Stellar To Introduce AMM Functionality, What This Means For Its Ecosystem

Image by: Tyler van der Hoeven – Unsplash

The Stellar Development Foundation (SDF) will enable an automated market maker (AMM) functionality via Protocol 18. The implementation will take place with a network upgrade, but a specific date is yet to be revealed.

In an official post, the SDF claims that the new functionality will help improved market liquidity. The Stellar Network has been created to aid financial infrastructure to issue assets for cross-border and international payments. Thus, better liquidity will also positively impact its main use case and increase its chances of success. The SDF said:

(…) improving liquidity is an essential part of the 2021 growth plan. The ability to efficiently convert assets is what enables varied use cases and actors to interact with one another on Stellar.

AMMs have been popular in the DeFi sector. Decentralized exchanges such as Uniswap and SushiSwap allow users to exchange tokens, provide liquidity, and receive rewards. The SDF acknowledged that the creation of a liquid market can be a challenge, but this functionality could be a major addition for the ecosystem to grow and become simpler and more accessible for everyone.

Currently, Stellar operates with an order book and a built-in DEX feature, the SDEX. The platform allows users to trade assets on the network with a priority mechanism based on price. Trades are activated automatically and facilitate asset transfer with asset conversion.

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Although this model has functioned with success, the SDF believes it presents limitations in terms of liquidity, complexity, and a key component that drives the operation, the market makers. The latter have few incentives to provide liquidity for every asset available on the network.

They usually seek high-volume trades that will yield more profits. With an AMM, developers can create their own build-in feature and use it to provide an alternative source of liquidity. These AMMs would co-exist with the current model if, as the SDF clarified, they are approved by the validators. The foundation said:

AMMs on Stellar have the potential to provide easy-to-access liquidity at scale, especially for new markets and markets currently overlooked by market makers. That’s because asset issuers will no longer need to rely on market makers to stock order books: they can simply create liquidity pools, and allow individual users to provide liquidity by depositing into them.

The SDF has been discussing how to introduce AMMs in the network for many years. The organization and community have been actively discussing different approaches. In the end, the group of protocol designers for the Stellar Network known as the CAP Committee voted to implement proposal CAP-38.

Consider as the easiest implementation for AMMs. This proposal will introduce constant product liquidity pools which will operate similarly to Uniswap, enable users to create liquidity between two assets, store pool share, allow users to deposit and withdraw assets for the pools, and more.

The proposal contemplates a 0.3% fee for transactions with AMMs. However, the SDF claims that all proposals can be review and modified. The CAP Committee will monitor the operations and evaluate if the ecosystem requires additional features.

When Stellar Core v18.0.0 is stable, we will upgrade the testnet so that developers can begin to experiment with sandbox AMMs.  About a month after the testnet upgrade, we will coordinate a date and time for validators to vote on the public network upgrade.

At the time of writing, XLM trades at $0,26 and has followed the general sentiment in the market with a 1.8% and 38.6% loss in the daily and monthly chart, respectively.