# What is a SecretKey? By [SecretKey](https://paragraph.com/@secretkey) · 2024-02-17 --- ![](https://storage.googleapis.com/papyrus_images/8ef0dc3ea2e3de18be00acdd3eebe5ca2bfb33d7ee2a34652c4d244c669caf18.jpg) **SecretKey is a standard 404 based liquidity management and market making protocol designed to achieve the highest available capital efficiency in the market through a variety of LPD and hedge volatile asset risk SecretKey provides liquidity, LP-centric protocols to earn enhanced yields while actively managing LP positions. This protocol earns automatic compounding fees on Uni SwAp-type AMMs and minimizes exposure to volatile assets by creating a delta-neutral strategy and a short position on a composable DEX.** **With the release of the 404 protocol, capital efficiency has improved significantly, but the difficulty of working with the CLMM has created barriers for liquidity providers to provide assets. The main limitation of CLMM is that it needs to constantly rebalance LP positions to avoid volatile losses. This is a complex and unpredictable strategy, and is often not executed correctly.** **There are several protocols in the market that deal with algorithmic MM strategies by providing proactive liquidity management solutions. Such agreements are of course essential to using CLMM. As it stands, liquidity management agreements are only effective on a relatively broad scale.** **Many market makers try to use CEX as a market cap method to avoid volatility, but NFT is not liquid enough and can be costly to hedge against the risk of volatile losses. Also, for the average user, options are a complex product. In DeFi, no option basket can fully hedge against the fickle loss of an active LP position.** **Another popular strategy to hedge against volatile losses is to use the money markets, such as AAVE or Compound, to short volatile assets. This strategy works well, but is less efficient in terms of capital use. SecretKey will also use this strategy in certain vaults.** **Currently, none of the volatile loss hedging methods can fully realize the potential of Uniswap V3. SecretKey solved the problem. The strategy we have developed allows everyone to use CLMM to charge LP without permission across a very narrow range of LPS, thereby squeezing the maximum APR out of liquidity.** **SecretKey developed hedging models to avoid the price risk of volatile assets by shorting on-chain perpetual assets. This approach was only possible recently, when decentralized derivatives exchanges such as GMX began to be deployed on the same layer as AMM, allowing them to be combined with each other.** **The protocol relies on the internal state of the AMM and the derivative DEX to determine the exposure of the current position and select the appropriate size to hedge. Because of Arbitrum's low transaction fees, rebalancing can be done very frequently to eliminate price risk, even in the case of the highest price volatility.** **SecretKey automatically selects the most efficient rebalancing frequency based on market volume and volatility, while leverage determines the maximum possible capital utilization. In addition to rebalancing, the agreement collects and automatically compounds fees to increase the annual interest rate. All of this allowed SecretKey to create a completely transparent and decentralized new infrastructure for market making.** **SecretKey is a two-tier automated market making mechanism based on ERC404 and effectively manages transactions between alternative tokens and NFTS, aiming to optimize liquidity management, facilitate cross-tier interactions, dynamically adjust market strategies, and implement risk management** **1）Two-tier liquidity strategy** **Dual Currency Incentive Program: provides additional rewards for users who provide fungible tokens and NFT liquidity. Time Weighted Average Price (TWAP) adjustment: Adjust the price of the NFT based on the average price over a period of time, reducing the impact of large transactions on market prices. Liquidity buffer Pool: Create an additional liquidity pool to balance out liquidity fluctuations caused by large transactions.** **1.1) Multi-Signature Liquidity management: requires liquidity adjustments or important parameter updates to be co-signed by multiple trusted parties.** **1.2) Dynamic Rate adjustment: Dynamically adjust transaction fees according to market activity and the liquidity status of the pool. Arbitrage detection and Limit: Monitor potential arbitrage opportunities in real time and automatically adjust strategies or limit trades when abnormal trading behavior is detected.** **1.3) Cross-layer interaction NFT fractional trading: Allows NFT to be traded on the fungible token market by means of fractional trading. Automated NFT valuation and pricing: Use machine learning models to automatically assess the value of an NFT based on its rarity, historical transaction data, and market trends.** **1.4) Smart contract-driven conversion: The conversion between NFT and token is automatically handled through smart contracts, ensuring the atomicity of transactions.** **1.5) Conditional Trading and Execution: Allows users to set specific conditions (price or time) and automatically execute trades when these conditions are met.** **1.6) Market dynamic adjustment Adaptive liquidity allocation: Automatically adjusts the allocation of liquidity between different pools based on market demand and trading volume.** **1.7) Price Volatility protection: Mechanisms are in place to terminate trades when price volatility exceeds a preset threshold to prevent market manipulation.** **1.8) Predict market trends: Use data analytics and machine learning to predict market trends and adjust strategies in advance. Dynamic rarity trading: Dynamic analysis of NFT rarity interactions based on market transaction data to stimulate trading and liquidity.** **1.9) Risk management** **Smart contract audit and testing: Regular security audits and stress tests of smart contracts are conducted to ensure the security of the system. Trading limit and rate limit: Set the maximum limit and rate limit of trading to prevent the market shock caused by a large number of rapid transactions.** **2）Abnormal transaction monitoring: Implement a real-time monitoring system to identify and prevent potential fraud or manipulation.** **2.1) Insurance fund: An insurance fund is established to protect user assets and stabilize the market in the event of systemic risks.** **2.2) Multi-level user verification: Increase transaction security, and enhance user account security by introducing multi-factor authentication, behavior analysis, etc.** **2.3) Community governance: Implement community-driven governance through the DAO model, allowing community members to participate in important decisions, including updating risk management strategies and adjusting parameters.** **SecretKey's protocol uses an automatic Market Maker (AMM) pricing algorithm that combines an exponential association curve model with a dynamic adjustment mechanism to adapt to market changes. The basic formula is expressed as: P=C times e^ (k times S) Among them: -\\ (P) stands for price -\\ (C) is the price constant (the initial price setting value), -\\ (e) is the base of the natural logarithm (about 2.71828), -\\ (k) is the constant slope of the curve, -\\ (S) indicates the current supply.** **Dynamic adjustment mechanism includes liquidity index adjustment: When market liquidity increases (based on volume and number of active trading addresses), the value of \\ (k) will decrease to encourage more trading activity.** * **When market liquidity is reduced, the value of \\ (k) is increased to raise the price, thereby attracting liquidity.** **Price volatility adjustment:** * **Maintain market stability by adjusting \\ (C) values to avoid excessive volatility when prices fluctuate significantly.** * **\\ (C) adjustments are based on average market prices and volatility and are designed to keep prices relatively stable.** ### **Exchange mechanism** **For direct exchanges between ERC404 and ERC20 tokens, we use the following formula to determine equivalence:** **\\【ERC20\_{amount}=\\frac{ERC404\_{value}\\】** **Among them: -\\ (ERC20\_{amount}) is the number of ERC20 tokens, -\\ (ERC404\_{value}) is the current value of the ERC404 token, -\\ (P) is the current price of the ERC404 token calculated using the exponential union curve model above.** ![](https://storage.googleapis.com/papyrus_images/9edcab435c99b6b17f947b02b928f1fa9ed09d0e470c7555e34b45dbd7cf000d.png) **Website:** [https://www.secretkey.online/](https://www.secretkey.online/) **Twitter:** [**@SecretKey404**](https://twitter.com/SecretKey404) **Project Introduction: SecretKey is the V2 version of 404 protocol, Binance official focus on the support of the protocol, not only to solve the problem of NFT liquidity, but also innovative design of NFT and Token two-layer automatic market making mechanism. It has been officially supported by Binance Web3 wallet and Bitget quasi-front-line head exchange.** --- *Originally published on [SecretKey](https://paragraph.com/@secretkey/what-is-a-secretkey)*