Virtual Automated Market Makers in DeFi: Innovating Liquidity Provision

A virtual automated market maker (vAMM) is an electronic system that provides liquidity, allowing traders to buy and sell derivative products on blockchain. The system has the ability to provide synthetic (or virtual) liquidity, allowing traders to buy and sell derivatives entirely on blockchain.

What is the Virtual Automated Market Maker (vAMM)?

Virtual automated market maker (vAMM) are based on an Automated Market Maker (AMM) concept. An AMM is an automatic smart contract platform, where traders can execute token trading with liquidity from sellers. The system is automated and they are able to use liquidity from sellers for execution of trade on tokens. At the same time, it is this basis on which the virtual automated marketmaker (vAMM) relies, extending its use from token swaps to derivative products such as perpetual contracts.

The exchange AMM is divided into two groups of users: liquidity companies providing the right to provide money and trading traders exchanging available tokens. A mathematical formula is used for setting prices. The “virtual” part of the vAMM acronym means what? At the same time, instead of exchanging real tokens, vAMM exchanges virtual assets such as derivative contracts. A real asset is not stored in the internal server of vAMM’s internal server; instead, traders can make trades based on collateral that was stored in the virtual asset vault.

If leveraged, vAMM is used to determine prices and is not spot trading tool. In the event of making a trade, vAMM calculates an entry or exit price, just like prices on other exchanges such as AMM. In the first generation of vAMM, prices are calculated using an fixed formula. The second generation of vAMM uses a concentrated liquidity construct along with virtual currency and the ability for producers to provide leverage.

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