MagicSea
MagicSea has been awarded a grant from IOTA and is currently one of 25 projects funded by the IOTA Foundation. To date, the IOTA Foundation has distributed $2.74 million to support the development of these innovative projects within the Web3 ecosystem.
Overview
MagicSea is a leading decentralized exchange and NFT marketplace serving IOTA EVM and Shimmer EVM ecosystems. Originally launched as ShimmerSea on ShimmerEVM, it has evolved into a multi-chain protocol designed to enable and grow DeFi across IOTA-based networks. MagicSea functions as an Automated Market Maker (AMM), facilitating token swaps and liquidity provision.
Key features of MagicSea include:
- Hybrid Liquidity Model: MagicSea combines two liquidity pool types:
- Simple V2 Pools: Based on the Uniswap V2 protocol, utilizing a constant product formula.
- Concentrated Liquidity Book (LB) Pools: Leveraging the Trader Joe V2 model for more flexible and efficient liquidity provision.
- NFT Marketplace: Allows users to buy, sell, and manage NFTs, with features like NFT-restricted staking pools.
- Yield Farming and Staking: Users can participate in liquidity mining and staking to earn rewards.
Value Proposition:
At its core, MagicSea provides a decentralized exchange that enables token swaps and liquidity provision for IOTA EVM and Shimmer EVM based assets. By implementing both traditional constant product pools and concentrated liquidity pools, MagicSea aims to offer improved capital efficiency for liquidity providers while maintaining competitive rates for traders.
The protocol’s yield farming and staking mechanisms provide avenues for token holders to generate returns on their assets.
MagicSea’s NFT marketplace adds another dimension to its offerings, allowing for the trading of digital assets and introducing NFT-gated functionalities like restricted staking pools. This feature may be particularly useful for projects looking to offer targeted incentives to their community members.
By offering a range of services – from token swaps and liquidity provision to yield generation and NFT trading – the protocol aims to become a one-stop platform for IOTA-based DeFi activities.
What Problem MagicSea is Solving
MagicSea addresses several critical issues particularly in the context of emerging blockchain ecosystems:
- DeFi Infrastructure for Emerging Networks: IOTA EVM is a relatively new entrant in the DeFi space. Protocols like MagicSea play a crucial role in building out the necessary DeFi infrastructure for these networks, providing essential services such as token swaps, liquidity provision, yield farming, and NFT trading. This helps in bootstrapping the DeFi ecosystem and attracting users and developers to these emerging blockchains.
- Capital Inefficiency in Traditional AMMs: Conventional automated market makers often suffer from capital inefficiency, with a significant portion of provided liquidity remaining unused. MagicSea tackles this issue by implementing Concentrated Liquidity Book (LB) pools alongside traditional V2 pools, allowing liquidity providers to allocate capital more efficiently within specific price ranges.
- Limited Cross-chain Liquidity: As blockchain ecosystems expand to include multiple chains, there’s a need for protocols that can facilitate liquidity and user activity across these networks. MagicSea’s multi-chain approach aims to create a unified DeFi experience across IOTA-based networks, potentially improving overall ecosystem liquidity.
- NFT Functionality: While NFTs have gained popularity, their integration with DeFi functionalities has been limited. MagicSea’s NFT marketplace, combined with features like NFT-gated staking pools, provides new use cases for NFTs within the IOTA EVM ecosystem.
Target Users of MagicSea
MagicSea caters to a diverse range of DeFi users:
- DeFi Newcomers:
- Users new to decentralized finance who are looking for a user-friendly platform to start their DeFi journey.
- MagicSea’s interface and diverse range of basic DeFi functionalities (swapping, staking, farming) make it accessible for beginners.
- Experienced DeFi Users:
- Traders and liquidity providers familiar with DeFi concepts who are seeking new opportunities on newer blockchains.
- These users can leverage MagicSea’s advanced features like Concentrated Liquidity Book pools to potentially maximize their returns and capital efficiency.
- Yield Farmers:
- Users looking to earn passive income through various DeFi strategies.
- MagicSea offers multiple yield farming opportunities, including liquidity provision rewards and staking options for both $LUM and Magic LUM tokens.
- NFT Enthusiasts:
- Users interested in buying, selling, or creating NFTs on the IOTA EVM network.
- The integrated NFT marketplace caters to this group, with additional DeFi functionalities like NFT-gated staking pools offering unique opportunities.
- Project Developers:
- Teams building on IOTA-based networks looking for liquidity solutions and token distribution mechanisms.
- MagicSea’s liquidity pools and farming programs can help new projects bootstrap liquidity and distribute tokens to their communities.
- Governance Enthusiasts:
- Users interested in participating in the decision-making processes of DeFi protocols.
- Magic LUM holders can engage in governance activities, influencing the protocol’s development and earning a share of its revenue.
Sector Outlook
MagicSea operates in the Decentralized Exchange (DEX) sector, a fundamental component of the broader DeFi ecosystem. DEXs facilitate trading without intermediaries, utilizing smart contracts to execute trades and manage liquidity.
The DEX sector’s growth and significance are propelled by several key factors. First, there’s a growing user preference for non-custodial trading solutions that offer greater security and control over funds. Second, DEXs provide access to a wide range of tokens, including newly launched and niche assets that may not be available on centralized exchanges. Third, the integration of additional DeFi functionalities, such as yield farming and liquidity provision, has expanded the utility of DEXs beyond simple token swaps.
DEXs have also been at the forefront of innovation in market-making mechanisms. Automated Market Makers (AMMs) have revolutionized liquidity provision, allowing any user to become a market maker by depositing assets into liquidity pools. More recent innovations, such as concentrated liquidity and dynamic fee structures, aim to improve capital efficiency and adapt to varying market conditions.
Similar dApps in the Sector:
Uniswap, one of the pioneering DEXs, introduced the concept of Automated Market Making to a wide audience. Its current V3 version introduced concentrated liquidity, allowing liquidity providers to allocate capital more efficiently within specific price ranges. The upcoming V4 iteration will bring transformative features like hooks, which enable custom code injection into the swap process. This advancement will allow for complex trading strategies, dynamic fees, and other customizable functionalities directly within the protocol.
PancakeSwap, operating on the BNB Chain, combines a traditional AMM-based token swap service with an NFT marketplace, allowing users to trade both tokens and digital collectibles in one ecosystem.
Trader Joe, initially launched on the Avalanche network, has implemented innovative features like its Liquidity Book model, which MagicSea has also adopted. This model aims to provide more capital-efficient liquidity provision and reduce impermanent loss for liquidity providers.
One of the key trends in the DEX sector is the move towards multi-chain or cross-chain functionality. Platforms are expanding to support multiple blockchain networks, aiming to capture liquidity and users across different ecosystems.
Business Model
MagicSea generates revenue through various fees associated with its services. The protocol has implemented a fee structure that applies to different operations within its ecosystem. These fees contribute to the protocol’s treasury and are managed by governance, ensuring the sustainable growth and development of the platform.
How the protocol makes money:
- Trading Fees: MagicSea collects fees from every trade executed on the exchange. These fees are split between liquidity providers and the protocol treasury.
- Liquidity Provision Fees: When users add or remove liquidity from pools, a portion of the fees generated goes to the protocol.
- Yield Farming and Staking Rewards: While primarily benefiting users, a portion of the rewards generated from yield farming and staking activities contributes to the protocol’s revenue.
- NFT Marketplace Fees: MagicSea charges fees on NFT trades, which are used for buying back and burning LUM tokens, indirectly benefiting the protocol.
What fees are charged and how they are distributed:
- Swap Fees:
- For Simple V2 Pools: The fee structure is similar to Uniswap V2, typically around 0.3% per swap.
- For Liquidity Book (LB) Pools: Fees are dynamic and can be adjusted on a pool-by-pool basis. This includes: a) Base Fee: Set by the protocol owner when creating the pool. b) Variable Fee: Depends on market volatility, affected by swap frequency and size.
- Distribution:
- 50% of the fees goes to liquidity providers for V2 pools.
- 75% of the fees goes to liquidity providers for LB pools.
- The remaining portion (50% for V2, 25% for LB) contributes to DEX profits in USDT, which are directed to the Magic LUM Staking Pool.
- Liquidity Provision Fees:
- Fees for adding or removing liquidity vary depending on the pool type and market conditions.
- A small percentage (usually 1-2%) may be charged and added to the protocol treasury.
- NFT Marketplace Fees:
- Trading Fees: Between 2.5% and 5% of the NFT sale price.
- Distribution: 100% of trading fees contribute to DEX profits in USDT, which are directed to the Magic LUM Staking Pool.
- Fairlaunch Listing Fees:
- 100% of listing fees from fairlaunches contribute to DEX profits in USDT.
- Booster Mechanism Fees:
- Users pay fees when converting $LUM to Magic LUM ($MLUM) through the Booster. This process burns $LUM over time while distributing $MLUM.
- Protocol Earnings Distribution:
- Magic LUM ($MLUM) stakers can access protocol earnings through special staking pools. The current APY average in this pool is 15%.
Additional Fee-Related Features:
- Dynamic Fee System (for LB Pools):
- Adjusts fees during volatile situations to compensate for possible impairment loss.
- Fees are calculated and distributed per bin, ensuring fair distribution to liquidity providers.
- Emission Voting:
- Magic LUM holders with tokens locked for 90+ days can participate in emission voting to determine LUM farm emissions distribution.
- Buyback and Burn Mechanism:
- A portion of the fees collected is used to buy back and burn $LUM tokens, creating deflationary pressure.
Tokenomics
MagicSea utilizes a dual token system consisting of LUM ($LUM) and Magic LUM ($MLUM). This structure is designed to address various needs within the protocol’s ecosystem.
The LUM token ($LUM) serves as an incentive mechanism for liquidity providers and participants in yield farming activities. By offering $LUM as a reward, the protocol aims to attract and retain liquidity, which is crucial for the efficient functioning of the DEX.
The Magic LUM token ($MLUM), on the other hand, is designed to enable governance participation and align the interests of long-term stakeholders with the protocol’s success. By giving Magic LUM holders voting rights and access to protocol earnings, MagicSea creates a mechanism for community-driven decision-making and value distribution.
Token Utility:
The $LUM token has several use cases within the MagicSea ecosystem. Primarily, it serves as a reward for liquidity providers and yield farmers, incentivizing users to contribute to the protocol’s liquidity pools. $LUM can be traded on the open market, allowing users to realize the value of their rewards. Additionally, users can stake $LUM or use it in farming activities to earn further rewards, creating additional incentives for holding and using the token within the ecosystem.
Magic LUM $(MLUM), as the governance token, allows holders to participate in the MagicSea DAO. This participation includes voting on protocol parameters, future developments, and other significant decisions affecting the platform. Magic LUM holders also gain access to special staking pools that distribute protocol earnings.
Total Supply and Distribution:
The supply and distribution mechanisms for $LUM and $MLUM differ significantly. $LUM operates on an inflationary model with no maximum supply cap. The protocol can mint a maximum of 4 $LUM per second, allowing for a consistent flow of rewards to incentivize liquidity provision and other activities.
The initial distribution of $LUM occurred through a Fairlaunch event, where 500,000 $LUM were minted and locked in a smart contract. This approach aimed to provide a fair starting point for token distribution, avoiding pre-mints, pre-sales, or airdrops that could concentrate token ownership.
In contrast, Magic LUM ($MLUM) has a fixed maximum supply of 1 million tokens, distributed over a 5-year period. The initial mint included 205,000 tokens allocated for initial liquidity and the team, with these tokens locked in liquidity pool or staking pool smart contracts. The remaining tokens are minted according to a predefined schedule, with varying monthly rates designed to reach the maximum supply by the end of the distribution period.
The Booster mechanism plays a crucial role in the tokenomics here. It allows users to convert $LUM to $MLUM through a process that gradually burns $LUM while distributing $MLUM. This mechanism creates a deflationary pressure on $LUM while maintaining the scarcity of $MLUM. Additionally, the protocol uses a portion of its fees for buyback and burn strategies for $LUM.
Risks & Security
MagicSea has undergone several security audits to ensure the safety of its smart contracts. The following audits have been conducted:
- MagicSea DEX v1 was audited by HashEx and AuditOne.
- MagicSea Booster Smart Contract was audited by AuditOne.
- MagicSea Magic LUM Staking & Magic LUM Voting/Bribing is currently undergoing an audit by AuditOne.
Potential Risks and Points of Failure
- Smart Contract Vulnerabilities:
- For All Users: Despite audits, smart contracts may contain undiscovered vulnerabilities that could be exploited, potentially leading to loss of funds or disruption of services.
- Impermanent Loss:
- For Liquidity Providers: In volatile market conditions, liquidity providers in AMM pools can suffer impermanent loss, potentially outweighing earned fees.
- Governance Attacks:
- For All Users: The emission voting system could be vulnerable to governance attacks if a small group accumulates a large amount of voting power.
- Bridge Vulnerabilities:
- For Cross-Chain Users: MagicSea plans to implement cross-chain functionality. This could create vulnerabilities in bridge protocols and could expose users to risks when transferring assets between chains.
- Interoperability Risks:
- For Cross-Chain Users: As MagicSea operates on multiple chains including IOTA EVM and Shimmer EVM, discrepancies in token values or liquidity between chains could introduce arbitrage risks or unexpected behavior.
Team
MagicSea is developed by an anonymous team. Some information on the team is available:
- Dr.Tangle (Doug) is a Core Contributor focusing on protocol engineering and business development.
- TangleHank is a Contributor primarily handling marketing and communication.
Project Investors
MagicSea does not have traditional venture capital investors. The project was initially bootstrapped by the founding team using their own resources. Instead of private investment rounds or an ICO, MagicSea opted for a fairlaunch approach to distribute its $LUM token.
The fair launch event, held in October 2023 on the Shimmer EVM, raised approximately 12.5 million Shimmer tokens $SMR (valued at about $500,000 USD at the time). This capital served as the initial liquidity for the protocol.
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