HOT - A New MEV Aware AMM Design | DappCon24

Summary

In this talk, Rafael from Araus introduces Hot AMM, a new decentralized market-making protocol designed to address the inefficiencies of traditional AMMs. Hot AMM aims to protect liquidity providers from impermanent loss with dynamic fees and leverages a permissioned solver order flow for price updates, combining the strengths of DEX and hybrid exchanges. The protocol seeks to offer better capital efficiency and a trustless trading environment, targeting retail and institutional traders alike.

Takeaways

• 😀 Rafael, from Araus, introduces a new decentralized market-making protocol called Hot AMM, designed in collaboration with Valunas.
• 🌐 Hot AMM aims to address the increasing dominance of private market makers and provide an alternative source of liquidity in the DeFi space.
• 🔍 The script discusses the evolution of AMMs, from constant function AMMs to concentrated liquidity AMMs, and the inefficiencies and challenges faced, such as impermanent loss (IL).
• 💡 Hot AMM introduces three main objectives: IL protection, maintaining a permissionless and trustless DEX design, and dynamic fee updates through a permissioned Araus quoting service.
• 🛠️ The protocol combines elements of both DEXs and hybrid exchanges, aiming to leverage the strengths of each while mitigating their weaknesses.
• 📈 Dynamic fees in Hot AMM are designed to increase over time, creating a 'no trade zone' that discourages arbitrage until price updates are provided by solvers.
• 🔒 The permissioned solver order flow is intended to bring in non-toxic order flow and reliable price updates, enhancing the protocol's security and efficiency.
• 💰 The protocol's dynamic fee mechanism is expected to benefit liquidity providers by ensuring that trading fees are generally higher than the losses due to price discrepancies.
• 🚀 Hot AMM is particularly suitable for more liquid assets and is not intended for use with illiquid tokens that are not widely traded.
• 🤖 Araus positions itself as a decentralized, permissionless onchain market maker, focusing on building infrastructure and serving algorithmic strategies to clients.
• 📚 The script concludes with an invitation to follow Araus on social media for updates and to read the Hot AMM research paper for a deeper understanding of the protocol.

Q & A

What is the main focus of the talk by Rafael from Araus?

The main focus of the talk is the introduction of Hot AMM, a new AMM (Automated Market Maker) design by Araus, which aims to address the increasing importance of private market makers and provide an alternative source of liquidity in the decentralized finance space.

What is the role of Araus in the decentralized market making protocol?

Araus is leading the product and growth for the decentralized market making protocol. They are responsible for designing and launching new types of DEX (Decentralized Exchange) solutions like Hot AMM.

Why is there a need for a new type of AMM like Hot AMM?

There is a need for Hot AMM because existing AMMs have limitations such as inefficient capital allocation and issues with arbitrage and impermanent loss (IL). Hot AMM is designed to provide better liquidity, reduce IL, and offer dynamic fee updates to protect liquidity providers.

What are the three main objectives of Hot AMM?

The three main objectives of Hot AMM are: 1) IL (Impermanent Loss) protection for liquidity providers, 2) Preservation of a permissionless, trustless DEX design while providing traditional swap AMM for retail traders, and 3) Introduction of a permissioned Araus quoting service that enables dynamic fee updates.

How does Hot AMM differentiate itself from traditional AMMs in terms of liquidity provision?

Hot AMM differentiates itself by using a combination of permissioned solver order flow and a traditional concentrated liquidity AMM design. This allows for more capital efficiency and dynamic fee adjustments to protect liquidity providers from IL.

What is the significance of dynamic fees in Hot AMM?

Dynamic fees in Hot AMM are significant because they adjust in real-time based on the staleness of the price in the AMM. This helps to create a 'no trade zone' that discourages arbitrage until a solver provides a price update, thus protecting liquidity providers from IL.

How does the solver order flow work in Hot AMM?

The solver order flow in Hot AMM involves trusted parties (solvers) competing for quotes and providing price updates to the AMM. This brings in non-toxic order flow and ensures that the AMM's price is frequently updated with accurate information from external venues.

What is the expected impact of Hot AMM on the market making side of decentralized exchanges?

The expected impact of Hot AMM on market making is to provide a more efficient and protective environment for liquidity providers. It aims to reduce the reliance on arbitrageurs for price discovery and instead use solvers to update prices, potentially leading to lower fees for retail traders on average.

How does the permissioned Araus quoting service benefit the Hot AMM ecosystem?

The permissioned Araus quoting service benefits the Hot AMM ecosystem by enabling dynamic fee updates based on market conditions. This service ensures that only trusted parties can influence the price updates, which helps maintain the integrity and efficiency of the AMM.

What is the future outlook for Araus and Hot AMM according to the talk?

The future outlook for Araus and Hot AMM is positive, with the expectation that the market will move towards various DEX designs that offer better solutions for liquidity provision and price discovery. Araus aims to continue innovating in the Dex and market making sphere and serving algorithmic strategies to clients.