Token Pricing: Addressing Challenges in Trading Pools & Introducing Our Solution

Recently, there have been discrepancies between the spot market prices of precious metals and the prices reflected in the trading pools on Uniswap. We understand that the differences in numbers may have raised some concerns amongst traders and ecosystem partners. That’s why we are introducing a new infrastructure solution that aims to enhance pricing accuracy and stability within Aurus DeFi trading pools.

Understanding the Challenges in DeFi Trading Pools

First, it is important to understand how the pricing of tokenized gold, silver and platinum works, as well as the challenges faced by our current trading pools.

Token prices are derived from the “balance of assets” in the liquidity pools on Uniswap. You are probably familiar with most of the mechanics; but if not, then here you go. Let’s use the tGOLD token ($TXAU) as an example:

Exemplifying:

Each tGOLD token is 100%  backed by 1 gram of physical Gold, held in audited and insured vaults.
Regardless of the 1:1 equivalence, the price of tGOLD in the Aurus App and on other sites like CoinMarketCap mainly reflects the price of the liquidity pool on Uniswap, not the spot market price of physical Gold. 

So when people sell large amounts of the tGOLD token for USDC (a stablecoin) on Uniswap, the price drops; as there is now more tGOLD vs USDC in the pool. That’s how pools work: too much supply results in a lower price.

Consequently, if fewer people are buying than selling tGOLD, the price will trade at a discount compared to the spot price of Gold. Additionally, the lower the total liquidity in the pool, the larger the difference in price from spot Gold markets.

Arbitrage: The Current Opportunity

On the one hand, the pool dynamics are creating a temporary price discrepancy. On the other hand, this also presents a profitable arbitrage opportunity for traders. That is, users can buy gold or silver tokens at a discount while rebalancing the pricing of the trading pool by doing so.
This is a free-market mechanism employed by open ecosystems, like Aurus, to regulate the pricing of precious metal tokens, like tGOLD. And it’s an opportunity that most users in the community are not yet taking advantage of.

Promoting Stability

So,  what are the measures that we can take to ensure more stable prices for the precious metal tokens reflective of Spot markets?

• Aurus Liquidity Providers and other traders can buy up the "arbitrage" and bring prices closer to the spot market on a more regular basis;
   
• Users can then "redeem" these tokens for physical Gold or FIAT - with an Aurus bullion provider; &/or swap them for USDC, to realize a profit;
   
• Pricing of tGOLD can also be kept more in line with spot market pricing for Gold, by using infrastructure or trading platforms focused on Real World Assets, like Gold, which haves a reference price in the “real world”traditional markets;
   
• By promoting more arbitrage opportunities and incentivization for liquidity providers, we can increase total liquidity in the trading pools. Hence, more stable pricing too.

Introducing Our Solution: 

Balancer and Xave Finance Integration: Our partnership with Xave Finance will further enhance liquidity provision and stability within our trading pools. Xave Finance builds liquid FX markets for DeFi, on top of Balancer’s advanced automated market maker (AMM) technology.  Xave's core product is the FXPool, a custom liquidity pool that uses a novel FX invariant to facilitate stablecoin swaps with no slippage. Xave works with global stablecoin issuers to grow liquidity and yield for non-USD stablecoins, which aligns perfectly with a stable asset like tGOLD.

Benefits of the New Infrastructure:

• Improved Pricing Accuracy: With enhanced liquidity and advanced AMM technology, our trading pools will more accurately reflect spot market prices, reducing price discrepancies and improving trading efficiency.
   
• Enhanced Stability: The integration of Balancer and Xave Finance will contribute to greater stability within our trading pools, reducing slippage and minimizing the impact of large trades.
   
• Increased Trading Opportunities & Incentives: Traders and investors will benefit from a more liquid and stable trading environment, with reduced trading costs, improved execution quality & more incentives for liquidity providers.
   
• More arbitrage opportunities: As arbitrage is the mechanism to regulate fair pricing, we will also set up an extra trading pool, with a more volatile & highly liquid asset like ETH or MATIC, paired against our precious metal tokens, to increase volatility slightly, whilst also promoting arbitrage trading opportunities.

Conclusion: Enhancing Pricing Accuracy and Stability

At Aurus, innovation is at the heart of everything we do. With the introduction of our new infrastructure solution powered by Balancer and Xave Finance, we are taking proactive steps to enhance liquidity provision, optimize pricing accuracy, and create a more efficient trading environment. We're excited about the possibilities that lie ahead and look forward to delivering this solution to our community in the coming months.

If you have any questions, you can reach out to our team and community via Telegram.

Stay tuned for opportunities and further updates as we work to deliver this solution.

Best regards,

Jon Boyd
Director - Institutional Markets

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