Virtual Automated Market Makers (vAMMs)

What Are Virtual Automated Market Makers (vAMMs)?

Virtual Automated Market Makers (vAMMs) are an extension of the concept of automated market makers (AMMs).

AMMs are smart contract platforms that enable traders to perform token swaps using liquidity provided by liquidity providers.

Building upon this foundation, vAMMs expand the scope of AMMs to include derivatives, specifically perpetual contracts.

Rethinking Asset Trading

In a traditional AMM-based exchange, there are two types of users:

  • Liquidity providers who supply tokens
  • Traders who execute token swaps.

Mathematical formulas determine the prices at which these swaps occur.

In the case of vAMMs, virtual, synthetic assets like derivatives contracts are traded instead of swapping real tokens.

Advancing Price Discovery

vAMMs primarily serve the purpose of price discovery for leveraged trading rather than spot trading.

Each trade made on a vAMM triggers the entry or exit price calculation, similar to how prices are calculated on AMM-style exchanges.

First-generation vAMMs used fixed formulas for price calculations, while second-generation vAMMs incorporated a concentrated liquidity design and virtual tokens, enabling liquidity providers to offer leverage.