AMM+PMM DEX
Current AMM Model
The Automated Market Making (AMM) algorithm, chosen by DEX leaders Uniswap, Sushiswap, and a large number of followers, is the most popular market maker algorithm for DEX. However, AMM has a few shortcomings make it an inadequate algorithm for DEX, particularly for DEX at early stages.
One of the most serious issues caused by using AMM is the low capital utilization rate. As a startup DEX, liquidity is crucial for survival. Therefore, a high capital utilization exchange method becomes the primary design need. Another issue of Curve's AMM algorithm is that it varies token prices based on supply ratio between two tokens in a liquidity pool, which fails to consider activities outside of the liquidity pool that still has an impact on the token price. Impermanent loss and slippage are big problems for liquidity providers if the price of the pool is not adjusted fast enough.
We conclude shortcomings of AMM as the following:
Poor liquidity
Low utilization of liquidity and turnover rate
High trading fees to mitigate impermanent loss
High slippage
High impermanent loss
Even though the Total Value Locked (TVL) for AMM liquidity pools is usually quite high, the cost of trading on these platforms remains unreasonably expensive, due to the shortcomings described above.
Why add PMM?
PEPA add PMM model option in our DEX to help improve current problems of AMM model.
PMM creates a protocol which can proactively adjust pool parameters to catch the market movements. PMM’s price is adjusted by comprehensive market price data from a decentralized oracle, thus no longer requiring base and quote token being in the same pool. PMM users are allowed to provide single asset for a trading pair, rather than depositing a balanced amount of both assets.
Using PMM, market makers can have their private pool, where they can withdraw, deposit, or change their price without changing the price of the pool. Traders, at the same time, enjoys a higher liquidity given by the PMM model, as more liquidity is gathered near trading price compared to AMM. These features protect investors from impermanent loss and traders from slippage.
Beyond that, PMM model can be easily reversed to stable swap as Curve, and AMM model as Uniswap, with a slight change of slippage coefficient k and mid price i. With this features, Pepa will be able to serve users that are used to AMM model, and also allows stablecoins trading.
Opposed to AMM, the advantages of PMM are as follows:
High liquidity
Single-sided liquidity provision
High flexibility
Low slippage
Low impermanent loss
Our DEX will include both AMM and PMM model to serve users with different needs
More PMM-related info can be found under Product Design/PMM Guided Exchange.
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