AMM and liquidity

Introduction to Pryzm's AMM

Pryzm's Automated Market Maker (AMM) is crafted with a focus on enhancing the user experience for both traders and liquidity providers (LPs) by addressing the inefficiencies found in traditional systems dealing with assets that have maturities. Unlike other platforms where LPs must actively manage their investments, Pryzm's AMM offers a passive opportunity for LPs whilst maximising swap fees and capital efficiency.

This system automatically manages the liquidity across all token maturities, allowing LPs to earn swap fees from trades of any maturity without the need to manually adjust their positions or withdraw funds when tokens expire. This innovation not only simplifies the investment process but also enhances liquidity for traders, making capital deployment more efficient and the platform more attractive for those seeking a straightforward, yield-optimizing investment in DeFi.

What is Pryzm's AMM?

Pryzm's AMM is designed to facilitate the trading between Liquid Staked Tokens, Principal Tokens (PTs), and Yield Tokens (YTs).

  • Principal Tokens (PTs): These tokens represent the principal amount of an asset which can be redeemed for the underlying asset at maturity.
  • Yield Tokens (YTs): These represent the yield or interest earned on the principal until the maturity date.

The Bootstrapping Mode Explained

When Pryzm introduces new token maturities:

  • Virtual Balance Creation: Initially, a high virtual balance of PTs is set by the AMM, which doesn't correspond to any real tokens. This makes the price of PTs artificially low as the starting price for gradually increasing the token price. However, as there is no real balance, the tokens cannot be bought at this stage.

You can monitor the current real balance of tokens in the pool on the pools page. For instance, the ATOM Mar25 token, currently in its bootstrapping phase, shows a real balance of zero. This will remain the case until its market price increases to a point where it becomes economically attractive for traders to either sell their Principal Tokens (PTs) or purchase Yield Tokens (YTs), thereby adding liquidity to the pool.

Price Mechanism

As time progresses, this virtual balance decreases, causing the price of PTs to rise. This incentivizes traders to add real PTs to the pool to capitalize on the price discrepancy. Traders sell the expensive new PT into the pool and remove other PTs or LSTs, helping the new PT find its fair value.

The image below illustrates how the new Dec26 maturity for ATOM was integrated into the pool. Initially, traders sold $pATOM at a peak price of 0.939 $ATOM per $pATOM. Since then, the price has adjusted to its current rate of 0.772 $ATOM per $pATOM, reflecting market dynamics and trader activities.

How Traders Boost Liquidity in Pryzm

  • Selling Principal Tokens (PTs): Traders can transform their existing tokens or Liquid Staked Tokens (LSTs/CTs as known in Pryzm) into Principal Tokens (PTs) and Yield Tokens (YTs) via a process termed 'refraction'. When these PTs are sold into the pool, they contribute directly to the pool's liquidity. Traders can swap the expensive PTs for cheaper PTs or LSTs.
  • Acquiring Yield Tokens (YTs): For users, buying YTs is straightforward with just a click. However, behind the scenes, Pryzm's AMM facilitates this by flash loaning LSTs from the AMM vault, refracting them into PTs and YTs, and then swapping the PTs to LSTs to settle the loan, thereby increasing the PT supply in the pool indirectly. This mechanism allows traders to engage with yield opportunities without needing to manage the underlying assets directly.

Economic Incentives

  • The system is designed so that either PTs become so attractive due to their increasing price that traders sell into the pool, or YTs become so undervalued that traders buy them, thereby adding real tokens into the system.

Transparency and Monitoring

  • Traders can monitor the real token balance in the pools through Pryzm's dedicated pools page, providing transparency on liquidity levels.

Managing Token Lifecycle in Pryzm's AMM - Expired Maturities

As tokens reach their maturity, Pryzm's AMM automatically adjusts to remove them from the liquidity pool. Here's the streamlined process:

  • Redeeming PTs: At maturity, holders can redeem each Principal Token (PT) for the equivalent underlying asset, like converting 1 pATOM into an LST worth 1 ATOM.
  • Clearing Expired Tokens: The system introduces a virtual balance of expiring PTs, which lowers their market price below their redemption value. This encourages traders to buy these PTs cheaply, redeem them for LSTs, and then repeat, effectively clearing expired tokens from the pool.

This mechanism ensures the pool remains fresh with active tokens, requires no action from LPs, and allows traders strategic arbitrage opportunities, maintaining pool health without manual intervention.

Actions for Traders

  • Set Price Limits: Use PulseTrade to set price limits for Dollar-Cost Averaging (DCA) or Time-Weighted Average Price (TWAP) strategies, allowing gradual buying of Yield Tokens (YTs) or selling of Principal Tokens (PTs) at desired prices or against matching orders.
  • Market Analysis: Evaluate the prices of nearby maturities of PTs and YTs to identify undervalued or overvalued opportunities. Place your orders via PulseTrade to execute at these strategic price points.

Below, you can see tokens currently in bootstrapping mode. Assess the prices of adjacent maturities to determine the fair value of nearby Principal Tokens (PTs) or buy Yield Tokens (YTs), then leave your orders through PulseTrade.

For example, if you decide that anything below 0.1 ATOM per yATOM is cheap you might leave an order like this:

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