What are Diesel Pools and how they could bring DeFi innovation to Hive

By achim03 | achim | 25 Mar 2021

During the last weeks whenever somebody was speaking of Diesel Pools, there was certainly at least one other person who would ask... What is a Diesel Pool?

That's why I believe it's a good idea to try to give an explanation here :-)

The traditional market through order books

When you open hive-engine or most of other markets, you often have an order book that contains all buy orders on one side and all sell orders on the other side. If somebody puts a new order that is matched by either buy or sell side, there is a transaction. That is how traditional markets work. This is how the price of shares, currencies, tokens are defined. The evolution of the different transactions draws what is commonly called the chart.

Liquidity pools

I believe that the first liquidity pools could be found on uniswap on the Ethereum blockchain. The principle is very simple but quite revolutionary.

Let's take the example of a market token A and token B
Liquidity providers deposit the same value of token A and token B in the liquidity pool.

Now if a person wants to swap token A for token B, he will add token A to the pool and extract token B. This means that the value of token A will decrease and the value of token B will increase.
With this transaction the price of these tokens will have changed. Obviously the token that is wanted more will go up in price and the other down in price. The liquidity pool will always hold 50% of its value in token A and 50% of its value in token B. If one token is added more than the other, the price change will compensate it.

It's quite a big innovation. Thanks to liquidity pools, you will always be able to swap your tokens at a more or less fixed price. It can give liquidity even to very small markets.

For Liquidity pools to work properly, there needs to be as much liquidity provided as possible. The more liquidity is provided, the more stable the prices are and the more swaps can be handled.

If there is little liquidity, there is a phenomena called slippage that will make the price change a lot even with little swaps.

Now let's turn to Diesel Pools

When you want to sell or buy Hive-engine tokens, you would probably do it over the market using order books. However it's now also possible to swap some tokens in Diesel Pools. These Diesel Pools are the same as the liquidity pools that you might find on ethereum or on binance smart chain. For the moment you can access these Diesel Pools over Tribaldex.

Very recently, the Hive Engine team has implemented the possibility to add reward pools for these Diesel Pools. This is a real game changer and brings us much closer to the Defi models proposed on ETH or BSC. People need an incentive to deposit their tokens into these Diesel Pools. Thanks to these reward pools, this is now possible.

Will Defi come to Hive?

In my opinion we have Defi on Hive for a long time. It simply looks different from the reward farming that you might find on ETH or BSC.

This reward farming is based on a business model that is centered around the costs related to the pools. These costs are then used to burn the token that is given as a reward to liquidity providers. If you have been on CUB finance, you will get CUBs for depositing your funds into the liquidity pools but you will also pay fees for depositing them. Thanks to these fees, CUB and LEO can be burned and the supply can be limited.

We will probably not see the same business model on Hive. There is however a huge advantage here on hive which is that we don't have any transaction costs. Even if these costs are lower on BSC than on ETH, they are still high compared to the zero costs on Hive.

We can do better on Hive

With these Diesel Pools we can reward liquidity providers with an inflationary token. We just need to find a way to find business models that provide sinks for these tokens. We need to come up with creative solutions but if Hive is full of something then it's full of creative people ;-).

Use Diesel Pools for arbitrage

Next time you need to swap your hive-engine tokens, check whether you don't get a better price over the Diesel Pools? We now have two parallel markets for some token pairs and it might be worth to explore potential price differences between Diesel pools and hive-engine markets.

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