AMM Swaps

Capital Efficient Swapping.

The Mint/Burn system described allows markets to be bootstrapped with zero liquidity while allowing outcome exchange. The downside is that it is capital-inefficient, and effectively eliminates the opportunity to trade outcomes near market expiry. Markets with high participation will become liquid enough to allow AMM pools. These are preferable to the Mint/Burn system for several reasons:

• AMM pools provide superior price discovery as the price of an outcome token, whether against other outcome tokens or some other asset, is derived directly from trading behaviour.

• AMM pools are considerably more capital-efficient, particularly modern DEXes with concentrated liquidity systems.

• AMMs are ubiquitous in DeFi and users will be both more familiar and more comfortable with the experience provided.

• AMM pools provide a way for users to ’stake’ their outcome tokens and earn fees by providing liquidity to the AMM - this incentivises deposits into outcomes throughout the market life-cycle. Furthermore, the AMM will provide users with the ability to conduct a market neutral strategy.

The provision of AMM-based swapping also exposes an arbitrage opportunity by depositing or exchanging outcomes using the Mint/Burn mechanism, which should align the implied likelihood of the market as users preferentially deposit or exchange into tokens that offer a better rate on the Mint/Burn exchange compared to the AMM, and vice-versa.

We propose a concentrated liquidity AMM tailored to support ERC1155s for outcome:outcome pairs as well as outcome:stable pairs. The design of the AMM is under development but it will not introduce features or limitations not present in the major contemporary AMM protocols (such as Uniswap V3).

The AMM will collect a small pool fee on swaps in-line with major DEXes. The outcome tokens collected on the fees will be utilised according to the governance process at time of fee collection and liquidated into USDC automatically.