Hybrid AMM and DMM

Velo Finance operates in parallel between Automated Market Maker (AMM) and Dynamic Market Maker (DMM). In the initial phase, DMM pools apply only for a token pair (BUSD-USDT). Therefore, if users want to swap EVRY to USDT, they must first swap EVRY to BUSD, then BUSD to USDT.

AMMs are smart contracts that create a liquidity pool for ERC20 tokens, which are automatically traded by an algorithm rather than an order book. This effectively replaces a traditional order book with a system where assets can be automatically swapped against the pool’s latest price. AMMs can be considered a very effective solution in providing liquidity and generating revenue for Liquidity Providers (LPs) in the Pool. However, issues associated with AMMs such as poor capital efficiency and impermanent loss are the most well-known issues.

DMMs are an improvement of AMMs and optimize capital efficiency and increase profit for LPs. The advantage of DMMs over Curve Finance of AMMs is that DMMs can be applied to all cryptocurrencies with a model consisting of 2 parameters which are:

1. Amplification Factor - programmable pricing curve setups allow better capital efficiency (figure 1); and

2. Dynamic Fees - flexible fee adjustment to reduce the impact of impermanent loss (figure 2).

The advantage of DMMs is its small slippage rate in the target range. This method is suitable for stablecoin pairs. The improvements of DMM compared to AMM are proven in the below table.

Comparison between AMM and DMM

	AMM	DMM
Impermanent loss	Yes	Varied
Capital efficiency	Low	High
Stable coins optimization	No	Yes
Gas consumption	High	Low

Figure 1

	Slippage with AMP = 100
	Slippage without AMP

Figure 1 displays the comparison between transactions with and without AMP factors. Transactions with AMP factors have more stable slippage.

Figure 2

DMM applies a dynamic fee to trades, which is added to reserves. This functions as a payout to LPs, which is realized when they burn their LP tokens to withdraw their portion of total reserves. LP fees increases when the market is moving fast (volatile market) and reduces when the market is stable (source)

Evry.Finance focuses on building DMM smart contracts and integrating AMMs. DMM pool is applicable for Stable pairs (USDT-BUSD) with new updated features: Amplification factor (AMP) and Dynamic Fee. This will prevent users from impermanent loss and slippage consequences.