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AMM 2.0: Exploring the Next Generation of AMMs
Yong Li Khoo
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Key Takeaways
16 min read
  • Despite Uniswap’s imperfections such as its rigid constant product design and the high risks of racking up impermanent losses, Uniswap remains the most popular AMM with its peers being nowhere close in terms of trading volume. This phenomenon attests to the design’s reliability as the high trading volume reflects a strong market fit.
  • Most AMM designs(DAMM, PMM, etc) in the space are fairly similar to one another, with main differences in how they deal with liquidity and impermanent losses. These innovations mainly aim to automate and improve liquidity management to minimize price slippage for traders and mitigate impermanent losses for LPs.
  • Existing AMM solutions appear to slightly prioritize offering better swap rates and reducing slippage over protecting LPs from impermanent losses, despite some attempts to do so.
  • Newer AMM models try to offer a true DEX / AMM experience with CEX-like capabilities which includes unidirectional liquidity provision by Carbon and Trader Joe that largely helps to eliminate the risk of impermanent losses for LPs.
  • Order-book designs are picking up in the DeFi space, a step away from traditional CFMM models.

Introduction

Following the decline of FTX, there has been a resurgence of interest in the Automated Market Maker (AMM). Unlike centralized exchanges such as Binance and FTX that operate using the conventional order book model, AMMs incorporate the idea of liquidity pools, enabling the pool to serve as the counterparty for each transaction. This enables a permissionless trading experience for users and the ability to execute trades instantly without the need for a matching counterpart as is the case with an order-book system. In this report, we will only be looking at AMM DEXs.

In the brief existence of the industry, there have been significant advancements and derivations of existing DEXs with the general aim of resolving the...