Hi everyone, in a previous article KMM Swap: What’s the difference? we have introduced the advantage of KMM Swap to products that use the CFMMs model and briefly explained how KMM can offer low slippage, high capital efficiency and low impermanent loss. In this article, I will walk you through the mechanism of KMM Swap that makes the price slippage extremely low.
Traditional AMMs submit to Price Impact and Price Slippage
Price Impact is the difference between the trading price on an AMM and the market price.
In the traditional CFMMs model: x*y = k, the trading price is actually determined due to assets reserved in corresponding liquidity pools and the trading amount. The price doesn’t balance itself but depends on traders to help balance it to the market price. When the price is off from the market price, traders can buy or sell an asset at better prices than the market price, at the same time changing the ratio of 2 assets in the liquidity pool, adjusting the price on the AMM to the market price.
Arbitrage happens to exploit the difference between the price on AMM and other markets to take profit. Arbitragers buy the asset in one market and sell it in the other market at the same time in order to pocket the difference between the two prices, causing impermanent loss to liquidity providers, we will go into detail of that topic later. Arbitragers usually play to the role to adjust the price of AMMs to the market price.
Because the price is always moving, it requires trading actions to be made all the time which will take a huge amount of resources, and for the arbitragers to have skin in the game an AMM has to own a great liquidity and trading volume.
Price Slippage refers to the difference between the expected price of a trade and the price at which the trade is executed.
As you may already know, the formula x*y=k or (x+Δx)*(y+Δy)=k means that the more quantity that you trade the higher price slippage you will take. A trader will often buy or sell many tokens at once, with every token costing more than the previous one.
With KMM Swap, Price Slippage and Price Impact are one and adjustable
Instead of the CFMMs formula, KMM uses brand new mathematical fundamentals and leverages the decentralized oracle Chainlink, which helps to obtain the market trading price, to minimize price slippage to traders.
The difference is traditional AMMs need trading actions to adjust the current price to the market price, on KMM the current price is always updated automatically due to the market price fetched from the oracle. The expected price is actually the market price so there is no Price impact.
Price slippage is calculated due to the trading amount and total amount of the output asset in the liquidity pool. The slippage will increase as the input amount is set greater but it will never go beyond maxSlippage, the maximum slippage that the pool allows.
maxSlippage of each pool is determined by its liquidity providers, a right that is fair since they are the ones who provide liquidity. For stable coin pairs, liquidity providers may choose to use a maxSlippage of 0.1% to enable extremely low slippage. When a trader trade on KMM Swap with a small amount compared with the total liquidity of the pool, he is nearly trading at the market price fetched from Chainlink oracle.
Stay tuned for our next updates. The countdown is about to start!
✣ Website: https://kmm.exchange/
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Learn more
✣ KMM tokenomics: https://devdefi.medium.com/kmm-tokenomics-the-increasing-difficulty-of-mining-tokens-bd68093e0390
✣ How KMM Swap utilizes liquidity 40 times better than CFMMs (x*y=k):https://devdefi.medium.com/kmm-utilizes-capital-40-times-better-than-the-constant-product-model-73540ed27b9
