Virtual Automated Market Maker (vAMM) is derived from the operations of the Automated Market Maker (AMM). AMM is designed to solve liquidity issues in decentralized exchanges. DEXs are usually plagued with liquidity problems, not minding that they have some incredible use cases.
Swapping tokens on a DEX may not be easy because of the aforementioned issue, leading to slippage cases. The concept of AMM was created to nip slippage cases in the bud.
AMM has a mechanism that allows people to provide liquidity into different pools in a decentralized exchange for rewards. A smart contract controls the operation of the pool. With the liquidity provided by people, it is easy for traders to swap their tokens.
After swapping tokens, these traders have to pay transaction fees for using these services. The trading fees are shared between the liquidity providers in the percentage of funds that they injected into a pool.
The Need for Virtual Automated Market Makers
Virtual Automated Market Makers build on the foundation of AMMs, except, in this case, it is not used only for swapping tokens.
When AMMs were released to the public, the major service that they offered was swapping one token for another. Virtual Automated Market Makers are a new type of AMMs that improve the use cases from merely swapping tokens to trading derivatives like perpetual contracts.
Features of a Virtual Automated Market Maker
- vAMM allows its users to swap synthetic digital assets such as derivative contracts instead of swapping regular tokens. It is important to note that no real asset is kept in the vAMM, and traders make leveraged trades depending on the smart contract vault collateral.
2. vAMMs are not designed for spot trading but are meant to calculate the price using either a fixed formula or opting for a concentrated liquidity model.
The former means is used for first generation vAMMs, while the latter is utilized by the second-generation AMMs.