Virtual Automated Market Makers (vAMMs)

What Is Virtual Automated Market Makers (vAMMs)?

Virtual Automated Market Makers (vAMMs) are a variation of the automated market maker (AMM) concept. AMMs are systems that use smart contracts to facilitate token swaps by utilizing liquidity provided by liquidity providers. vAMMs build upon this foundation and expand the functionality of AMMs to include derivatives, such as perpetual contracts.

An AMM-based exchange consists of two types of users: liquidity providers who supply tokens and traders who execute token swaps. The prices at which these swaps occur are determined by a mathematical formula. Unlike traditional AMMs that swap real tokens, vAMMs are designed to swap virtual synthetic assets, specifically derivatives contracts. The vAMM itself does not hold any real assets; instead, traders can participate in leveraged trades based on collateral stored in a smart contract vault.

vAMMs are primarily used for price discovery and leverage management, rather than spot trading. Each trade conducted on a vAMM triggers the calculation of an entry or exit price, similar to how prices are calculated on AMM-style exchanges. While first-generation vAMMs relied on fixed formulas for price calculations, second-generation vAMMs utilize a concentrated liquidity design and virtual tokens to enable liquidity providers to offer leverage.

Author: Yenwen Feng – Co-Founder at Perpetual Protocol

Yenwen Feng is a cryptocurrency and technology professional with extensive experience as a CEO and co-founder of multiple startups. Since 2004, Yenwen has founded Decore (Stripe Atlas for Crypto Companies), Cinch Network (Decentralized Derivatives), Cubie Messenger (Mobile Messenger, 500 Startups B5, 10M downloads), Gamelet, and Willmobile (Top mobile financial service app in Taiwan, acquired by Systex). Since 2019, Yenwen has served as the CEO and co-founder of Perpetual Protocol, a decentralized perpetual contract protocol.