Decentralized finance (DeFi) has been gaining a lot of momentum in recent years, and Automated Market Maker (AMM) has been a key technology driving this trend. AMMs are decentralized exchanges (DEXs) that allow users to trade cryptocurrencies without the need for an intermediary. However, a breed of AMM called Constant Product Market Maker (CPMM) is the dominant implementation DeFi space.
How CPMMs are useful
CPMMs are useful for several reasons:
- Efficient liquidity provision: CPMMs are designed to provide liquidity more efficiently than traditional AMMs. They do this by using a constant product formula which ensures that the liquidity pool is always in a balanced state, no matter how much the prices fluctuate. This results in lower slippage for users and more predictable pricing for traders.
- Lower impermanent loss: Traditional AMMs can have a problem called impermanent loss (IL) where liquidity providers can experience a loss if the price of the asset changes. CPMMs, on the other hand, have a lower IL, as the constant product formula helps to minimize the impact of price fluctuations on liquidity providers.
- Better token price stability: CPMMs are better suited for stablecoin markets as they are less sensitive to price fluctuations, ensuring a more stable token price.
A Code Sample
Here is an example of a simple CPMM smart contract, written in the Vyper programming language:
# @version >=0.3.3 from vyper.interfaces import ERC20 token0: public(address) token1: public(address) reserve0: public(uint256) reserve1: public(uint256) totalSupply: public(uint256) balanceOf: HashMap[address, uint256] @external def __init__(_token0: address, _token1: address): self.token0 = _token0 self.token1 = _token1 @internal def _mint(_to: address, _amount: uint256): self.balanceOf[_to] += _amount self.totalSupply += _amount @internal def _burn(_from: address, _amount: uint256): self.balanceOf[_from] -= _amount self.totalSupply -= _amount @internal def _update(_reserve0: uint256, _reserve1: uint256): self.reserve0 = _reserve0 self.reserve1 = _reserve1 @external def swap(_tokenIn: address, _amountIn: uint256) -> uint256: assert _tokenIn == self.token0 or _tokenIn == self.token1, "invalid token" assert _amountIn > 0, "amount in is zero" tokenIn: ERC20 = empty(ERC20) tokenOut: ERC20 = empty(ERC20) reserveIn: uint256 = 0 reserveOut: uint256 = 0 if _tokenIn == self.token0: tokenIn = ERC20(self.token0) tokenOut = ERC20(self.token1) reserveIn = self.reserve0 reserveOut = self.reserve1 else: tokenIn = ERC20(self.token1) tokenOut = ERC20(self.token0) reserveIn = self.reserve1 reserveOut = self.reserve0 tokenIn.transferFrom(msg.sender, self, _amountIn) amountInWithFee: uint256 = (_amountIn * 997) / 1000 amountOut: uint256 = (reserveOut * amountInWithFee) / (reserveIn + amountInWithFee) tokenOut.transfer(msg.sender, amountOut) self._update(ERC20(self.token0).balanceOf(self), ERC20(self.token1).balanceOf(self)) return amountOut @external def addLiquidity(_amount0: uint256, _amount1: uint256) -> uint256: ERC20(self.token0).transferFrom(msg.sender, self, _amount0) ERC20(self.token1).transferFrom(msg.sender, self, _amount1) if self.reserve0 > 0 or self.reserve1 > 0: assert self.reserve0 * _amount1 == self.reserve1 * _amount0, "x / y != dx / dy" shares: uint256 = 0 if self.totalSupply == 0: shares = isqrt(_amount0 * _amount1) else: shares = min( (_amount0 * self.totalSupply) / self.reserve0, (_amount0 * self.totalSupply) / self.reserve0, ) assert shares > 0, "shares are zero" self._mint(msg.sender, shares) return shares @external def removeLiquidity(_shares: uint256) -> (uint256, uint256): bal0: uint256 = ERC20(self.token0).balanceOf(self) bal1: uint256 = ERC20(self.token1).balanceOf(self) amount0: uint256 = (_shares * bal0) / self.totalSupply amount1: uint256 = (_shares * bal1) / self.totalSupply assert amount0 > 0 and amount1 > 0, "amount0 or amount is zero" self._burn(msg.sender, _shares) self._update(bal0 - amount0, bal1 - amount1) ERC20(self.token0).transfer(msg.sender, amount0) ERC20(self.token1).transfer(msg.sender, amount1) return (amount0, amount1) This example is quite basic, most real-world AMM smart contracts use more complex mechanisms to calculate prices and determine the amounts of assets that are exchanged in a trade.
In the code above the contract provide the functionality to deposit, withdraw and trade assets on a pool, the trading functionality uses the current state of the pool to determine the amounts of assets that are exchanged, you could use a different mechanism to price the assets like a constant product or a bonding curve.
Please keep in mind that, this is just a sample code, it should not be used in production as is, it lacks many important aspects such
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