A virtual Automated Market Maker (vAMM) is a system that provides synthetic (or virtual) liquidity, allowing traders to buy and sell derivatives entirely on the blockchain.
Virtual Automated Market Makers (vAMMs) are based on the concept of the
automated market maker (AMM). The AMM is a system that provides an automated
smart contract platform where traders can perform
token swaps using liquidity from
liquidity providers. Building on this foundation, the virtual Automated Market Maker (vAMM) is a new type of AMM that expands its application from token swaps to
derivatives, such as
perpetual contracts.
An AMM-based exchange has two types of users:
liquidity providers to provide tokens, and traders to swap available tokens. The prices at which swaps occur are determined by a mathematical formula. As the “virtual” part of vAMM implies, rather than swapping real tokens,
vAMMs are used to swap virtual, synthetic assets like derivatives contracts. No real assets are stored inside the vAMM itself; instead, traders are able to make leveraged trades based on collateral stored in a smart contract vault.
vAMMs are used for price discovery in handling leverage but not for spot trading. Every time a trade is made, the vAMM calculates the entry or exit price in the same way prices are calculated on AMM-style exchanges. While first-generation vAMMs used a fixed formula for calculating prices, second-generation vAMMs use a concentrated liquidity design along with virtual tokens to allow makers to provide
liquidity with
leverage.