Market Maker Pool
The DODO Market Maker Pool is a product that is geared towards professional market makers with special requirements that cannot be satisfied by the regular liquidity pool models available on DODO (these being the Standard, Pegged, and Single-Token Pools).
A Market Maker Pool differ from the other liquidity pool models available on DODO in two major ways:
- Only the pool creator can supply liquidity to the pool, and
- The Market Maker Pool's parameters can be adjusted by the pool creator at any time after the pool is created.
In other words, you can set the price curve any way you want and provide any amount of money, just like with a grid trading instrument.
Imagine that, as a market maker, you predict that ETH is going to fluctuate around $X and set the price curve for that point, making your liquidity provision very competitive with very little capital - and earning you large fees.
Or, you may sense that ETH is about to rise and withdraw your ETH inventory to reduce your one-sided risk. Or perhaps you go even further and withdraw some of your USDT to invest in more ETH.
Perhaps you want to raise money to buy a CryptoPunk worth 1000 ETH, you can issue 1000 MINIPUNK tokens and sell them at a constant price of 1 MINIPUNK = 1 ETH. After the sale, the 1000 ETH in the pool can be withdrawn immediately and used to buy the CryptoPunk.
Wootrade has created a Market Maker Pool on DODO, using the PMM algorithm to provide liquidity on the chain. It also hedges positions on other exchanges to generate stable returns.
In the eight month period between March and November 2021, Wootrade provided over $10 million in TVL and generated over $10 billion in trading volume and $7 million in fee income!
Most on-chain liquidity is currently provided by AMMs, but this type of market making is very rudimentary. It is essentially a grid trading strategy that ranges from 0 to infinity. Professionals can often provide liquidity more efficiently based on some market information, and in turn get far better capital utilization than with AMMs, securing a large number of trades with a relatively small amount of capital.
The PMM algorithm provided by DODO is more flexible than the AMM algorithm and can give professional market makers a major competitive advantage. You can adjust the parameters to make PMM quotes fit to your own price models.
In addition, DODO's liquidity pools are accessed by all major aggregators, including 1inch, Matcha, Paraswap, and others. These diverse distribution channels can help you deliver liquidity to more users.
Private pools are very flexible and the ways to use them are still being explored. However, many people have adopted a fully or partially hedged approach to using private pools.
There is always risk involved when operating a liquidity pool. However, building an automated market-making bot to reduce this risk requires coding experience. To learn more, see the Market Making page.
When market conditions change, market makers need to take measures to avert and reduce downside risk, which is the estimated amount of loss in value of their assets that could be sustained as a result of market movements. With a Private Pool, they can do so easily by removing some of their bid-side liquidity (i.e. withdrawing the tokens opposite the token asset that is expected to depreciate in value).
You are a market maker for the apple market. You feel that apples have a lot of potential and their price will go up. Not wanting to sell apples at a low price, you have two options on AMMs:
- 1.Buy apples yourself - you need a lot of capital to do this.
- 2.Reduce the size of the pool by withdrawing apples from the market - market liquidity will be negatively affected.
Neither option is ideal, because you do not have the power to actively influence the price discovery process within the AMM framework. The process of determining the price of apples happens passively as buyers and sellers interact. You believe you have a sound market thesis, but unfortunately you don’t get to apply it.
Using a DODO Private Pool drastically improves the market making experience. It allows them to intervene and adjust the market price directly. This is what we call active price discovery, because market makers actively get involved in the price discovery process, which renders it more efficient.
You just issued a new stablecoin, X, that is pegged to 1 USDT. To create a liquid stablecoin market for X and USDT, you can add some USDT and a much larger amount of X to a Private Pool, and set
. This market will guarantee that 1 X is always swapped for exactly 1 USDT.
You could also set k to a very small non-zero value (e.g.
) to get an “approximately constant” pricing curve as seen on Curve.
, and deposit both base and quote tokens with a price ratio
, to get a market that behaves and performs in the exact same manner as traditional AMMs. For example, if the initial price i is 1 base token = 3 quote tokens, then simply deposit base and quote tokens at a 1:3 ratio.
If the main liquidity of the market is provided by you, you can set the price and depth as needed. This allows you to provide price support and curb speculation.