Automated Market Makers (AMMs) emerged as a decentralized alternative to traditional order books, which were impractical to implement on-chain due to the blockchain trilemma. Over the years, platforms like Uniswap and SushiSwap have pioneered the AMM model, facilitating trillions of dollars in trade volume. However, while revolutionary, AMMs have several limitations such as slippage, MEV extraction, and under-utilized liquidity.
Now, a new class of market-making systems is entering the DeFi scene — Actively Validated Market Maker (AVMM) pioneered by Dextr. Powered by EigenLayer and its AVS ecosystem, AVMM promises to address the issues plaguing AMMs and offer more flexibility, capital efficiency, and consumer protection. In this article, we’ll compare AMM and AVMM and explore why AVMM may represent the future of DeFi market-making.
Key Differences Between AMMs and AVMM
1. Price Discovery: Price Curves vs Price Oracles
AMMs use price curves like the constant product formula (x*y=k) to determine asset prices. While this approach simplifies on-chain trading, it can lead to price inefficiencies and value extraction, especially during periods of high volatility.
AVMM, on the other hand, utilizes price oracles that aggregate real-time market data. This allows for more accurate price discovery, ensuring zero slippage, and improves trade execution. LPs in AVMM can even select their preferred price feeds, tailoring their strategies to specific market conditions.
2. Liquidity Pools: Dual-sided Public Pools vs Single-sided Private Pools
AMMs rely on dual-sided liquidity pools, where liquidity providers (LPs) must supply equal value of both assets in a trading pair (e.g., ETH/USDT). While this structure simplifies the liquidity provision process, it significantly limits capital efficiency and exposes LPs to divergence loss. Additionally, LPs face Loss Versus Rebalancing (LVR), a type of inherent loss. LVR occurs when arbitrageurs exploit price movements, leading to adverse cost selection and costing LPs an estimated 5–7% of their capital.
In contrast, AVMM introduces single-sided private pools, allowing LPs to provide liquidity for multiple pairs using just one asset. This eliminates the risks of divergence loss and LVR while offering LPs greater flexibility and control over their capital. In an AVMM, each LP manages their own abstracted liquidity pool, enabling them to implement custom strategies, thereby maximizing capital efficiency.
3. Liquidity Management: Concentrated Price Range vs Adaptive Price Range
AMMs like Uniswap v3 introduced concentrated liquidity where LPs can specify narrow price ranges within which their liquidity is active. This liquidity is managed through tiny price intervals known as ticks, where each tick corresponds to a specific price point. LPs must manually adjust these ranges in response to market movements to optimize their liquidity positions, which requires ongoing attention to prevent impermanent loss or maximize fee earnings.
AVMM revolutionizes liquidity management by implementing adaptive liquidity ranges that incorporate built-in stop-loss and take-profit functionalities. Here, the liquidity settings are not static but dynamically adjust based on prevailing market conditions and trading activity. This system employs elastic markers which, unlike the static ticks in traditional AMMs, shift according to percentage price deviations and dollar value thresholds, providing a more refined control mechanism over liquidity placement, thus minimizing active liquidity management by LPs.
4. Capital Efficiency: Fragmented & Idle Liquidity vs Abstracted & Rotating Liquidity
In AMMs, liquidity is locked within specific pairs or ranges, leading to underutilized capital when prices move outside an LP’s selected range.
AVMM provides far greater capital efficiency by abstracting liquidity across multiple trading pairs and ranges. Liquidity is dynamically deployed where it’s most needed, reducing idle capital and improving returns for LPs.
5. Order Routing & Execution: Atomic vs Optimistic
AMMs facilitate trades using smart contracts that prioritize pools with greater liquidity, lower fees, and reduced slippage, ensuring atomic (all-or-nothing) transactions. Although this approach enhances security, it may also result in higher gas fees and a greater chance of failed transactions, particularly when executing complex trades such as multi-hop orders.
In contrast, AVMM uses an optimistic execution model. Trades are matched off-chain and settled on-chain via AVS Operators, considering factors such as price, discount offered, and LP rank. This approach allows for more efficient trade execution, reducing failed transactions and lowering gas costs while enhancing overall price discovery and liquidity utilization.
6. Fee Structure and Sharing: Rigid Fee Tiers vs Dynamic Fee Discounts
In AMMs, LPs earn fees based on their contribution to a pool, with multiple fee tiers depending on the asset type. However, these fee structures are relatively rigid.
AVMM enables LPs to set their fees, retaining up to 100% of the fees accrued per trade. LPs can also offer dynamic fee discounts to attract more liquidity, fostering competition, and maximizing returns.
7. Consumer Protection: MEV Mitigation vs Loss Compensation
In AMMs, strategies such as order fragmentation, batch auctions, and lead searcher auctions are designed to mitigate the effects of MEV exploits. However, these approaches are not entirely foolproof, leaving users vulnerable to potential value extraction.
In contrast, AVMM introduces a more comprehensive approach to MEV protection. Through pre-confirmations and zk-proofs, AVMMs automatically penalize bad actors and compensate users for any losses incurred, providing an additional layer of security.
8. Design & Architecture: Monolithic V/s Modular
AMMs operate on monolithic architectures, where liquidity is confined to a single blockchain, like Ethereum or Binance Smart Chain.
AVMM adopts a modular design, allowing liquidity to be routed across multiple blockchains. This expands liquidity depth and opens up new trading opportunities, making AVMM more scalable and interoperable.
9. Token Listings: Pair-wise V/s Category-wise
AMMs require each token to be paired with another, leading to fragmented liquidity and operational inefficiencies.
AVMM utilizes a category-wide listing mechanism, allowing tokens to be listed across entire asset categories (e.g., all stablecoins) without needing separate liquidity allocation for each pair reducing listing operational costs.
10. Token Utility: Governance V/s Indemnity
In AMMs, the native token’s primary utility is often centered around governance. Token holders are granted voting rights, allowing them to propose and vote on key decisions such as protocol upgrades, fee structures, and liquidity incentives. However, the token’s value is largely tied to speculation and the protocol’s success, rather than direct utility within the market-making process.
In contrast, AVMM introduces a native token with a different utility — indemnity. Here, the token is used as collateral to cover potential losses as well as eligibility for insurance claims for LPs and traders in the event of MEV extraction. This indemnity model aligns incentives more closely with capital protection and market performance, making the token an integral part of the risk management and profitability dynamics of the platform. In addition to governance, the token’s value is derived from its role in safeguarding users and ensuring the reliability of the trading process.
Conclusion: The Future of DeFi with AVMMs
While AMMs have played a pivotal role in the growth of decentralized finance, their limitations in capital efficiency, liquidity management, and protection from market manipulation are becoming increasingly apparent. For LPs, AVMMs offer more control, better returns, and greater protection against market risks. Traders benefit from more accurate pricing, deeper liquidity, and reduced slippage.
Additionally, Dextr AVMM is designed to function as a ‘hook’ on top of existing AMMs, extending capabilities such as adaptive price ranges, dynamic liquidity rotation, and comprehensive protection against MEV and LVR.
As DeFi continues to evolve, AVMMs represent the next frontier in decentralized market-making, offering a more dynamic, efficient, and profitable ecosystem for all participants.
