Dynamic Pool Market-Making (Coming Soon)

wmx.fi unveils an innovative approach to market-making that empowers professional market-makers to fine-tune the thresholds at which trades can be executed against the Liquidity Pool.

This represents a departure from the strategies employed by platforms like GMX or Synthetix, where trades against the pool are typically made at prices dictated solely by oracles. We contend that this common practice is not in the best interest of Liquidity Providers (LPs), and our novel setup is designed to offer a more balanced and LP-friendly trading environment.

Mechanics of Market Making

Dynamic Price Levels: Unlike static pricing based on oracle feeds, wmx.fi allows market-makers to adjust price levels dynamically. This means that the price at which traders can fill orders against the Liquidity Pool (LP) isn't just a reflection of the current market price but can be modified to account for market conditions, liquidity depth, and other strategic considerations.

Dynamic Edge Adjustment

An edge in market-making is typically a small price advantage that the market-maker sets to make a profit. For instance, if the oracle price of an asset is $100, the market-maker might set the sell price at 101 and the buy price at 99. This creates a 1 edge on either side of the trade, allowing the market-maker to earn on the spread while still providing competitive prices to traders. This would effectively be set by the market-maker within some allowed deviation of the oracle price.

Volatility and Position-based Skews

Skews are adjustments to the price levels based on the current state/imbalance of the LP or market sentiment. If there's a belief that the market will move in a certain direction, the market-maker can skew prices to favor one side of the book to mitigate risk or capitalize on anticipated market movements. For example, if there's a heavy demand for buys, prices can be skewed higher to take advantage of the buying pressure or to protect the LP from being depleted on one side.

Advantages

By adjusting edges and skews, market-makers can protect the LP from adverse selection and potential manipulation. This is important because pools that rely solely on oracle prices can be vulnerable to losses if the oracle price does not reflect actual market conditions or if there's a delay in price updates.

Responsive to Market Dynamics

This market-making design allows the system to be highly responsive to market dynamics. The professional market-makers can adjust the edges and skews in real-time, providing a more robust mechanism to deal with volatility, large orders, or imbalanced markets.

Balancing Trader and LP Interests

The ultimate goal is to balance the interests of traders, who want fair and competitive prices, with those of LPs, who are exposed to risks from providing liquidity. By allowing professional market-makers to manage price levels, wmx.fi aims to create a more sustainable and stable trading environment that benefits all participants.

This design represents a more active and managed approach to DeFi market-making, which can lead to better outcomes for LPs by reducing the likelihood of large losses due to market inefficiencies or exploitation through oracle manipulation. It also provides traders with more reliable and fair trading conditions, as the prices are continuously adjusted to reflect the true state of the market.