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Pact: A Decentralized Exchange and the Home of Liquidity on Algorand

By 2sats | 2sats | 11 Jun 2022

*obligatory not financial advice*


What is Pact?

Pact is a decentralized exchange that is running on the Algorand blockchain with a unique fee structure, and it is along with Tinyman and Algofi one of the most used DeFi dApps there.

The DEX works with liquidity pools and an Automated Market Maker that are based on the code for Uniswap V2. This means that people can supply their cryptocurrencies to liquidity pools of trading pairs, which are then offered to traders in exchange of a trading fee and the prices are set automatically based on the ratio of the two tokens in the pool.

The liquidity providers of certain pools are earning besides the trading fees also additional ALGO coins as reward because Pact is part of the Aeneas Reward program, where the Algorand Foundation is distributing rewards to the users of supported protocols, which means that even the Algorand Foundation considers Pact a solid project.

Most DEXes have a standard trading fee of 0.3% for each swap. Pact is special in that regard because it allows its users to create liquidity pools with different fees. Pact allows pools with 0.01%, 0.05%, 0.3% and 1% fee. This makes it possible to adjust the rewards for liquidity providers based on how risky the trading pair is.

It can happen that the value of one of the tokens in the pair drastically changes, in this case the liquidity providers would have been better off holding their tokens separate, this is called impermanent loss and how high the trading fee should be depends on how likely this is too happen. If the chance of impermanent loss is low, like in a trading pair for two US dollar tokens, then you could set a low fee with only 0.05% or even just 0.01%. If the chance is higher you could set a fee of 0.3% to compensate the liquidity providers more for their risk and potential loss. Should the chance be really high you could even set a fee of 1%.

Pact is one of the most used dApps on Algorand and one of its most successful decentralized exchanges. However, the Tinyman DEX has been around for longer and has more users, and AlgoFi has also a native DEX which is also a strong competitor. But Pact still does well and more of its liquidity pools are receiving Aeneas Rewards from the Algorand Foundation than any other DEX. Pact also has a good relationship with Algomint that was boosting liquidity for its native token there.

Pact currently has no governance token and there are no plans for changing that within the near future. It could happen that there will be an airdrop for early users if a native token does launch eventually but that is just speculation at this point.




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