SynFutures
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SynFutures

SynFutures Synthetic Automated Market Maker (sAMM) Explained

Automated market makers (AMMs) have become a popular means of choice for decentralized crypto trading. Their growth has drastically increased over the past few years, and they’ve now officially cemented themselves as big contenders in the digital asset trading world.

Many crypto retail and professional traders prefer using AMMs because they offer an attractive alternative to the centralized exchange model, where there are various permissions and a lack of anonymity. But these traditional AMMs have been built only for spot trading, without the ability to handle what everyone these days is really hungry for — crypto derivatives.

First ever in the derivatives market, SynFutures has built a synthetic AMM (sAMM) model, which is poised to play a huge role in enhancing the feasibility of permissionless and fully decentralized futures trading. We’re here to revolutionize the entire process, in a big way.

But what exactly are AMMs? And how will sAMMs completely change the game in how users can access digital asset derivatives trading via DeFi? Stay tuned to find out!

What is an AMM?

Simply put, AMMs allow for the automatic trading of crypto assets in a permissionless fashion through the use of liquidity pools. This differs from the traditional centralized exchange trading interfaces, where there are buyers and sellers offering different prices for specific tokens through an order book.

Within these liquidity pools, liquidity providers (LPs) deposit assets in order to supply the pools with enough tokens to facilitate a seamless trading experience. LPs are typically rewarded for providing liquidity with passive income in the form of a portion of the transaction fees relative to their contribution.

The most popular examples of AMMs on the market today are Uniswap and SushiSwap, two of the world’s largest DEXes that utilize liquidity pools as replacements for traditional order books.

They’re all mostly run on the Ethereum blockchain and lack advanced trading features, but get the job done for basic spot trading and the swapping of assets.

Synthetic vs. Traditional AMMs

Now that you’ve got a grip on the basics of a traditional AMM, let’s dig a little deeper into what sAMMs are and how they have the potential to revolutionize trading.

The sAMM is a new spin on this decentralized trading model, built to handle derivatives trading. Simply put, a sAMM is a contributor to the market with an independent margin account that can create prices based on the constant product formula and its current position.

Our sAMM lets LPs supply one asset of a trading pair (such as a stablecoin), where the smart contract automatically synthesizes the other asset within the pool. As an example, if you choose to use a stablecoin (i.e. USDT) to deposit into an ETH/USDT pool, you can supply the entire amount in USDT instead of an equal amount of each token.

50% of the value of your deposit will stay in USDT, and the other 50% will be used as margin to represent a synthetic 1x long futures contract in ETH, giving you exposure to a derivative position.

When the long position is created, the sAMM will also enter into a short position of an equal amount for the user. The long and short positions counteract each other, so there’s no added risk when the user adds liquidity to the pool.

It’s important to note that after supplying liquidity, the LP needs to have enough margin within their account to maintain the margin requirement. When the LP removes liquidity, the sAMM reduces the long position it holds and also enters a long position for the LP, similar to the process of adding liquidity, but in opposite directions.

sAMMs are a far more advanced version of traditional AMMs, offering a simple yet powerful way for derivatives traders to open futures contracts in a fully permissionless and decentralized manner. Traditional ones also require that LPs supply an equal amount of liquidity to both tokens within a liquidity pool — we completely eliminate this hassle, without exposing LPs to any one-sided risks.

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