SunSwap Overview

SunSwap protocol keywords: Automated market maker (AMM), liquidity pool and swap

Background

SunSwap AMM (automated market maker) adopts the most used trading model in the world of DeFi today. Unlike the order book, AMMs utilize the constant product model to calculate tokens in the pool, where trades are automatically executed, and the liquidity supply of the trading pair is ensured.

Anyone can deposit a token into a pool in exchange for the pool's dedicated token (LP token) of an equivalent value, and thus become a liquidity provider (LP) for the pool. The amount of the LP token received divided by the pool's total LP reserves represents the liquidity provider's share of assets in the pool, and the liquidity provider can redeem the above assets at any time.

Mechanism

Swapping is based on the constant product formula, with x and y representing the amount of two different tokens (assumed to be token X and token Y), then:

$$x * y = k$$

If we want to swap X for Y from the liquidity pool, and assume that the amount of X entered is Δx and the amount of Y obtained is Δy, provided that the pool has sufficient funds, then:

$$(x + \Delta x) \times (y - \Delta y) = k \\\\ \Delta y = y - \frac{k}{x + \Delta x} = \frac{\Delta x \times y}{x + \Delta x}$$

This means that the product of the two tokens in the liquidity pool remains unchanged after the transaction. In this case, if the volume of a transaction only accounts for a minimal fraction of the liquidity pool's total volume, then the transaction price will approximate the ratio of the two tokens' amount:

$$price_y = \frac{\Delta x}{\Delta y} = \frac{x + \Delta x}{y} \approx \frac{x}{y}$$

However, the price of y in the liquidity pool is $\frac{x}{y}$ before the swap. This results in a slippage of y's price:

$$Slippage_y = \frac{\Delta x}{\Delta y} - \frac{x}{y} = \frac{\Delta x}{y}$$

The larger the transaction volume Δx, the greater the slippage and the more the transaction price deviates from the actual price; likewise, more funds and greater depth in the pool can reduce the slippage and thus lower the losses for users. In actual SunSwap transactions, a 0.3% fee will be deducted before the calculation.

Example: Suppose the liquidity pool has 100 X and 1 Y. If a user wants to trade 20 X, then the actual amount of X traded will be 19.94 X (net of a 0.3% fee), according to the formula x ∗ y = k:

$$(100 + 19.94) \times (1 - \Delta y) = 100 \\\\ \Delta y = 0.1662$$

Liquidity Pool

The SunSwap contract of Sun.io allows users to swap between regular tokens and add and remove liquidity. Its V1 and V2 contracts are now running on the TRON MainNet.