The Increment protocol introduces a system design that uses pooled virtual assets for liquidity and leverages Curve V2's AMM (Automated Market Maker) for trade execution. Increment's architectural layout proposes an alternative solution to the construction of current on-chain derivative protocols and establishes a complete infrastructure for multi-currency perpetual swaps.
In the year 2022, the on-chain ecosystem is revolutionized by tremendous financial utilities created by decentralized finance protocols. Crypto holders can earn passive income, take out loans, and do much more with their digital assets in the decentralized universe compared to previous years. Below, we explain two major innovations that has kicked off this development:
Peer-to-Contract System Design
Traditionally, the fundamental building block of electronic trading involves the order book and matching engine. This model is great for facilitating efficient exchange and allows the creation of sophisticated financial markets. However, when decentralized exchanges (DEXs) implemented the same peer-to-peer model on the Ethereum blockchain, each interaction with the order book requires gas fees, making it expensive and unsustainable to execute trades. During the DeFi summer of 2020, the breakthrough of the peer-to-contract system design, which is utilized by leading protocols like Uniswap and Compound, incentivizes the pooling of funds into a smart contract. Thus there isn't a seller on the other side in the traditional sense, instead, the user is executing trades against the liquidity in the pooled smart contract. This not only creates a much more efficient on-chain spot trading system but also establishes the potential for many other financial experiments, such as yield farming, synthetic assets, insurance, etc. In addition, when funds are pooled together, pooling participants are more incentivized to vote together on a common cause that they deem important by using the platform's governance token.
No one feels left behind or without a voice in the DeFi ecosystem. Developers do not have to make all the hard choices, because they can interact with the community and find out what improvements should be made to the platform, why a specific feature should be changed, and how the team should handle funds or partnerships. This atmosphere fosters new participants and ideas, which is enabled through governance tokens - the harbinger of decentralization. Holders of governance tokens can be thought of as stakeholders who are financially incentivized to push the project forward by contributing to platform development, voting in the decision-making process, etc. Without this, a majority of projects would not have the right to call themselves decentralized. Nevertheless, decentralized governance systems are still at early stages and have a long way to go with experiments in Decentralized Autonomous Organizations (DAOs), decentralized credit systems, etc.
While these innovations have boosted capital efficiency in the DeFi space, there are still parts of the market that are overlooked and present major challenges today, such as the lack of a proper infrastructure for global currency or stablecoin derivatives, especially during a time where USD-backed stablecoins dominate the market. Hence, Increment aims to create a decentralized exchange rate infrastructure that will unleash the power of DeFi for citizens around the globe. In the first iteration of the Increment protocol, we are building decentralized exchange rate perpetual swaps.
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