Phase 2 FAQ
Frequently Asked Questions about Phase 2 ad. all you need to know.
Polaris Finance's Phase 2 is a one-stop decentralized trading and investment platform on Aurora powered by Balancer V2.
Polaris Finance targets three prominent use cases. Liquidity Providers who can create and contribute to existing pools, traders and arbitragers looking for liquidity sources, and developers building on top of the Protocol.
Like most of the DEX models in DeFi, Polaris Finance deploys liquidity pools to facilitate trading, rather than order books. Liquidity pools are the fundamental building blocks and they are smart contracts that define how traders can swap between tokens.
What makes Polaris Finance pools unique from those of other protocols is their limitless flexibility. While other exchanges have pools with constrained parameters, Polaris Finance can accommodate pools of any composition and underlying math, thanks to the Balancer v2 mechanisms. It is possible to include different types of pools, like weighted pools, stable pools, etc., with tailored algorithms to provide customized slippages, impermanent loss exposure and rewarding structures for traders and liquidity providers.
Balancer, one of the best-known decentralized exchange (DEX) platforms, has been in development since 2018 and was released in 2020 on Ethereum. Since then, it has risen to become one of the top DEX platforms in the world, with the 13th largest TVL among DeFi protocols according to DefiLlama (as of April 2022).
Balancer is a modern form of a decentralized exchange, known as an automated market maker (AMM). This means it uses the ratio between assets shared in a liquidity pool to determine each asset’s value. As users add or remove liquidity from one side of a pool by conducting trades, this changes the pool ratio, and hence the price of each asset.
It offers similar functionality to platforms like Uniswap and TraderJoe but includes a number of unique features that set it apart from other DEXs. One of the main differentiators is that it applies an innovative AMM algorithm to build liquidity pools with more than two assets and facilitates trades among them. At the same time, it provides additional flexibility and control to pool owners in setting up key parameters in terms of liquidity management and trading.
The unique features from Balancer provide great flexibility for both traders and liquidity providers. The weighted pools facilitate having various pooled assets, trading pairs and reduce impermanent loss. The model can even perform as a tailored mutual fund, while automatically rebalancing itself and accumulating transaction fees.
Its stable and metastable pools apply stable math to lower slippages in trading homogenous and correlated tokens.
Furthermore, the Aurora ecosystem is rife with a number of successful DEXs using the Uniswap model - think of Trisolaris, Wannaswap, etc. - while almost no one has embraced the Balancer model so far.
This means that Polaris not only will definitely provide additional choices for institutional investors, retail traders, and yield hunters but will also naturally stand out amongst the crowd.
Polaris Finance was originally fork of Tomb Finance - what we refer to as ”Phase 1”. Polaris Pools are smart contracts that define how traders can swap between tokens on Polaris Finance.
Polaris Finance is building a user-friendly interface to exchange tokens, with optimal routes automatically picked for trades and multiple tokens supported within the same pool. This in turn guarantees better liquidity and a greater variety of pairs compared with the Uniswap model.
For example, in a hypothetical SPOLAR-XPOLAR-pNEAR pool, one could simply trade pNEAR for SPOLAR or XPOLAR in the same pool without having to separately build liquidity for an SPOLAR-pNEAR and XPOLAR-pNEAR pair.
Users can earn yields by contributing liquidity to the Polaris pools.
What makes Polaris pools unique compared to other protocols on Aurora is that liquidity pools can be created using algorithms tailored to their specific assets, providing limitless flexibility. This mechanism can provide different risk-return profiles for users.
Stable pools apply stable math to facilitate trades between stablecoins and highly correlated tokens. The stable pools tend to have low slippage for stablecoin transactions, with little fluctuation expected in terms of pooled value. This also applies to the metastable pools such as our stNEAR/pNEAR.
Projects building liquidity for their platform tokens, in addition to the traditional 50/50 liquidity pools paired with stablecoin or pNEAR, can customize the token weights in their weighted pools.
Normally, an 80/20 or 70/30 pool is recommended for newly launched projects, as new tokens are expected to be volatile. These pools may provide a liquidity solution with less impermanent loss, compared with the 50/50 pool, for liquidity contributors.
For a deeper understanding of impermanent loss, please check the Polaris docs here.
Polaris pools with a variety of tokens are similar to traditional index funds, allowing users to have broad exposure to the crypto market. Weighted pools are so flexible they can include up to 8 crypto assets in a single pool, with customized weights.
These pools will create a portfolio, or even an index if you like, with auto-rebalancing features. Where Polaris Finance differs from traditional index funds, however, is that in the DeFi world you can gain from transaction fees besides price fluctuations.
For example, let us imagine you intend to invest a DeFi portfolio on Aurora. A pool featuring equal shares of ETH, AURORA, pNEAR, BNB, BTC, SOL, AVAX and SPOLAR would probably be suitable. By contributing liquidity in the pool, you will automatically split your funds evenly into these 8 crypto assets. No matter how the prices of these 8 assets move in the future, arbitraging will ensure that your share in any of the 8 cryptos will be 12.5% of your total investment.
But you can still earn both transaction fees in the liquidity pool - in case any trades are made among these tokens - and mining incentives, if the pool is whitelisted for rewards.
Polaris Finance is a perfect venue to build liquidity for platform tokens, since projects, no matter newly launched or already established, can choose to build pools with tailored weights.
(As arule of thumb, pools with weights leaning toward the platform’s token may require fewer contributions in the token itself, display less impermanent loss and have higher slippage when trading. Vice versa, pools with weights favoring the paired token could require higher contributions in the paired token, while having higher impermanent loss and lower slippages.)
Also, some projects would certainly be interested in building safety mechanisms using weighted pools, while still providing liquidity.
Every time someone makes a trade on Polaris Finance, liquidity providers (people who have deposited funds onto Polaris Finance) get some fee split evenly between all providers.
It’s important to note that because fees are dependent on volume, daily APRs can often be quite low just like they can be very high.
When you go to the deposit page (Dawn) and deposit in the liquidity pools on Polaris Finance, liquidity provider tokens (LP tokens) will be transferred to the same address. The fund you provide then gets split between each token in the pool. That’s something you have to keep in mind because if you were to deposit 1000 USDC in a 50/50 USDT/USDC Pool, you would then get half in USDC, half of the value in USDT and deposit these into the pool. Those values change constantly as people trade and arb the price in the pool.