Polkaswap is a decentralized exchange to be launched on the Polkadot network. It provides a standard bridging interface and will give the easy possibility to list and exchange tokens for all substrate parachains and other blockchains like Ethereum and Bitcoin.^[1]

Polkaswap is being created with the help of a Web3 Foundation Grant.^[2]

Protocol

How Polkaswap Works

When traders call the swap function, Polkadot's liquidity aggregation algorithm will fill the order using the best offers from liquidity sources. Liquidity sources can be represented as automated market makers, order books, or other algorithms.^[3]

PSWAP token

Polkaswap will enable users to create liquidity pools for token trading pairs in the Polkaswap DEX and receive PSWAP. Like Uniswap, Polkaswap will have 0.3% trading fees per transaction. Trading fees are used to buy back and burn PSWAP tokens and new PSWAP tokens are minted to reward liquidity providers (LPs). Rewards to liquidity providers start at 100% of burned trading fees and gradually goes down to a flatline at 35% of daily burned tokens after 5 years.  The PSWAP token issuer will be a smart contract that will distribute PSWAP according to programmed logic and to incentivize Polkaswap growth.^[1]

There are currently no plans to sell PSWAP via an Initial Coin Offering (ICO) or private sales.

Distribution

PSWAP tokens will be given as rewards to those who join the Kusama and Polkadot parachain auctions. As Polkaswap is being developed, the team will publish more information about the distribution of PSWAP tokens.^[2]

PSWAP Utility

The PSWAP token incentivizes liquidity providers, utilizing a deflationary model with respect to token supply. The 0.3% fee for every trade in the Polkaswap DEX is used to buy back PSWAP tokens. Part of these PSWAP tokens are allocated to the liquidity providers, and part are burned to decrease the token supply. At first, 100% of bought-back PSWAP tokens are allocated to the liquidity providers, but with time this percentage decreases with the burned tokens.^[1]

Sora (XOR)

Polkaswap will be built on top of the SORA Network. The SORA token (XOR) will be used for gas/fees and liquidity provision on Polkaswap. XOR is a useful token for liquidity provision on Polkaswap because it is "stable-ish" (minimizing impermanent loss), highly liquid (because of the token bonding curve market maker), and neutral between other Polkadot ecosystem projects, but uses DOT and KSM as reserves.^[1]

Polkaswap Prices

The Polkaswap protocol design allows multiple liquidity sources per token pair. Every liquidity source will have its own algorithm to determine prices. When a user calls a swap function, the Polkaswap liquidity aggregation algorithm will fill the order using the best offers from liquidity sources.^[2]

Permissionless

The Polkaswap protocol and traders cannot be censored or allowlisted. The developers cannot technically stop or edit the smart contracts in any way after they have been deployed. Deployment of developed code will be decided by the community and is not the decision of the developers.^[1]

Polkaswap Pool

There will be multiple, different pools in Polkaswap. It will start with a 50/50 XYK pool (similar to contemporary DEXs like Uniswap), and then add multiple other pool technologies to provide a better trading experience for users. Polkaswap will have a liquidity aggregation path algorithm, which will fill trades according to the best offers using multiple pools simultaneously.^[1]