A Custom-Built DEX for Retail Traders
The vast majority of existing DEXs are structured in a way that prioritizes high dollar trading volume above everything else. While this may sound nice, in practice this unfocused “growth for the sake of growth” model generates profit-scalping opportunities for bot-driven front-runners and arbitrageurs – often to the detriment of average retail traders. Meanwhile, on centralized exchanges, retail traders also typically get the worst deals; they often pay up to 10x higher fees than institutional traders. Today's exchanges were built to serve everyone---but their focus on volume means their benefits accrue only to large professional traders, hedge funds, and market makers. Clipper is the antithesis of this approach.
Clipper is a decentralized exchange (DEX) designed to have the lowest per-transaction costs for small-to-medium-sized trades. It is intended to be the best place for self-made traders to buy and sell the most popular cryptoassets.
Clipper’s Core Design Principles
Our decision to create Clipper is a direct rejection of this lopsided “one-size-fits-all” approach. Instead, Clipper is built specifically for smaller, self-made traders. To that end, Clipper is designed with one key goal: optimizing prices for smaller trades (≤$10K). This is accomplished by capping liquidity and mitigating impermanent loss.
Our core insight in designing Clipper is that, counterintuitively, higher levels of liquidity can ultimately end up hurting retail traders. Most DEXs want as much liquidity as possible in order to reduce slippage when executing large trades, but after a certain point more liquidity no longer has any additional benefits for smaller trades. In other words, there are diminishing marginal returns to increased liquidity; the amount of slippage that occurs in a $1,000 trade is virtually the same whether the pool has $100m or $1b in liquidity. Even worse, these DEXs charge higher trading fees in order to attract such large amounts of liquidity. This ends up benefiting whale trades, but actually results in higher prices than necessary for small trades.
This is why we decided to cap Clipper’s liquidity pool, initially at $20m, which mathematically corresponds to better prices on <$10k trades and worse prices on >$10k trades. This small pool allows for significantly lower trading fees. For small trades relative to the pool size the decrease in fees more than offsets any slight increases in slippage that may occur. By contrast, for large trades relative to the pool size, the increase in slippage outweighs the decrease in fees. That means Clipper will effectively offer terrible prices for large trades. That’s ok with us though — we’re only focused on small, self-made traders; the whales have plenty of other exchanges to choose from.
Mitigating Impermanent Loss
Many crypto traders aren’t aware that impermanent loss (which results from changes in external market prices that allow arbitrage trades to take bits of the liquidity pool) isn’t just a problem for liquidity providers. This is because the more LPs lose, the higher the trading fees must be to offset those losses and stabilize the liquidity pool.
Clipper is designed to mitigate impermanent loss by basing its pricing function on external market prices from decentralized oracles in addition to the standard approach of relying on the ratio of assets in its liquidity pool. This means that, when the markets move, Clipper can update its prices without needing arbitrage flow. Additionally, because Clipper’s pool is capped, it is extremely sensitive to arbitrage flow that occurs faster than the Oracle updates. For every unit traded in the same direction, the amount of slippage incurred increases exponentially. As a result, when markets move quickly, slippage costs on Clipper not only eclipse the lower trading fees Clipper offers, but quickly outweigh the profit potential of any arbitrage opportunities.
Of course, impermanent loss can never be eliminated completely. Clipper simply mitigates it as much as possible so it can keep trading fees as low as possible. This is also the reason that Clipper initially only supports major trading pairs - tokens that move more cause more impermanent loss, which would necessitate higher trading fees across the board. Clipper was built as a lean, specialized trading ship for the most popular trading routes.
For example, a 1% move in the market will only create an arbitrage opportunity of $1k in Clipper’s initial pool, whereas the same market movement might result in a $100k arbitrage opportunity (and thus a higher level of impermanent loss) in a $1b Uniswap pool. In short, when the market prices of one of our listed cryptocurrencies experience a sudden and significant shift, Clipper’s trading prices react to disincentivize arbitrageurs and other large scalpers. As a result, Clipper has built-in mechanisms which disincentivize high levels of toxic flow, which makes it much easier to maintain a more balanced equilibrium of low trading fees and healthy LP yields.
Retail Investors Should be Second to None
If the blockchain industry ever hopes to supplant traditional finance, we need to do a better job at creating services catering specifically to the users we want to attract. While institutional privilege and predatory rent seekers continue to exist on many crypto exchanges, with thoughtful design and a more focused approach we can leave these practices in the past where they belong. The future of DeFi will likely involve a series of highly specialized, user-specific exchanges and applications, and the tides are starting to turn.
This is why we are establishing Clipper as the go-to DEX for the best retail trading experience for the most commonly traded cryptocurrencies. We believe that prioritizing everyday traders from the start is the best way to ensure the biggest positive impact for the largest number of people, and the most benefit to the blockchain industry. Clipper is the embodiment of the belief that smaller, self-made traders should be second to none – and are ready to be the master and commander of their own DeFi destinies.