Degen Protocol’s Solution and Architecture: How Does it All Work Under the Hood?

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Degen Protocol’s Solution and Architecture: How Does it All Work Under the Hood?

May 24 2021

In brief

  • Degen protocol revolutionized DeFi trading by being the first to bring decentralized margin trading.
  • The project relies on the use of bi-pools, which brings liquidity and simultaneously increases security.
  • With this addition to DeFi, decentralized exchanges are finally able to offer almost all services that CEXes have.

Degen protocol enabled margin trading in the decentralized finance sector, which has inspired many to look into the protocol and see how this solution actually works.

Margin trading has been a part of the crypto industry for several years now, but for all its existence in this emerging sector of digital finance, it has been stuck in its centralized part. In other words, if you wanted to trade with leverage, you had to go to crypto exchanges and brokers.

Of course, only a year or two ago, centralized exchanges (CEXes) were necessary for the industry, as there was no alternative. Decentralized exchanges (DEXes) were only starting to emerge, and they had major issues, including the lack of liquidity, the inability to list many coins, and, of course, the lack of regulatory clarity.

Things started to change when DeFi started to explode last year, and in 12 short months, the DeFi sector blew up to what it looks like today, where DEXes are highly functional and all around. Still, decentralized margin trading seemed to be an obstacle that wasn’t so easy to solve, until the Degen Protocol emerged.

What is Degen Protocol and How Does it Work?

Degen is a DeFi protocol specifically designed for margin trading with liquidity providers. Its greatest selling points include the fact that it is fully decentralized, and that it is almost completely customizable.

As a decentralized project, it relies 100% on its community, which has been split into 4 groups — those who create pools, those who lend money to those pools, those who borrow the money from the pools and use it for trading, and those who engage in staking. These four groups work together to ensure that the money will keep flowing and that desirable trading pairs are always available. Plus, of course, that there are tokens available in the pools, for would-be traders.

Apart from these four groups, the rest of the internal processes are covered by Degen’s unique architecture. The protocol’s core consists of the bi-pool, which is essentially a pair of liquidity pools. Let’s take ETH/USDC bi-pool as an example. This is a pool that contains an ETH pool and a USDC pool. Together, two separate pools make up a bi-pool, which, by its nature, offers more than enough liquidity for the pair. The same is with other pairs.

However, it should be noted that it is not possible to mix existing pools with different pairs, as it could make the tokens vulnerable. The project also kept in mind that there are many pool creators who might become malicious in order to harm the project or its users, which is why bi-pools are separate from original, singular pools.

Once it is created, a bi-pool is basically just a smart contract for margin trading that allows the creation of new bi-pools for new Uniswap or other AMM pairs. Their creators get to side on the trading pair, the percentage of the reward that goes to the pool, as well as the percentage that goes to lenders. They also get to decide how high leverage for the specific pool can be, or the utilization of the pool.

This is where the total customization we mentioned earlier comes from. Essentially, it is a very unique solution, and as always, it seems simple once it has been created. However, its apparent simplicity should not reduce the importance of the project, which, essentially, revolutionized DeFi trading with its mere existence.