-of-stake. This depends on how much money is provided to the staking pools.
(3) The Total Value Locked (TVL) into the exchange. If more investors are staking, rewards are distributed across more people.
(4) The farm and pool multipliers. Volatile assets (like LP tokens) receive higher reward multipliers to encourage users to take the risk and own/stake those tokens.
Thankfully, GalaxySwap will provide an estimate to the APY for each farm and pool to keep you all updated on the profitability of your investment strategies.
Once GalaxySwap is released, how should you proceed? Here, we’ll list a couple strategies for making the most out of GalaxySwap with your SafeGalaxy.
(1) Stake 100% of your SafeGalaxy in the pool. This is the safest option. There is zero risk involved and you’ll begin passively accumulating Galaxia. Because of the low risk, reward rates will be lower, but still expect more than 200% APY at the minimum. Don’t forget to restake your Galaxia in the Galaxia pool to compound your rewards.
(2) Stake 80% of your SafeGalaxy in the pool and use the remaining 20% to provide liquidity. Because farms will have much higher APY than pools, it might be advantageous to use some of your SafeGalaxy to provide liquidity. For example, you can take 20% of your SafeGalaxy, convert 10% of it to Galaxia, then put both in the SafeGalaxy-Galaxia LP to receive SafeGalaxy-Galaxia LP tokens. The tokens can then be staked in the SafeGalaxy-Galaxia farm to start farming Galaxia with a high multiplier. Please be careful when providing liquidity, as it exposes you to impermanent loss. We fully expect the price of SafeGalaxy to rise exponentially after the release of GalaxySwap, so if you put most of it in liquidity, you won’t see the benefit of that increase in price. That’s why we recommend putting in a smaller percentage. In the end, your investment strategy will be determined by how much risk you are willing to take on. Again, don’t forget to restake your Galaxia in the Galaxia pool to compound your rewards.
GalaxySwap: Leveling up SafeGalaxy
GalaxySwap was built to give SafeGalaxy a use case. By sitting in your wallet, SafeGalaxy already accumulates reflection from its tokenomics. But we decided to level it up. Now, you can stake your SafeGalaxy or SafeGalaxy LP tokens in staking pools to earn much more than you would with reflection.
GalaxySwap also provides a liquid environment to buy and sell SafeGalaxy. With high trading volume, more SafeGalaxy will be burned, further increasing the value of SafeGalaxy staked in the pools. Earn while we burn.
GalaxySwap is also compatible with the SafeGalaxy tokenomics. We whitelisted the pool addresses to ensure that sending your SafeGalaxy to the pools does not charge you the 10% transaction fee. There is zero risk involved in staking your SafeGalaxy to earn Galaxia.
Sending SafeGalaxy to LPs to provide liquidity will still incur the 10% tax, because we cannot simply whitelist the LP addresses. Doing so would remove the tax on all transactions passing through the liquidity pool, including buys and sells. BUT, we have an elegant solution to this problem that will be implemented in an upgrade to the GalaxySwap exchange.
To summarize, even without GalaxySwap, the deflationary tokenomics of SafeGalaxy ensures that long-term HODLers are rewarded. With GalaxySwap, you can put your SafeGalaxy to work to achieve passive income and financial freedom. Like we said above, earn while we burn!