Solana Summer: Raydium and RAY Explained
Solana Summer is here on AAX, and we have some super exciting projects to show you as part of the series.
In this article, we will explore what Raydium is, how it works, why it is unique, as well as the utilities of its native RAY token.
What Is Raydium?
Raydium is an AMM protocol and decentralized exchange (DEX) on top of the Solana blockchain that utilizes Serum's on-chain central order books to allow users to access near-instant trades, shared liquidity, and new ways to farm yields.
The project seeks to provide a viable solution to three core problems in the decentralized finance (DeFi) industry:
- The high transaction fees and slower processing times, which are mostly due to Ethereum's scalability issues. Result: many users can't access DeFi services.
- The fragmentation of the market prevents protocols from accessing liquidity held in pools at other DeFi platforms. Result: Increased slippage while AMMs are intensely competing with each other for liquidity.
- The limited number of trading features (e.g., the lack of limit orders). Result: DeFi AMMs fail to offer a user experience similar to those at centralized exchanges.
Raydium solves the first issue by building its platform on top of the Solana blockchain, which features high scalability of up to 50,000 transactions per second (TPS) with a 0.4-second block time. As a result, with the average transaction fee on Solana being $0.00025, Raydium can offer near-instant and inexpensive transfers for various DeFi activities.
Furthermore, unlike other AMMs, Raydium utilizes Serum's on-chain central order book for trading, allowing users to access trading features similar to what can be found at centralized exchanges. At the same time, Raydium can access and supply liquidity from its pools to other DeFi protocols within the ecosystem.
With the project's development starting last summer, Raydium's platform launched a little more than three months ago. According to the project, the core team has more than 20 years of experience in market making and high-frequency trading via crypto and traditional markets.
It's important to note that Raydium's team members use pseudonyms instead of their real names, such as "AlphaRay", "XRay", and "GammaRay".
In some cases, the anonymity of team members is a concern for crypto community members as there were multiple cases in the past when fraudsters had hidden their identities to operate DeFi scams.
However, using pseudonyms instead of real identities has some benefits for the project team (e.g., it allows them to focus more on development).
As a side note, Bitcoin creator Satoshi Nakamoto also remained anonymous after creating the world's top cryptocurrency by market capitalization.
How Does Raydium Work?
After visiting the basics, let's see how Raydium works by taking a more extensive look at each component, feature, and service within the AMM's ecosystem.
AMM Protocol Powered by an On-Chain Central Order Book
What makes Raydium unique is that it is the first AMM protocol in the DeFi industry utilizing a central order book to match trades.
In crypto, an order book refers to a list of open buy and sell orders for a digital asset trading pair that includes the amounts and the price to trade at.
Nowadays, the most efficient way for an exchange to match orders is by using the order book to execute trades between buyers and sellers. For example, AAX leverages a combination of central order books and a robust matching engine powered LSEG technology to offer lightning-fast trades for its users.
However, despite its efficiency for matching buyers and sellers, an order book in its traditional form comes with centralization. For that reason, most DeFi solutions have replaced order books with AMM mechanisms to match orders in a decentralized way.
As a recap, AMMs eliminate all kinds of third parties and centralization on the platform. Instead, they require users to provide liquidity by supplying a token pair with a 50/50 ratio in a pool. Powered by smart contracts, DeFi AMMs offer automated, decentralized, non-custodial, and trustless coin swaps for users.
However, as described earlier, the completely decentralized AMM model has some downsides, such as the lack of advanced trading features, risks of paying gas fees unnecessarily for failed orders, and the inability of DeFi solutions to share liquidity with other platforms.
Raydium seeks to provide a solution to the above issues by sacrificing a degree of decentralization to combine the benefits of AMMs and central order book matching.
While utilizing Serum's order books makes Raydium a bit more centralized than most DeFi platforms, the project's AMM and DEX remain fully decentralized. As a result, users can swap tokens, farm yields, and participate in other activities while harnessing the full benefits of decentralized finance.
Furthermore, Serum's order books operate on the Solana blockchain and utilize smart contracts to automate trades between users. For that reason, the on-chain order matching on Raydium provides increased transparency and traceability without the need for a centralized network participant or trusted third party to settle trades between buyers and sellers.
Interestingly, DeFi solutions other than Raydium haven't integrated the (more or less) decentralized version of order books into AMMs due to their computationally intensive nature. For that reason, running them on a blockchain like Ethereum that features limited scalability and transaction throughput would severely congest the network and provide a horrible user experience for customers.
However, as Solana can achieve 50,000 TPS – which can be potentially scaled up to 65,000 TPS, according to the project –, the network can take the heavy load of order books (although with a large number of optimizations).
DEX and Atomic Swaps
Due to the integration with Serum, Raydium offers both a DEX and an atomic swap service for users.
Atomic swaps on Raydium are very similar to what you can find on other AMMs, such as Uniswap, SushiSwap, or PancakeSwap. Powered by smart contracts, you can convert between multiple tokens on Raydium's swap service.
However, while trades are inexpensive and fast on Raydium due to Solana's high throughput and rapid block times, the project's swap solution only supports SPL tokens (the standard for Solana-based cryptocurrencies).
That said, due to the cross-chain functionality of Serum, you can easily convert your ERC-20 tokens into SPL coins via one of the wallet services supported by Solana.
Another difference between Raydium Swap and other AMMs is how the platform handles orders when a cryptocurrency's price moves past a trader's slippage (the event when a trade settles at a different price than what the user initially requested) tolerance.
While competing AMMs cancel the swap in such a case – which costs gas and trading fees for the trader –, Raydium fills the trader's order up to what is called the "worst price" (the price level in which the maximum amount of slippage tolerated by the user is counted in) and cancel the rest.
In addition to the swap service, Raydium users can utilize the platform's DEX to trade SPL tokens with features similar to centralized exchanges'.
However, while you have access to charts, limit orders, order books, and trade history, Raydium's features are still limited compared to a robust centralized cryptocurrency trading platform. For example, you can only place limit orders without the option for market trades or stop losses.
Due to its integrations, Raydium's liquidity comes from both its own pools and Serum's order book.
Just like with other AMMs, liquidity providers (LPs) can contribute tokens into pools to receive a portion of the fees in exchange for facilitating enhanced trading between users.
The trading fee for liquidity pools on Raydium is set at 0.25%, with 0.22% going to LPs and the rest (0.03%) distributed among users staking the project's native RAY token.
In addition to the liquidity pools created by the project, Raydium introduced permissionless pools as well. The difference between the two is that the latter allows users to create their own pools for various SPL tokens with options for customization.
After a user creates a permissionless pool, the platform will automatically add its trading pair to the Raydium swap interface while leveraging Serum's order book to share its liquidity with other solutions in the ecosystem.
Farms and Staking
When liquidity providers supply tokens into a pool, AMMs automatically issue them LP tokens representing their share in the pool. The process is the same on Radium, which opens up yield farming opportunities for users by staking their LP tokens to farm the native RAY token and generate extra rewards.
Interestingly, thanks to partnerships between Raydium and other Solana-based projects, the platform allows liquidity providers to leverage their LP tokens to farm two tokens simultaneously by staking them in a single pool.
Such solutions are called fusion pools that provide dual yields to users to maximize their returns via farming on Raydium.
In addition to that, users looking for "simpler" ways to generate a passive income on the platform can stake RAY to earn extra rewards while holding the project's token.
Learn more about farming in DeFI
AcceleRaytor is Raydium's own crypto launchpad solution that allows projects to raise funds on top of the platform.
On AcceleRaytor, Solana-based projects can receive contributions from Raydium users by launching Initial DEX Offerings (IDOs).
To participate, contributors have to fulfill the requirements specified by each project by joining community pools that are open to the general public. In addition to community pools, users can also join RAY pools to participate in IDOs, where they have to stake a specific number of tokens for a certain period.
Upon all requirements are met, contributors can utilize the tokens they supplied in a pool to purchase the coins sold by the project.
What Is RAY?
RAY is the native cryptocurrency of the Raydium platform that is based on Solana's SPL token standard. In addition to that, RAY is also available as an ERC-20 token on Ethereum.
RAY is a utility token featuring the following core functionalities:
- Staking that allows users to generate extra yields by receiving 0.03% of the trading fees from each pool (proportionally to their RAY holdings).
- Distributing rewards to liquidity providers who lock their LP tokens across various pools.
- Some AcceleRaytor IDOs require users to stake a specific amount of RAY tokens to become contributors during the sale.
- In the future, the project seeks to introduce a limited governance mechanism, which will allow RAY stakers to vote on community proposals and changes.
RAY has its maximum supply capped at 555 million coins. While only a fraction (51 million) of the tokens are circulating on the market, emissions will only last 36 months (until the max supply is reached).
Furthermore, RAY features a similar deflationary mechanism as Bitcoin's halvening, in which the project cuts token emissions in half every six months to facilitate a long-term price appreciation for the cryptocurrency.
Now that you know the essentials about RAY let's see how Raydium's native token has been doing in terms of price.
Since its launch in February, RAY's price decreased from the initial $6.7 to $4 as of June 12, representing a -40.3% year-to-date (YTD) ROI.
That said, RAY has been doing well until the market downturn occurred in mid-May. Before that, the cryptocurrency's price increased to as high as $16.13 on May 3 (an over 140% growth since its launch).
For that reason, it will be interesting to see whether RAY can reach new highs when the crypto market rebounds from its current phase of correction.
Raydium: a Cheap, Fast, and Efficient AMM on top of Solana
Raydium leverages Solana's high scalability and Serum's on-chain central order books to operate an efficient AMM featuring inexpensive and fast trades with advanced features.
While the above allows the platform to match orders with much better performance than competing AMMs, Raydium maintains a good balance between decentralization and efficiency.
In addition to traders, Raydium is also an attractive choice for yield farmers due to the platform's partnership with other Solana-based projects that allow users to earn dual yields via fusion pools.
Also, it's important to emphasize the rapid development of the platform. While the team started working on the project last summer, they launched Raydium in February.
Since then, they introduced multiple new features on the platform, with more to come soon (such as community governance and external price oracle integration).
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