Time-Weighted Automated Market Maker (TWAMM)

November 21, 2023 - Around 3 mins mins to read

Understanding the Time-Weighted Automated Market Maker (TWAMM)

The Time-Weighted Automated Market Maker (TWAMM) is an automated market maker designed to assist traders in executing large orders with minimal slippage and low gas fees, while also minimizing the impact on the asset’s price.
In traditional finance (TradFi), traders often rely on brokers to algorithmically execute large orders over a specific time period, ensuring they get the best possible price. This is typically achieved through a Time-Weighted Average Price (TWAP) order, which provides the average price of a security or asset over the designated time frame.

When a large trader wants to purchase $10 million worth of Solana, they cannot simply execute a single trade as it would significantly impact the market price. Instead, they would use a trading desk or algorithm to break down the $10 million order into smaller orders of $1,000 spread across several hours or days, minimizing the price impact in the market.
The TWAMM aims to replicate the functionality of TWAP orders by breaking them down into a combination of numerous small orders through an automated market maker (AMM) over a period of time.

However, this trading method may cause prices to deviate from the overall crypto market. To mitigate this issue, the TWAMM relies on arbitrageurs who trade against the AMM’s price to bring it back in line with the market price, ensuring effective execution for long-term orders.

Traders face similar challenges on AMMs when placing large buy orders, as the constant product formula used by the AMM leads market makers to increase the price against the trader. Manually breaking up the trades as an alternative can be time-consuming and result in additional gas fees due to the extra transactions required. The TWAMM addresses this problem by automating the small trades, maximizing trade execution smoothness while minimizing gas fees.

The TWAMM algorithm is one of the pioneering solutions in decentralized finance (DeFi) that allows users to set parameters for buying and selling assets over a specified time period, such as one week, a certain number of hours, or days, without relying on a centralized exchange (CEX) or trading desk.

As DeFi and crypto gain mainstream acceptance and attract larger investors, features like the TWAMM will play a crucial role in facilitating a better trading experience for all users. This will further drive the adoption and usage of decentralized exchanges (DEXs).

Author Bio: Hisham Khan, CEO of Aldrin

Hisham Khan brings with him a wealth of experience in managing and developing robust and innovative financial and enterprise technology solutions. With a successful career at Bloomberg and based in New York, Hisham has collaborated with some of the world’s top engineers as a project manager. It was during this time that he recognized the transformative potential of cryptocurrencies, leading him to leave Bloomberg and establish Aldrin, a platform that offers comprehensive and accessible trading tools. His primary mission is to make advanced crypto trading and strategy development accessible to everyone.