Introduction | dAMM: Addressing L2 Liquidity Fragmentation

dAMM brings L2 liquidity to L1 and aims to use L1's trustlessness to reverse the trend of liquidity fragmentation caused by the rise of L2.

Too long to watch

• AMM on L2 is plagued by liquidity fragmentation issues

• dAMM solves the problem of liquidity fragmentation by allowing liquidity to be shared between different L2s

• dAMM allows ZK-based L2 (e.g. DeversiFi, Loopring, etc.) to asynchronously share liquidity — so that more transactions can be supported by liquidity providers

• dAMm allows liquidity providers to be in serviceUniswapParticipate in L2 transactions while waiting for L1 AMM => Achieve scalability without any compromises

• dAMM uses L1's permissionless nature to mitigate liquidity fragmentation issues caused by L2 being independent of each other.

dAMm (formerly Caspian)

In March 2021, when we first officially announced dAMm, we named it Caspian (Caspian Sea) (Chinese translation), but eventually dropped the name due to trademark issues (long live dAMm!). dAMm isStarkWareThe L2 AMM, developed in collaboration with Loopring, gathers liquidity into an L1 liquidity pool and enforces logic through L1 contracts. This greatly increases capital efficiency and development flexibility, while enjoying the security guarantees provided by L1.

Expanded functionality of dAMM — Asynchronicity across L2

The functionality of dAMM has been extended to enable cross-L2 AMM, that is, have different L2sasynchronousShare the same liquidity pool. The design allows AMM scalability, but does not cause fragmentation of liquidity.

So-called asynchronicity means that an L2 does not need to use the AMM L1 liquidity pool to communicate with other L2 when processing dAMM transactions. Asynchronicity is a core function of dAMM, making shared AMM actually usable for the first time in the real sense of the word.

How did dAMm do this? Because it decouples the liquidity pool from the pricing state. Under this design, any offer provided by the agreement status of the contract, as long as it has sufficient liquidity to execute the transaction.

By decoupling capital and status, we can enable each L2 to create its own DAMM state based on the same liquidity pool, enabling asynchronous cross-L2 AMM.

Supports multiple independent markets

Participants' characters still retain their previous design. The new design is unique in that it supports multiple independent markets—some on L2 and L1, but they all share AMM infrastructure and liquidity.

Finally, the new design also has a minor tweak: dAMM can use L1 liquidity (for example, transactions on Uniswap/Sushiswap) to expand its liquidity pool. To this end, we support direct deposit of L1 liquidity provider tokens (for example, liquidity provider voucher tokens from the UniSwap ETH/DAI pool) into the appropriate dAMM liquidity pool (e.g., ETH/DAI liquidity pool).

What are the benefits of expanded dAMm?

The expanded dAMM has obvious advantages and creates a virtuous cycle:

• Since dAMm supports multiple markets, trading volume on dAMm has increased

• Increased transaction volume means increased processing fees

• When liquidity remains the same, an increase in processing fees means an increase in capital efficiency

• More liquidity means better prices

How high is the risk of impermanent loss with dAMm?

AMM's liquidity providers are subject to the risk of impermanent loss (impermanent loss). This is even more true of dAMM's liquidity providers. In fact, the more markets DAMM supports, the higher the risk of impermanent losses for its liquidity providers. In an impermanent loss neutral environment (such as Curve pools), liquidity providers don't have much risk. This is not the case with other types of liquidity pools.

To mitigate this problem, dAMm smart contracts use a method calleddAMm health factorA parameter to limit the impermanent losses suffered by liquidity providers. We'll write a separate article about this mechanism later.

conclusions

We predict that dAMM will become one of the basic primitives for DeFi scaling. Furthermore, we believe this design is a strong proof of permissionless connectivity between independent L2 systems. dAMM shows how to use the trustlessness of L1 to reverse the fragmentation of liquidity caused by the rise of L2.

Acknowledgements: dAMm's license-free design is the result of close collaboration between different L2 teams. We really enjoy the feeling of working side by side with everyone, and trust that we will continue to create, design, build, and operate together.

Written by Louis Guthmann and Brecht Devos Translated and proofread by Min Min and Ah Jian