- Virtual Automated Market Makers initially introduced the concept of Perpetual contract, which defines a Crypto’s future contract without an expiry date.
- In vAAM, there is no necessity for liquidity providers and there is no impermanent loss.
Before understanding vAAM in brief, you should first know about Automated Market Makers.
What are Automated Market Makers(AMM)?
Automated Market Makers provides auto-generated and DEXs trading to set the price of an asset in a liquidity pool. It also allows leveraging Token Swap, made possible via liquidity providers. AMM uses crowd-sourced liquidity and smart contracts to facilitate trading.
A well-known example of Automated Market Makers is Uniswap, a decentralized exchange that employs the x*y=k algorithm for token swapping.
By using AMM, a user gains the liberty to perform trades directly from a non-custodial wallet. This helps in reducing all the unnecessary in-between processes involved in crypto trading.
What is a Virtually Automated Market Maker(vAAM)?
vAMMs are the system that are known to provide liquidity to decentralized exchange for a trading asset. Because it generates liquidity in a transaction, it helps to reduce the price impact on large trades.
Virtual Automated Market Makers are built on the concept of Automated Market Makers (AMM). vAAM is a new type of market maker that introduces innovative concepts such as Perpetual Contracts and Derivatives.
vAAM enables various properties such as:
- No Requirement of Liquidity Provider
To make a vAMM work, there is no need to rely on liquidity providers. Traders provide liquidity without any impermanent loss.
- Manage Slippage
With respect to AMM, the vAMM operator manually sets the initial value of K, enabling customisation or adjustments to it as needed. This flexibility allows the market to adapt to any possible situation.
Despite its functionality, moving funds inside a vault remains impossible.
vAMM assists in marking entry or exit points whenever a trade is executed. This calculation works in the same way as AMM exchanges do. vAMM allows makers to offer liquidity and leverage on behalf of virtual tokens and Liquidity design.
What is a Market Maker?
A Market Maker acts as an intermediary component that provides liquidity between trading peers. Essentially, a market maker offers two-way prices for security purposes, aiming to reduce the risk level and maximize the profit ratio.
The centralized exchange serves as a moderator between Trader A and B. Its main purpose is to facilitate an efficient and easy process for traders to buy and sell assets.
A centralized exchange manages a trader’s activity and provides an automated mechanism to match trading orders significantly. It ensures that when a trader is willing to buy a cryptocurrency at a preferred price, another trader is selling that particular cryptocurrency at the buying trader’s preferred rate.
Liquidity Pools and Providers
Liquidity providers are entities that add funds to the Liquidity Pool, which serves as a stack of funds against which a trader can trade. Providers earn their return profit by providing liquidity to the system. They make a profit when a trade is executed within their pool.
Advantages of Automated Market Makers
- Due to its formula and calculation algorithm, it reduces price manipulation.
- An individual user can easily make a passive entry for profit by contributing to the liquidity pool.
- Enhanced transparency and clarity are provided to decentralised transactions on blockchain.
- It provides stability
- Helps to reduce price impact on large trades.
Conclusion
Virtually Automated Market Maker provides enhanced scalability and stability to keep up with the market. It also attracts a significant number of Liquidity providers to this zone. While numerous projects are in process, it’s safe to get into AMM, as the DeFi sector is evolving and growing over time.
