Hello everyone! In this article we will introduce you to the concept of a virtual automated market maker (vAMM), understand the pricing of assets and consider the ways of liquidity flow on Storm Trade. It sounds complicated, but it only seems so. Let's get to the bottom of it!
We are often asked where we get assets from in order to long or short them. The answer is nowhere, we don't have any. We don't need assets to use Storm, and therein lies the magic of virtual AMM.
AMM is a popular and familiar concept pioneered by Bancor and then Uniswap. The essence of the concept is that exchange rates for tokens depend only on the number of tokens in the underlying liquidity pool. MMA does not use oracles or any external data sources to determine asset prices.
In order to be able to trade with leverage, and more importantly, to trade really any assets, you need not just an AMM, but a vAMM or virtual AMM. Instead of providing real assets to the pool, a pledge of the full value of those assets is used, and the asset prices are in turn determined by the Oracles.
The vAMM also helps in calculating Price Impact or the impact on the price of an asset by the position being opened. The movement of the Index Price follows the price transmitted by the Oracle (more on this below), so deviations of the Market Price from the Index Price create a field for arbitrage, attracting even more liquidity into the ecosystem.
You rightly ask, if the assets themselves are not needed for trading, how to determine the value of the asset for a virtual copy, i.e. collateral? This is where the almighty Oracles come to our aid.
No, the word Oracle has nothing to do with clairvoyance, in this case it is a kind of transmitter that helps to send prices to Storm in real time and with minimal delay. Oracles collect prices from the largest exchanges by liquidity, aggregate them and send them directly to the trading interface on Storm.
Okay, prices are supplied by Oracles, but where do they come from? In order to transmit prices you need a source, in our case it's the Pyth Network data provider. These guys know their stuff, supplying various venues with prices for over 200 assets to trade, helping us go beyond cryptocurrencies and making forex, stocks and indices available for trading.
With near lightning fast asset price updates several times per second, traders are able to access different time frames for trading. A trader can implement both strategies for medium-term position holding and minute scalping, thanks to the price updating several times per second. This approach creates a lot of different opportunities for traders to create unique strategies and improve the user experience.
Okay, you will say, prices are taken care of, but what about leverage? If the collateral for my position is 100 USD and I want to open a long with 10 leverage, I need 1000 USD. How do I get another 900?
Let's remember physics. According to the law of conservation of energy, 900 USD must come from somewhere to be used in trading. To help traders open positions with higher leverage in Storm, additional external liquidity will be used, and liquidity providers will help us with this.
Who can be a supplier? Anyone! As a counterbalance to traders, suppliers provide funds for trading, in turn receiving most of the commissions collected by the protocol, some of the liquidation penalties and all of the traders' negative PnL.
In order to understand the way liquidity flows and supplies to traders, let's turn to a new concept - vault.
A vault is a secure location designed to safely store the liquidity being supplied.
Whenever a trader opens or closes a position, the trader's funds pass through the liquidity vault. When a new position is opened, the collateral is sent to the vault, and after the position is closed, it is given to the trader along with a positive PnL or taken away in case of a negative PnL.
We've figured out the basic mechanisms inside the exchange, which means it's time for the most interesting part. Join the public testing of Storm Trade and tell us about your impressions in our google form. The most active traders-testers, bug reporters, Influencers and community members will take part in a large-scale airdrop that will take place this fall.
Stay tuned, become olds of the Storm community and ask your questions. We are very glad to meet you!