HumidiFi: A Deep Dive into Solana's Leading Dark Pool Protocol

HumidiFi: A Deep Dive into Solana's Leading Dark Pool Protocol

Article Highlights

HumidiFi, the largest dark pool protocol on Solana, has already made waves in the Decentralized Finance (DeFi) space. Having launched just six months ago, HumidiFi has become the largest Decentralized Exchange (DEX) on Solana in terms of trading volume, accounting for over 50% of the total. With the Token Generation Event (TGE) coming up on December 5th, it's time to take a closer look at this innovative protocol and what makes it unique.

Prop AMM: An Innovative Approach to Market Making

While many categorize HumidiFi as a "dark pool" protocol, HumidiFi describes its own DEX model as "Prop AMM," or Proprietary Automated Market Maker. Unlike traditional AMMs that use a simple equation (k = x * y) for asset pricing, HumidiFi's Prop AMM takes a more proactive approach to market making. This proactive approach centers around three key aspects:

1. Off-Chain Computation: HumidiFi utilizes high-performance, ultra-low latency servers to monitor prices on centralized exchanges (such as Binance and Coinbase) and other on-chain DEXs. These servers also use predictive models to forecast future price movements.
2. Custom Oracle: This oracle relays the latest prices, market conditions, and inventory updates to HumidiFi on-chain in real-time.
3. On-Chain Execution: HumidiFi utilizes Nozomi, a direct connection with major validators, to reduce latency and complete transactions quickly. On-chain smart contracts also handle fund management.

A Practical Example

To understand how HumidiFi's Prop AMM works, let's compare it to a traditional AMM:

1. Traditional AMM: A traditional AMM (k = x * y) relies on changes in the ratio of tokens in a trading pair to determine prices. A large purchase can quickly change the price curve. For example, buying $10,000 worth of TRUMP might result in slippage greater than 2%.
2. HumidiFi: HumidiFi's off-chain servers monitor prices on various platforms and detect that TRUMP sell orders are plentiful on Binance and that prices are relatively stable in the short term. The oracle communicates with the on-chain contract to inform the contract of this information, meaning that the on-chain contract doesn't need to significantly increase the price. As a result, traders can enjoy lower slippage.

Inventory Rebalancing and Risk Management

HumidiFi's whitepaper also highlights two additional scenarios: "managing and rebalancing on-chain inventory" and "identifying and penalizing toxic arbitrage and informed bots."

• Inventory Rebalancing: When the ratio of tokens in an LP pool becomes excessively skewed (e.g., too much SOL remaining in a SOL-USDC pool during a market downturn as users sell SOL for USDC), HumidiFi monitors this imbalance and lowers the sell price of SOL. For example, if the SOL price on a CEX is currently $138, HumidiFi might offer $137.5 in order to attract arbitrage and rebalance the LP pool ratio.
• Penalizing Toxic Arbitrage and Informed Bots: HumidiFi relies on the Nozomi VIP channel to cancel orders before they are executed.

From DEX to Liquidity Layer

HumidiFi suggests the potential to evolve "from a single DEX into a universal liquidity layer for the capital market on the Solana network."

WET Token Economics

The total supply of the WET token is 1 billion tokens, with 90% controlled by the team and 10% allocated to the ICO TGE (to be fully unlocked). The ICO's Fully Diluted Valuation (FDV) is $69 million. While this looks attractive, the whitelist has already been snapshotted.

Conclusion

Dark pools, like prediction markets, are an emerging trend worth watching. HumidiFi is currently the most noteworthy project in this space and could be a valuable starting point for learning. Pay attention!