KMM Swap is estimated to be launched on the Christmas of 2021, promising to be the next innovative product on Binance Smart Chain ecosystem, KMM Swap aims to solve the current pitfalls of Constant Function Market Makers (CFMMs) in which Uniswap V2 is a typical example with the famous formula: x*y=k.
KMM Swap mechanism is built to both empower traders and liquidity providers, the mechanism optimizes capital efficiency that allows the platform to utilize 100% liquidity provided and reduces the price slippage.
So what’s the difference in the mechanism of KMM Swap?
Guess we have to find out.
KMM leverages on Chainlink price oracle to provide low slippage for traders.
As you may already know, the formula: x*y=k has been so successful but this model has its shortcomings which result in high price slippage, high impermanent loss, and low capital efficiency.
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.
Instead of the CFMMs formula, KMM uses brand new mathematical fundamentals and leverages on the decentralized oracle Chainlink to obtain the market trading price. This mechanism allows KMM Swap to minimize the slippage to traders, a parameter called maxSlippage is set out, 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.
KMM provides high capital efficiency
The original Uniswap offers infinite liquidity for every trading pair since the price of an asset can go to infinity according to the constant product formula. Therefore, even in LPs that have limited liquidity, traders can complete a trade regardless of how large their trade is. While this is nice in theory, in practice, no trader is willing to trade at an inferior price. Consequently, by reserving liquidity for inferior prices, traditional and even some new AMMs are not utilizing the liquidity provided to them properly.
KMM Swap doesn’t offer infinite liquidity but instead much higher capital efficiency. In the traditional CFMMs model, a liquidity provider provides 100 units of a token knowing that only 0.5% of provided liquidity will be ever traded. KMM is different, the Swap concentrate all liquidity provided, a liquidity provider can provide 0.5 unit of token X to KMM and know that his 0.5 unit in KMM will make the same effect as 100 units in DEXs like Pancakeswap.
For traditional AMMs, when the price is too off from the market price, the trading pair is practically dead, a scenario that is worse than when one side of KMM trading pair is depleted. Of course, KMM can make liquidity virtually infinite by setting extremely high maxSlippage; however, as said before, while this is nice in theory, no trader is willing to trade at an inferior price.
Talking about the formula of x*y=k, variations of this model have been introduced. Notably, we have Uniswap V3 introduced concentrated liquidity and Kyber introduced Dynamic Automatic Maker, both of which focus on reducing price slippage and increasing capital efficiency. However, low slippage and high capital efficiency also mean that the new algorithms require much more trading volume to adjust to new market prices.
For example, when market price moves by 1%, traditional AMMs such as Uniswap, with high slippage and low capital efficiency, will require X amount of volume to adjust to the new market price; however, for Uniswap V3 and Kyber DMM, the algorithms, assuming a 10x capital efficiency, will require 10X amount of volume to adjust to the same new market price.
Therefore, the new models will result in higher impermanent loss to liquidity providers during volatile market since greater liquidity is traded at inferior prices.
Impermanent loss is a risk that any AMM can barely avoid.
For example, in the BTC-USDT trading pair, a user provides BTC to the LP. When providing liquidity to KMM, the liquidity provider effectively sold part of his BTC for USDT at the market price as he injected liquidity. When BTC price rises compared to the initial price when he deposited, he will suffer impermanent loss compared to the scenario in which he had held his BTC instead.
However, KMM mitigates impermanent loss by ensuring that the asset is always exchanged at the current market price or better since KMM obtains the market price from Chainlink. Therefore, none of the assets will be exchanged at an inferior price.
And moreover, by utilizing 100% of the liquidity provided, KMM generates more trading fees. All of the trading fees will go to a Treasury vault in which the community has all the authority. Along the way, the KMM team has been building KMM Swap with one ethos, community money gives more benefits to everyone than if we distribute it to individuals.
Stay tuned for our next updates. The countdown is about to start!
✣ 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