A novel trading architecture that offers deep liquidity and a smoother experience for traders.
The market maker also incorporates the concept of 'premium benefits,' aiming to balance long and short open interests in the market. Doing so creates an ecosystem where traders are incentivized to maintain balanced positions, enhancing the market's overall stability.
Streaming Funding Fees
Whenever someone holds a perpetual swap position, they will be subject to paying or receiving funding fees continuously as long as the position is open. Funding fees balance long/short open interest (OI) and the skew between the Mark Price and Index Price.
Additionally, the market maker measures Price Impact, a useful metric that helps traders understand the potential slippage their trades might experience. This is calculated using the Depth Factor, thus offering traders more granular insights into market conditions before executing a trade. Price Impact also has stability/security benefits, such as preventing oracle price manipulation.
Benefits to Traders
The Reflective Market Maker is the lynchpin in the trading flywheel, facilitating smoother and more efficient trades. It offers deep liquidity and a stable trading ecosystem, thus enabling traders to execute their strategies effectively. Whether you're a long-term investor or a high-frequency trader, this market maker model provides a stable and transparent platform that enhances your trading experience in decentralized exchanges.
Example #1 - Price Impact
Imagine Alice wants to buy 50 ETH contracts, and the current market price is $2,000 per ETH. In a traditional decentralized exchange without a sophisticated market maker, a purchase of this size could move the price to $2,050 due to limited liquidity, resulting in Alice paying an extra $50 per contract or $2,500 more.
With the RMM in place, the Depth Factor indicates ample liquidity near the Mark Price, also at $2,000. The Price Impact metric estimates that her large order would only shift the price to $2,010 instead of $2,050. So, Alice confidently places her order to buy 50 ETH contracts and only pays an additional $10 per contract or $500 extra in total, saving $2,000 compared to the traditional scenario.
This more favorable outcome shows the effectiveness of the RMM in reducing price impact and slippage for traders like Alice. By offering a more efficient trading environment, the RMM becomes vital in the trading flywheel, encouraging increased participation and liquidity.
Example #2 - Avoiding Oracle Price Manipulation
In addition, this model also avoids the pitfalls of alternative perps DEXs, such as oracle price manipulation. In the zero price impact model, if a trader opens a $100m long position on GMX, there is no price impact; the price remains the same. If that trader then opens a long position on Binance to raise the price 15%, GMX's oracle would raise the price 15% to meet the price on CEX. If the trader closes their position on GMX, they are at a 15% profit, while there has been no corresponding change to the price from their trade. In this case, LPs would be at a $15m loss from the price imbalance between GMX/Binance.
Reflective Market Maker prevents this type of manipulation in a few ways. Firstly, since RMM mirrors the liquidity depth of CEX, the price impact of trade will be similar to that of CEX, making it impossible to manipulate price and create an artificial arbitrage opportunity. If it takes $10m to move the price +10%, similarly, it would require $10m to cause the price to fall -10%. Secondly, since RMM aggregates order books from CEX and DEX, the spread between Aark and CEX is always similar. Third, with funding fees (as opposed to borrowing fees), there is always an incentive for funding fee arbitrageurs to bring the mark price to the index price.
Example #3 - Algorithmic Trading
In the future, we also plan to implement simulated order books (or RMM books) where takers can trade against randomized liquidity depths. This will create new opportunities for on-chain traders. Despite Aark Digital being a pool-based DEX, algorithm traders can implement strategies previously only possible through CLOBs. As such, while traditionally, high operational costs accompany CLOBs, RMM-based DEXs can provide a simulated order book environment for traders to execute high-frequency strategies on the broadest range of markets. At the same time, Aark only has to manage a single liquidity pool.