Mechanism

MECHANISM

The Solid Protocol acts as a bridge that could take any supply of any market and convert it into a “Solid version” of the market. It creates a stable market that the price is adjusted non-linearly, in which it is a more stabilized market and could be considered as a subset of the original market.

There are two key points in this mechanism:

• The only way Solid-token is minted and burnt is through buying and selling. (meaning there should be 0 supply at the beginning)

• Tokens are always minted when bought and burnt when sold if and only if through the Solid Protocol.

Solid protocol

When buyers buy into the Solid Protocol with a token on the blockchain, the “Solid version” of the coin is minted and sent to the buyer, total supply also increased by the amount that is minted.

Vice versa, when sellers sell the “Solid version” of a token on the blockchain, the original token is sent to the seller, the “Solid version” of the token is burnt, total supply also decreased by the amount that is burnt.

The amount that is minted/burnt always based on the supply at the moment when Solid-token is minted/burnt. Basically, the price is based on supply.

Self-liquidated

The Solid Protocol bridges all pairs of tokens into a “Solid version” of those tokens themselves. Every token could be converted into a “Solid version” of the token itself.

When the supply of a token is being minted, those supplies could then be used to buy into the “Solid version” of the token, creating a self-liquidated Solid-token based on the token itself.

By “proof-of-staking”, holders of the Solid-token can lock up their liquidity in a pool to ensure there is a supply that would not be sold, and be rewarded as others sell. This creates a good cycle of a supply and demand model that there is a value of just holding the Solid-token itself.

Unlike most markets, the Solid Protocol does not adjust the price of the Solid-token linearly, but with a simple formula to calculate the price of such. (See below section 3 Price Oracle)

Anti-Inflation

Solid protocol allows traders to use Solid-token as a base for trading, it is also an anti-inflation protocol for the market with quantitative easing (QE), since if one holds a “Solid version” of a stable coin, the Solid-token could keep itself value accordingly to inflation as the supply of the “Solid version” of the stable coin would increases when more stable coin is minted.

If one holds a stable coin like US dollars (USD), USD is being minted but the holder does not benefit from this as stable coin does not increases in value as time goes by generally, but by converting USD into Solid-USD through the Solid Protocol, the buyer holds the “Solid version” of the token which enables the catch up to inflation as more USD is being minted, the price of Solid-USD also increases over USD as more USD is being used to buy into Solid-USD.

However, a token that has a fixed supply that does not increase over time could not take good use of the Solid Protocol since there would be also a fixed amount in this protocol based on the fixed supply.

Price Oracle

We propose a simple mechanism to calculate the price, based on supply, given as the supply of the token, the price of the token, , is determined by the following formula:

Formula 1.1 Price of Solid-token based on total supply of Solid-token

In a real-life scenario, when a trader buys the token, the trader cannot buy all the tokens he wants at the current price. Exchanges mimic the effect that, the token’s price goes up as the buyer buys in more coin in a dynamic way, which is called price impact. Price impact normally could be deduced to a simpler formula since markets normally adjust the price linearly.

All price impact could be calculated with definite integral given$f(x)$as the formula for calculating the price. Since the proposed method does not adjust the price in a linear way, therefore, we need to deduce our own price impact formula with the definite integral.

Let α be the initial supply of the Solid-token, β be the final supply of the Solid-token, and let ẟ = β - α, which is tokens in total bought by the buyer, the below formula is used to calculate the total price of all tokens that the buyer needs to pay for buying ẟ token(s). Given f(x)= √(2&x); we could further deduce the total price with the Riemann Sum definite integral formula:

Riemann Sum formula

Formula 1.2. Definite integral summation formula of formula 1.1

Formula 2. Token based on ẟ amount of Solid-Token

For instance, let’s call a token ABC, if one sells 5 Solid-ABC when the supply is 105 Solid-ABC, the supply of Solid-ABC becomes 100 after selling, the amount one would get is $2/3*(105^(3/2)-5^(3/2))$ ≈ 709.83 ABC (rounded to 2 decimal places), the same price as for buying 5 Solid-ABC when the supply is 105 Solid-ABC.

The below formula could be deduced for the total amount of token one can get, in a buying scenario, given as the current supply and as the amount in price, we would not provide the mathematical proof or discuss in detail how the below formula is deduced. The total number of tokens is deduced as follows:

Formula 3. A formula deduced for buying.

Anti-dumping dynamic trading fee

The Solid Protocol also has embedded a feature that is against the attack of dumping and dumping of the price, it introduces a dynamic trading fee (similar to gas fee on the Ethereum blockchain network) based on the exponential daily trading volume.

Holders of the “Solid version” of a token could stake into the staking pool that collects those trading fees, when selling volume increases, the trading fee would also increase as holders of in the protocol is locking up their liquidity, it could be so-called “proof by staking”, arbitrageurs that has large proportion in the Solid Protocol could not profit from an instant-massive sell-off as the trading fee is increased.

On every single transaction of selling, the exponential average trading volume (EATV) would be updated based on the number of tokens sold and the difference between last traded timestamp $t_1$and timestamp $t_2$of the transaction when the transaction is executed, with the below formula:

Let δ be the difference between the last traded timestamp and timestamp of the transaction $(t_2-t_1)$ and ρ be the number of tokens sold:

Formula 4. Calculation of EAVT based on δ

Let α be the balance of tokens in the Solid Protocol, then the trading fee percentage (TFP) is calculated based on the following:

$$TFP = min (EAVT * 48 / α),1) * 20$$

Formula 5. Calculation of TFP based on α and EAVT

Finally, the trading fee (TF) sent to the reward pool is calculated as follows:

$$TF = TFP*ρ$$

Formula 6. Calculation of TF based on TFP andρ

TF would be the amount sent to the reward pool and distributed among those who staked in the staking pool proportionally.