A Custom-Built DEX for Retail Traders
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.
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’s Core Design Principles
Clipper's design is a direct rejection of the lopsided “one-size-fits-all” model most other DEXs have adopted. To that end, Clipper is designed with one key goal: optimizing prices for smaller trades (≤$50K).
The first iteration of Clipper did so by capping liquidity and mitigating impermanent loss. Now, this is accomplished through a novel Formula Market Maker (FMM) architecture and a series of design tradeoffs that sacrifice price competitiveness on large trades for better prices for smaller trades.
Clipper has two unique structures for providing liquidity and collecting yield:
Clipper Pools are multi-asset liquidity pools composed of Core Assets. Pools are maintained at the ideal volume for small trades, and only Clipper community members that whitelist their wallet address can deposit liquidity.
Clipper Coves is an ecosystem of liquidity pools containing one Cove Asset and ClipperLP tokens, they enable the trading of any asset through Clipper.
The core insight behind Clipper's design is that, counterintuitively, more liquidity can be bad for retail traders. In general, Most AMMs want as much liquidity as possible because it means less slippage. But after a certain point, more liquidity doesn't have any material benefit for small trades; it only continues to reduce slippage on large trades. Put another way, the slippage on a $1,000 trade is virtually the same with a $100m pool and a $1b pool. Even worse, more liquidity can be counterproductive! That's because the more liquidity in an AMM, the more the AMM needs to charge traders in fees to attract such large amounts of liquidity. This ends up better for large traders, but will make for worse prices for smaller trades. Consequently, on most DEXs retail traders end up subsidizing whales!
To counter the harmful effects of liquidity overprovisioning on retail traders, Clipper has a smaller, capped liquidity pool and lower fees. A smaller pool means that there is more slippage on Clipper, but the decrease in fees more than offsets the increased slippage for small trades. On the other hand, on large trades the slippage outweighs the decrease in fees. That makes Clipper a terrible place to make large trades! But that's ok, Clipper is for the self-made trader. Let the whales and hedge funds go elsewhere.
Mitigating Impermanent Loss
In AMMs, liquidity providers (LPs) contribute their capital in exchange for a pro rata share of trading fees. This generates positive yield. However, LPs also suffer from impermanent loss, which happens when the price of their tokens change compared to when they were deposited in the pool. This generates negative yield. This isn't just a problem for LPs – it also matters to traders. This is because the more LPs lose to impermanent loss, the higher fees traders will need to pay to offset those losses and attract sufficient liquidity to the pool. Thus, it is important that Clipper's design also minimizes impermanent loss.
Clipper accomplishes this by considering external market prices through the use of an off-chain oracle in addition to the ratio of assets in its pool. That means that when the markets move, Clipper updates its prices without needing arbitrage flow to equilibrate the pool size. Lower returns to arbitrageurs means less loss for LPs!
On top of that, Clipper is very sensitive to arbitrage flow, primarily because the pool size is small. For every unit traded in the same direction, slippage increases a little bit. Soon after about $10k in one direction, the exponentially growing slippage starts to outweigh the arbitrage opportunity! In other words, when market prices move a lot quickly, prices on Clipper quickly get so bad that trades will flow elsewhere. That minimizes impermanent loss, though it doesn't remove it altogether. Despite occasional claims to the contrary, it is impossible to design a market maker that eliminates impermanent loss.
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.