GlowSwap Introduction

GlowSwap is a decentralized exchange (DEX) protocol built on a two token pair constant-product automated market maker (CPAMM) foundation. GlowSwap allows anyone to borrow the underlying liquidity in a pair in return for interest payments on the amount of liquidity they borrowed. In GlowSwap, interest repayments have no price based liquidation risk nor margin calls. This allows for advanced trading strategies that are not typically found in DeFi.

Before we dive into the details of how GlowSwap works, let’s first take a step back and understand the problem that GlowSwap is trying to solve.

The Problem

Liquidity Providers

Typically, in DeFi, liquidity providers deposit their tokens into a pool and earn fees based on the volume of trades in the pool.

However, this model has a few drawbacks:

1. Limited Yield: Liquidity providers are incentivized to provide liquidity to pools with high volume and low volatility. The higher the volatility, the higher risk of divergence loss (loss due to price unfavorable price movements).

2. Loss vs Rebalancing (LVR): Liquidity providers are prone to unfavorable conditions due to the nature of AMMs lagging behind other price sources. This allows arbitrageurs to profit from stale prices in the DEX.

3. Liquidity Provisioning Complexity: Liquidity providers must actively manage their positions and look for yield optimization strategies to maximize their returns. Not all liquidity providers have the time or expertise to do this.

4. Limited Use Cases: The traditional model of providing liquidity to a pool is inflexible. Once the liquidity is provided, it cannot be used for other purposes.

Borrowers

In traditional DeFi lending, borrowers must deposit collateral assets worth more than their desired loan amount (known as the Loan-to-Value Ratio or LTVR), typically maintaining a collateralization ratio of 130% or higher to avoid liquidation.

Traditional DeFi lending protocols like Aave and Compound have several key limitations for borrowers:

1. High Collateral Requirements

   • Must deposit significantly more value than borrowed amount
   • Typical collateralization ratios of 130% or higher
   • Inefficient capital utilization

2. Price Oracle Dependencies

   • Reliance on external price feeds
   • Need constant monitoring of volatile asset prices
   • Oracle failures can trigger unnecessary liquidations

3. Harsh Liquidation Mechanics

   • Positions forcibly closed when collateral ratio drops
   • Liquidators purchase collateral at significant discounts
   • Borrowers suffer substantial losses even from short-term price swings
   • No grace period or recovery options

4. Restricted Asset Selection

   • Limited mainly to stablecoins and major cryptocurrencies

Similar constraints are present for leverage traders that borrow liquidity. Notably, liquidations due to short term price swings.

These constraints create an unstable borrowing environment where users face significant risks from market volatility, even when their long-term thesis remains sound. The system prioritizes protocol safety over capital efficiency and user experience.

Enter GlowSwap

GlowSwap is a decentralized exchange (DEX) built on a constant-product AMM (CPAMM) foundation, enhanced with a liquidity borrowing mechanism. It allows anyone to move liquidity from the public “source” pool into a private “exclusive” pool where only the borrower can trade. Borrowers pay interest for this exclusive right, and that interest flows back to liquidity providers (LPs).

Why It Matters

1. Solving LVR for LPs

   • In traditional AMMs, “Loss vs. Rebalancing” (LVR) means LPs lose out to arbitrageurs.
   • In GlowSwap, borrowers become the arbitrageurs—paying interest to LPs.
   • This converts LVR into passive returns for LPs.

2. No Price-Based Liquidations

   • Borrowers owe liquidity back to the source pool (not a fixed token amount).
   • They can’t be margin-called due to price swings.
   • Positions remain safe indefinitely, as long as interest is paid.

3. Flexible Borrowing & Leveraging

   • Borrowers can leverage or rebalance in their private pools without giving up capital to forced liquidations.
   • They can add extra liquidity to cover ongoing interest, so positions can last long-term.

4. Outsourced Yield Management

• LPs can rely on the most effective borrowers to maximize their returns.
• More effective borrowers push up interest rates as they can afford to a pay more, which in return increases the passive returns for LPs.
• LPs can focus on providing liquidity without thinking about capital optimization strategies.

Key Takeaway

By letting liquidity fragment into multiple exclusive CPMMs, GlowSwap harnesses competition among borrowers to deliver higher, passive yields for LPs—while enabling long-term leverage and no-margin-call lending for borrowers.