Breaking Down Bancor V2 Dynamic Automated Market Makers

This article was first published on Bancor - Medium
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In this post, we’ll explore the dynamic weighting and staking features of a new type of liquidity pool in Bancor v2 called a Dynamic Automated Market Maker (DAMM).

The process below allows for automated market-making on any staked asset supported by a reliable price oracle, and is designed to maintain the value of liquidity provider (LP) contributions over time using dynamic parameters in the pool.

In other words, all LPs in the pool should be able to withdraw the same amount as they staked plus a share of fees that the pool earned during their staking period.

Core concepts of v2 pools are:

  • Single-Reserve Pool Tokens: Each v2 pool is anchored to two pool tokens (one per reserve).
  • Staked Balance and Current Balance: For each reserve, staked balance indicates the total amount of tokens staked by liquidity providers, and current balance indicates the amount of tokens held in the reserve.
  • Dynamic Weights: The pool updates reserve weights to incentivize market participants to equalize the current balance with the staked balance.
  • Price Feeds: Price feeds are used for calculating the weights such that after arbitrage closure, the pool price becomes equal to the market price.

For additional details, read the Balancing Mechanics section of the in-progress Bancor v2 docs or read the open-source v2 smart contracts themselves.

Single-Reserve Pool Tokens

In existing AMMs, users provide liquidity to a pool in exchange for pool tokens. These pool tokens track a liquidity provider’s share of the pool across multiple reserves.

In Bancor v2, we’ve made a key change: a v2 pool issues a separate pool token for each reserve. This simplifies the process of tracking liquidity provider contributions. Instead of one pool token representing shares across multiple token reserves, each pool token now represents a share in one reserve.

Note that while in existing AMMs there is only one pool token per ...

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