What Is Virtual Automated Market Makers (vAMMs)?

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.

Author: Yenwen Feng - Co-Founder at Perpetual Protocol

Yenwen Feng is a cryptocurrency and technology professional with vast experience as a CEO and co-founder of several startups. Since 2004, Yenwen founded Decore (Stripe Atlas for Crypto Companies), Cinch Network (Decentralized Derivatives), Cubie Messenger (Mobile Messenger, 500 Startups B5, 10M downloads), Gamelet, and Willmobile (Top mobile financial service app in Taiwan, acquired by Systex). Since 2019, Yenwen’s acted as CEO and co-founder of Perpetual Protocol, a decentralized perpetual contract protocol.