# Background

## Current challenges of DEXs

Our research shows that existing DEXs have several design flaws:

1. **Inefficient liquidity pools/math**\
   Inefficiently set up liquidity pools can cause a way lower liquidity utilization than possible in theory. These effects have shown that only up to 3% of most pools are actually needed in order to enable seamless swaps. This discrepancy results in low capital efficiency and low APYs.<br>
2. **Arbitrage – the biggest value drain for the DEX**\
   Whereas traditional market makers benefit from price differences within and across exchanges, generating arbitrage profits, liquidity providers do not participate in arbitrage trading. What users experience as impermanent loss, mostly is a consequence of arbitrage traders taking benefit from pool liquidity provided by liquidity providers.<br>
3. **Manual liquidity management**\
   Liquidity providers must manually identify, manage, and rebalance their liquidity allocations across different pools. In fact, this opportunity cost of managing funds hinders many individuals from participating in the DeFi ecosystem. This process is not only time-consuming and error-prone but also capital-inefficient. Inefficient liquidity management leads to low APY, increased impermanent loss, and inefficient capital markets.<br>
4. **No fair trading**\
   To achieve mass adoption trading at DEXs must be fair. Miner extractable value and liquidity attacks allow trading bots to front-run, sandwich, or attack traders and liquidity providers. Experts who know about it benefit by deploying trading bots, and those who don’t suffer losses.<br>
5. **High price impacts and slippage**\
   As a result of manual liquidity management and fragmented liquidity, traders often experience high price impacts and slippage on their trades, leading to financial losses. This situation also creates arbitrage opportunities, causing assets and value to be drained from DeFi protocols.

In summary, the design flaws and challenges in the current DEX ecosystem contribute to unfair trading, arbitrage value drain, impermanent loss risks, and low APY for liquidity providers, as well as high slippage and price impact for traders. Despite attempts to address these issues, no existing solution has successfully eliminated losses for both parties. Therefore, there is a pressing need for innovative approaches that can tackle these problems and improve the overall DeFi user experience.


---

# Agent Instructions: Querying This Documentation

If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question.

Perform an HTTP GET request on the current page URL with the `ask` query parameter:

```
GET https://docs.stabble.org/introduction/background.md?ask=<question>
```

The question should be specific, self-contained, and written in natural language.
The response will contain a direct answer to the question and relevant excerpts and sources from the documentation.

Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.