Automated Market Maker (AMM) is a new way to instantly access liquidity on the ethereum blockchain for high-volume assets, allowing cryptocurrency holders and traders to exchange tokens without having to interact with order books, and inefficient centralized exchanges that are difficult to access. In fact, in today’s decentralized financial space, there are already protocols trying to explore the implementation of automated market maker cross-chain liquidity, so let’s take a look below.
Back in 2018, Uniswap, an ethereum-based protocol, introduced automated market makers that revolutionized the trajectory of the entire decentralized finance (DeFi) space.Uniswap originally proposed an automated market maker model that
Cryptocurrency holders could offer their holdings to a “liquidity pool” (essentially a portfolio of two assets while maintaining a constant ratio between the total value of each asset) and then execute trades or “swap” assets between the two assets in a programmable manner and according to a smart contract.
In comparison to the past, cryptocurrency traders can more easily “instantly exchange” one asset for another through the automated market maker trading model. Since the launch of Uniswap’s automated market maker service, the trading model has quickly inspired other decentralized financial protocols and soon became so widely used in the decentralized financial space that it is now almost ubiquitous.
The popularity of the automated market maker model is largely due to the explosive growth of “liquidity” on blockchains such as ethereum. Essentially, automated market makers allow cryptocurrency traders to easily exchange one asset for another at current market prices, but even so, this concept of “liquidity” in decentralized finance is still very limited, as automated market makers require liquidity providers to lock in their own assets in the agreement, resulting in liquidity providers almost always being able to exchange their own assets. This results in the liquidity provider having little access to these locked assets elsewhere.
In addition, the automated market maker model has a “side effect” in that liquidity and assets are actually heavily concentrated on the ethereum blockchain (rather than other alternative blockchains) and a few decentralized applications, and users such as liquidity providers (LPs) are still unable to fully utilize their capital, making decentralized finance even more centralized as a result.
In order to truly realize the vision of “decentralized finance” – where users can easily exchange any asset on any blockchain without relying on a few centralized trusted parties – it is imperative that the crypto community comes up with new and exciting solutions (such as derivatives, and synthetic assets like stablecoins and anchored coins) to address the centralization of liquidity in decentralized financial protocols.
New decentralized cross-chain liquidity protocols are born
The crypto community never disappoints, and now a new decentralized cross-chain liquidity protocol, Unbound Finance, has been born, building an ecosystem of combinable decentralized financial native derivatives from automated market makers on Ether and other blockchains. The protocol will offer a suite of products designed to unlock liquidity from various automated market makers on different blockchains, including new liquidity pools derived from the crossover of multiple automated market makers, synthetic assets collateralized by liquidity provider passes (LPTs), and financial instruments that support compound income and margin trading, among others.
The protocol has its own stablecoin, which can be pegged to the US dollar and is available to users by pledging Liquidity Provider Passes. Using this stablecoin, liquidity providers can regain a certain amount of liquidity from the pool of liquidity they have locked in with automated market makers such as Uniswap. Liquidity providers can deposit Liquidity Provider Passes into this protocol, and in exchange they can draw down loans in the form of stablecoins anchored to USD by simply returning the exact amount of stablecoins minted to the protocol, and can also redeem their Liquidity Provider Passes from the protocol at any time – i.e., users can use their Liquidity Provider Passes as collateral to obtain an interest-free loan and never risk liquidation of the collateral, as such agreements do not maintain a liquidation engine.
Not only that, but such protocols can provide incredible lending services. The risk of undercollateralization is estimated by predicting a critical mass of infrequent losses that the liquidity provider pass-through must withstand, ensuring that the loan is not undercollateralized, and then setting the loan-to-value (LTV) ratio of the loan on the protocol, which is the maximum amount of tokens that a user can mint in exchange for a certain value of collateral.
Such protocols are said to have launched a test network and will soon also be integrated with public chains based on the Ether Virtual Machine (EVM), aiming to drive the vision of cross-chain derivatives within the decentralized financial space to be realized sooner rather than later. Not surprisingly, the protocol will also introduce additional products, including: virtual automated market makers that automatically provide liquidity, other synthetic assets, and clearing engines for highly volatile, high-risk trading pairs. Ultimately, for users of decentralized finance like liquidity providers, such protocols enable them to use assets they have locked into common decentralized finance protocols like Uniswap.
How does AMM support cross-chain liquidity?
As a new decentralized cross-chain liquidity protocol, it builds an ecosystem of combinable decentralized financial native derivatives from automated market makers on Ether and other blockchains, and plans to offer a suite of products that can unlock liquidity from existing automated market makers, including prophecy machine feeds, synthetic assets (stablecoins, tokens anchored to the value of other assets such as Ether or Bitcoin, etc.); new liquidity pools derived from the crossover of multiple different automated market makers (e.g., new automated market makers combined from multiple existing automated market makers); and financial instruments that support compound returns and margin trading.
In addition, it uses “liquidity provider tokens” – liquidity provider passes – to provide liquidity providers in exchange for providing liquidity to protocols such as Uniswap, which then generates new synthetic assets. However, these liquidity provider passes represent only a portion of the liquidity pool and are generally not tradable, although they still have value. That is, without the “derivative feature”, the value of the liquidity provider passes cannot be “cashed out” unless they are redeemed.
Of course, such protocols were launched alongside their own new stablecoins. Typically, this stablecoin is pegged to the US dollar, is fully decentralized, and is fully pledged by liquidity provider passes rather than more volatile “traditional” crypto assets such as Bitcoin and Ether.
When users provide liquidity to a Uniswap liquidity pool, they receive, in exchange, a Liquidity Provider Pass, which essentially represents the Liquidity Provider’s locked-in “share” of value in the underlying liquidity pool. This value, in turn, is equal to a portion of the current dollar value of the liquidity provider pass minus a small token minting fee. The user can then immediately use his token for various other decentralized financial products (e.g. other market makers, lending agreements, etc.), which means that this user can now earn returns as a liquidity provider again (by locking assets into liquidity) and can continue to participate in the decentralized financial ecosystem. When he wants to get his liquidity provider pass back, he simply provides the same number of tokens he initially received to the protocol, his liquidity provider pass is unlocked, and these tokens are then returned to the initial automated market maker, at which point the user regains the share of value he originally enjoyed in the liquidity pool, without affecting the share of revenue earned from the liquidity pool transaction fees.
It is worth noting that since such agreements do not have a clearing engine for other users, the user is never at risk of the liquidity provider’s tokens being liquidated to other users. Even if the value of a liquidity-providing user’s liquidity provider pass falls below a certain collateral ratio queue, there is no need to pay the difference and it will not be forced to liquidate. This means that the liquidation risks and barriers to entry that currently exist in the stablecoin ecosystem can be effectively addressed.
What is even more promising is that such protocols can provide incredible lending services due to a variable loan-to-value (LTV) ratio designed to regulate the number of tokens minted by the user for a given amount of collateral. The biggest problem with the risk of under-collateralization when using liquidity provider pass-throughs for lending comes from impermanent losses. While impermanent losses erode the value of user assets in the liquidity pool compared to users holding crypto assets directly, the protocol uses an algorithm to predict the likelihood of impermanent losses when a loan is undercollateralized and then sets the loan-to-value ratio based on the prediction.
In addition, as a collateral, the value of the liquidity provider pass-throughs is relatively stable, as opposed to “traditional” crypto assets like Bitcoin and ETH, which are more volatile.
In general, liquidity provider passes are considered much more stable than “traditional” crypto assets such as ethereum and bitcoin, as the value of assets in the liquidity pool is often actively maintained by arbitrageurs, who correct them to match market asset prices as they fluctuate.
At this stage, the automated market makers supported by such protocols already cover almost all of the most popular automated market makers on Ether, which means that ordinary decentralized financial liquidity providers holding liquidity provider passes can start using the protocols immediately.
Such protocols are also reportedly planned to include more automated market makers and other blockchain ecosystems, expanding their integration. Not only that, the protocol also plans to: build V3 liquidity aggregator contracts; add on-chain price prognosticators to find accurate prices and minimize user loss risk; use other synthetic assets to provide lending services; introduce virtual automated market makers to automate liquidity provision; create clearing engines for highly volatile trading pairs; and deploy decentralized autonomous organizations (DAOs) using native tokens to drive decentralized centralized governance using native tokens.
As one of the first decentralized financial protocols in the crypto market to offer such service capabilities today, it significantly extends the scope of ethereum liquidity by enabling liquidity providers to re-use assets already locked in liquidity pools, enhancing cross-chain open liquidity for ethereum and other blockchains, driving true decentralization of decentralized finance, helping more innovative crypto projects bring more and newer sources of funding, and of course paving the way for a highly composable cross-chain decentralized financial future.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/can-amm-also-support-cross-chain-liquidity/
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