Automated Market Maker
How to stake in the Strips AMM
Our exchange markets center around a pooled liquidity automated market maker. A few key features of the Strips AMM:
- 1.Strips Exchange is 100% AMM based
- 2.The market fixed rate price is determined purely by market supply and demand
- 3.Liquidity providers can provide liquidity in the AMM to receive fees and act as a market maker
The Strips AMM uses an innovative calculation to fairly reflect prices based on the market imbalance present in the market. Using a modified ratio of the total outstanding long positions to outstanding short positions, the market prices on Strips reflect the AMM's capacity to quote the current market fixed rate to the trader.
In order to ensure the robustness of our markets, and reduce market manipulation, the position size of each new trade must be smaller than 10% of the total AMM net liquidity. AMM net liquidity is calculated as the TVL staked minus the absolute net long/short position of the AMM. i.e. if the AMM has a TVL of $2m, and currently has a net long position of $500k, then the AMM net liquidity is $2m - $0.5m = $1.5m.
The AMM makes money from trading fees, trading pnl, and slippage. Based on our thousands of backtests, the AMM is profitable for stakers in the long run.
The AMM developed by Strips is a market imbalance based automated market maker. As there aren't any physical tokens being exchanged, we use long/short positions as the "imbalance" of the market. The price of the AMM will adjust higher when there are more long positions than short positions, and vice versa.
The formula for the AMM is based approximately:
market price = longs / shorts * initial market rate
Initial market rate is based on modelling the long term average interest rate.
Our unique AMM model allows users to trade any type of interest rate markets, in both DeFi and CeFi. Our AMM model has been tested rigorously for Strips and is extremely robust. Our simulations show the AMM has a median Sharpe ratio of 5.64 and Sortino ratio of 55.