How Does MerlinSwap Work?
MerlinSwap is the primary DEX on Merlin Chain, a Bitcoin Layer 2 network, using a custom DL-AMM (Discretized Liquidity AMM) for concentrated liquidity trading. Once boasting over $100M in TVL, it has declined to ~$15M as the Merlin Chain ecosystem lost momentum. The C+ risk grade reflects its bridge dependency risk, declining TVL trend, and limited documentation for its custom AMM design.
TVL
$9M
Sector
DEX
Risk Grade
C+
Value Grade
D-
Core Mechanisms
4.1.2
DL-AMM (Discretized Liquidity AMM) — concentrated liquidity with advanced liquidity algorithms customized for Bitcoin L2 trading
Modified concentrated liquidity design — DL-AMM terminology suggests discretized price bins similar to Trader Joe LB
2.1.2
Percentage-based swap fees on trades executed through DL-AMM pools
Standard DEX percentage swap fees
7.1.1
Adaptive liquidity mining with both static and dynamic reward options for LPs
Standard liquidity mining incentives
2.2.4
Swap fee split between active LPs and protocol treasury
Standard fee split for DEX protocol
8.1.1
Merlin Chain uses lock-and-mint bridge for BTC from Bitcoin mainnet to L2 — MerlinSwap DEX relies on this bridge for BTC-denominated liquidity
Standard Bitcoin L2 bridge dependency
5.4.1
Protocol operations likely controlled by MerlinSwap team as the official DEX of Merlin Chain
Centralized control typical of early-stage chain-native DEXs
How the Pieces Interact
All BTC-denominated liquidity on MerlinSwap depends on Merlin Chain bridge integrity — a bridge exploit would drain backing for wrapped BTC in all pools
Incentivized concentrated liquidity may attract capital to narrow ranges that become inactive during price moves, wasting mining rewards on non-productive positions
With TVL declining from $100M+ to $15M, fee revenue has dropped proportionally — insufficient revenue to sustain development or attract competitive liquidity
Tight coupling between MerlinSwap team and Merlin Chain creates single-team concentration risk — if the team fails, both the chain and DEX are at risk
Aggressive mining rewards may be subsidizing activity that generates minimal organic trading fees, creating unsustainable economics
What Could Go Wrong
- Merlin Chain is a newer Bitcoin L2 with limited track record — chain-level vulnerabilities or bridge exploits could affect all MerlinSwap liquidity
- TVL has declined from $100M+ peak to ~$15M, suggesting significant capital flight and reduced ecosystem momentum
- DL-AMM (Discretized Liquidity AMM) is a custom AMM design with less battle-testing than standard Uniswap-style implementations
Merlin Chain Bridge Exploit Drains DEX Liquidity
ModerateTrigger: Critical vulnerability in Merlin Chain's Bitcoin bridge allowing attacker to mint unbacked wrapped BTC or drain locked BTC
- 1.Attacker exploits Merlin Chain bridge to mint unbacked wrapped BTC — Attacker dumps minted tokens across MerlinSwap pools, draining real assets
- 2.Wrapped BTC on Merlin Chain depegs from real BTC — All MerlinSwap pools containing wrapped BTC lose value as backing is broken
- 3.LPs rush to withdraw remaining assets — Remaining liquidity depleted, DEX becomes non-functional
- 4.Merlin Chain TVL collapses across all protocols — Entire L2 ecosystem loses credibility and user base
Risk Profile at a Glance
Overall: C+ (39/100)
Lower score = safer