What is AMM-Based Market?
An Automated Market Maker (AMM) is a mechanism that replaces traditional order books with a mathematical formula to facilitate trading and price discovery.
AMM in Prophecy
In Prophecy, AMM-based markets are utilised to:
Provide Continuous Liquidity: Traders can buy or sell shares at any time without relying on counterparties.
Enable Efficient Price Discovery: Prices are dynamically adjusted based on the AMM formula and the ratio of assets in the liquidity pool.
How It Works
Liquidity Pools:
Each market is backed by a liquidity pool containing two assets: tokens representing the possible outcomes (e.g., YES/NO).
Users provide liquidity to these pools and earn fees from trades.
Pricing Mechanism:
The price of an outcome token is determined by the constant product formula: x⋅y=k
In a trading pool, as traders buy or sell tokens, the ratio of tokens adjusts, impacting the price. Here:
k: represents the pool's total liquidity (a constant value).
y: is the quantity of token B (e.g., NO tokens).
x: is the quantity of token A (e.g., YES tokens).
3. Market Creation:
Anyone can create a market by providing an initial liquidity deposit( SOL and USDC) and defining the event’s outcomes.
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