Introduction to Orchestra Finance with Legato

Today, we have the privilege of speaking with Legato, the CEO of Orchestra Finance to discuss their unique DEX and AMM platform on the XRP Ledger. With the ever-evolving landscape of decentralized finance, Orchestra Finance aims to introduce one of the first Automated Market Maker experiences that leverages the features of XRP Ledger. In this session, we'll explore the mechanics, features, and vision behind Orchestra Finance and what it seeks to bring to the decentralized exchange ecosystem.

Thank you for joining us, Legato. Could you briefly introduce yourself and the role you play in the development of Orchestra finance?

Thanks for the invitation! I am the lead developer at Orchestra Finance, so my main focus is the development of the front-end dApp and the infrastructure behind it (rippled node, Clio, etc.). However, I do indulge in non-technical things from time to time.

Why did you choose XRP Ledger to build your project? What are some differences from EVM-based systems?

Compared to EVM-based chains, XRP Ledger is completely different. All functionality on the XRP Ledger (including AMM) is built into the ledger itself. There are no smart contracts holding on their own little chunk of overall liquidity, so all liquidity is consolidated, and this creates a better trading environment. Of course, not having smart contracts has drawbacks in terms of possible features that can be implemented, but XRP Ledger doesn’t stay still, there are more exciting amendments coming up that will enable us to have more flexibility.

Overall, we think XRP Ledger has a good track record and an even better future. Hence, we decided to jump in!

Do you feel like XRP Ledger has a solid developer tooling foundation?

There are plenty of open source tools available for anyone who wants to develop applications on XRPL. However, as more features are added to XRPL, like AMM, there is a need for existing tools’ improvement or new better tools. For example, our team is working on an open source library for easier interactions with AMM. Stay tuned!

We have seen an enormous amount of Uniswap forks and other generic DEXs. What does Orchestra do differently to separate itself from the crowd?

With the majority of blockchains being built on top of EVM, it is trivial to fork any popular AMM DEX and deploy it, in a matter of minutes. However, AMM on XRPL is vastly different from dozens of others on EVM-compatible chains. It is integrated into the XRPL payment engine, interlinked with order-book DeX, fees work differently, etc. The Orchestra Finance team is focused on building a UI specifically designed for trading on XRPL, so forking anything from the EVM world is just not possible, everything needs to be built from the ground up, taking into account all XRPL-specific details. Our team, however, has a background in EVM dApps, so we are bringing all the best practices from there to the XRPL community.

For end-users, AMM on XRPL offers such features as reducing impermanent loss via continuous auction mechanism, votable trading fees for each liquidity pool, consolidated liquidity across the whole XRPL AMM and LOB, and protection from front-running.

What will be the main features available to users at the time of Orchestra launch? How will they use the service?

All of them! Trading assets, depositing in and out of liquidity pools (and earning shares of fees), participating in trading fee voting, continuous auction, etc. We aim to give users access to all the existing and upcoming features XRPL has to offer!

One unique feature you offer is the ability for liquidity providers to influence trading fees by voting. Can you elaborate on how this works and the benefits it provides?

Typically, AMM pools on the other chains have fixed trading fees or, at most, several fixed tiers of fixed fees. AMM pools on XRPL provide more fine-grained control over the fees: liquidity providers can vote to change the trading fee, ranging from 0.000% to 1%. This way, the trading fee can be adjusted based on the market conditions.

For example, if the XRP/BTC pool has a 0.2% trading fee, but liquidity providers notice that the trading volume is too low - they can vote to decrease the fee to e.g. 0.1%, which should incentivize traders to do more trades in this pool. On the other hand - if the demand for XRP/BTC has increased a lot, liquidity providers can increase the fee.

Another interesting feature is the Continuous Auction Mechanism, which promises 90% descounted trading fees. How is this possible?

Each AMM pool on XRPL comes with an auction attached to it.

Any liquidity provider for this pool (i.e. a holder of the pool’s LP tokens) can participate in an auction.

The way it works is best described with an example:

1. You bid 100 LP tokens in the XRP/BTC pool.
2. You are now an “auction slot holder”. Additionally, you can add up to 4 other accounts to share the auction slot with you.
3. Now you (and up to 4 of your friends) can do trades on the XRP/BTC pool with a 90% discount on the trading fee. So if previously you paid 10 XPR as a fee to do some trade - now you pay only 1 XRP.
4. You hold this privilege for up to 24 hours.
5. The auction is continuous, meaning somebody can outbid you at any moment. However, if that happens, you will get a refund (LP tokens) for the time left out of the 24 hours assigned to you.
6. The LP tokens used for the bid are burned (i.e. destroyed).

You might wonder why you’d want to effectively burn your LP tokens for this, and the answer is pretty simple - if you’re using this feature you are probably an arbitrage trader. Arbitrage traders can utilize the discounted trading fee to execute their trades faster and increase their profit. So burning $100 worth of LP tokens is justified for them since they probably can make up for it many times over with the right trading strategy.

This does not benefit only arbitrageurs but all liquidity providers. Since LP tokens are burned, there are fewer LP tokens in existence, which means every LP token holder can now withdraw slightly more assets from the pool for the same amount of LP tokens. Simply put - your impermanent loss gets smaller with each bid in an auction. If you want to learn more about how it works - I walked through an example in this tweet.

To conclude - this feature is definitely not something regular users would want to use. But even if you never pay attention to it - behind the scenes all the auction biddings are working in your favor, if you hold LP tokens.

What were the major challenges faced in the AMM development and testing phase, and how did you overcome them?

As mentioned previously, AMM on XRPL is unique in many aspects, so a lot of time is being spent on development, there are no shortcuts or “just fork project X” solutions. We dedicate a significant amount of our time to writing automated tests, looking for edge cases, refining our UI, and optimizing our code. There’s certainly a lot more to be done before we can claim it is “perfect”, but we’re getting there. We welcome everybody to test drive it and share feedback! Orchestra Finance is also available on devnet if you want, no real value is needed, go get some free tokens and try to break things!

What is the origin behind the music-themed aesthetic of Orchestra finance? How does music connect to finance?

We feel like great projects are built by teams where each member has some special skill to bring to the table. Like in a real orchestra, each person plays a specific instrument, but the real beauty comes when many professionals come together and play. It’s about teamwork.

Can you let us in on some exciting future projections for Orchestra? How about the planned mobile app?

We’re watching closely the future developments of XRPL. Things like EVM-sidechains or Hooks can potentially open many doors to more DeFi applications on XRPL.

The Bottom Line

We thank Legato for their elaboration on Orchestra finance and the state of XRPL AMMs in general. It seems like building the essential DeFi services from the ground up can promote true innovation and some fresh features we have not seen for some time in the EVM space. I am particularly excited to see how Orchestra Finance will deal with impermanent loss, as that often seems to be a crucial problem for many yield farmers and liquidity providers.

DeFi infrastructure is essential for adoption and subsequent development of practical applications. It will be interesting to watch what new types of services will be built on the XRPL. Thank you for reading and see you in the next interview!