Time-Weighted Automated Market Maker (TWAMM)

What Is a Time-Weighted Automated Market Maker (TWAMM)?

A Time-Weighted Automated Market Maker (TWAMM) is an algorithmic trading strategy designed to execute large orders with minimal slippage and low gas fees in decentralized exchanges (DEXs).

It aims to achieve efficient execution without significantly impacting the market price of the asset being traded.

In traditional finance, traders often use brokers to execute large orders over a specific time frame, ensuring they get the best price.

This is typically done through a Time-Weighted Average Price (TWAP) order, which spreads the execution of the order over time and provides an average price for the asset during that period.

The TWAMM Strategy

In the context of DEXs and crypto markets, the TWAMM strategy aims to emulate TWAP orders by breaking them down into small orders executed through an automated market maker (AMM) over a designated time frame.

Executing a large order in smaller increments can minimize the impact on the market price.

However, the TWAMM strategy can lead to price deviations compared to the broader crypto market. To mitigate this, arbitrageurs play a crucial role.

They trade against the AMM’s price to return it to the market price, ensuring effective execution for long-term orders.

Overcoming Challenges

One of the challenges faced by traders executing large orders on AMMs is the constant product formula used by these protocols.

Buying a significant amount of tokens can cause market makers to raise the price against the trader.

Breaking up the trades manually can be time-consuming and result in additional gas fees due to the need for multiple transactions.

The TWAMM strategy automates small trades, optimizing smooth execution while keeping gas fees minimal.

The TWAMM Algorithm

The TWAMM algorithm is one of the pioneering approaches in decentralized finance (DeFi) that allows users to set parameters for buying and selling assets over a specified period, such as a week, a specific number of hours, or days, without relying on centralized exchanges or trading desks.

As DeFi and the crypto market continue to gain mainstream adoption and attract larger investors, features like TWAMM are essential in facilitating better user trading experiences.

They contribute to the growth and usability of DEXs, offering improved liquidity and execution options.