The time-weighted automated market maker (TWAMM) is a decentralized finance component designed for dividing and executing large orders with minimal price impact or transaction fees (gas).
The Overview of AMM
Crypto Automated market makers (AMM) ensure that a token pair is always tradeable at any value or time. AMMs manage two token pools with limited amounts and regulate their prices based on an algorithm to balance supply and demand.
The earliest version is called Constant Product Market Maker (CPAMM), as outlined by Vitalik Buterin in 2017. Uniswap v1 was the first Ethereum decentralized exchange (DEX) to implement it (TWAMM added to Uniswap v4).
Automated Market Makers
AMMs replace traditional order books, which centralized exchanges (CEXs) use to match prices for buyer and seller orders.
For example, the constant product formula (xy=k) changes prices based on quantity proportions to guarantee token supplies for both pools.
The AMM “ecosystem” involves liquidity providers, arbitrageurs, and traders. Providers deposit both tokens in exchange for incentives, traders swap them while unbalancing prices and arbitrageurs profit from the difference on other exchanges to rebalance them.
In ideal conditions, traders get prices similar to those in large exchanges, and providers withdraw token pairs at original liquidity ratios (typically, 50/50).
If prices aren’t rebalanced quickly, traders swap with a price gap called spread.
For large buyers, not only may there be insufficient liquidity, but tokens become more and more expensive. Hypothetically, buying 100% of token A would cost an infinite amount of token B. TWAMM can prevent this.
The Time-Weighted Average Market Maker
TWAMMs aim to replicate the TWAP strategy used for traditional brokers (time weighting average prices). This strategy makes buyers split large orders into smaller ones executed evenly over minutes or days. It’s similar to dollar-cost averaging but with a higher frequency.
For example, TWAMMs may break down a $10M swap into $100,000 trades executed every 10 minutes (or every block), giving enough time to rebalance prices with arbitrageurs but short enough to avoid market volatility (in this case, ~16h).
As a result, the average execution price of $10M is much closer to the price where the order was first placed.
(Even if the pool only has $3M, arbitrageurs keep replacing them externally until they surpass the $10M trading volume.)
Doing this isn’t efficient since every split adds up gas fees (in theory, infinite). TWAMMs prevent this with various built-in features (such as order pooling and lazy evaluation). Thus, accumulating small orders incurs similar costs to a single large swap—without the price impact.
On volatile markets, prices can sharply change before the swap completes, which is why traders are allowed to cancel it anytime.
What Are the Benefits of TWAMM
When using a time-weighted automated market maker in crypto:
- Smoother price execution: Large orders have a minimal price impact on liquidity pools, achieving prices similar to those of large exchanges.
- Simplified trading: Traders can execute large trades without having to switch to trading desks or CEXs, and without having to monitor orders manually.
- Amplified liquidity: If orders are split and spaced out sufficiently, it’s possible to swap larger amounts than the maximum tokens held.
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White, D., Robinson, D., & Adams, H. (2021, July 28). Twamm. Paradigm. https://www.paradigm.xyz/2021/07/twamm#lazy-evaluation
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Tren.Finance. (2024, April 3). How Tren Finance uses time-weighted Automated Market Maker (TWAMM). https://medium.com/@trenfinance/how-tren-finance-uses-time-weighted-automated-market-maker-twamm-af1f5e5a9cec
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