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Mooniswap: Next Generation AMM Protocol by 1inch

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Mooniswap is an automated market maker whose function is to redistribute earnings to liquidity pools. It concentrates on user slippages and shields traders from common attacks. An automated market maker essentially alters how users exchange cryptocurrencies. 

The liquidity batches enable users to switch between cryptos quite quickly, and in a fully decentralized manner that lacks custody. Mooniswap has virtual balances that allow liquidity providers to realize gains otherwise captured by investors.

The Mooniswap design can hold most of the slippage earnings in the pool by maintaining virtual balances for various switch directions. After that, new prices for upcoming trades are shown. The first-ever AMM was launched in 2017 by Bancor. After that, it was possible to trade cryptocurrencies without depending on outside data for setting prices. Consequently, innovative AMMs started to grow all over the Decentralized Finance.

How an Automated Market Maker Operates

The always continuous invariant equation harmonizes cryptos in a pool to continuously produce two parties of a trade:

  1. The first one is traders who trade with a collection causing a disparity in prices.
  2. Secondly, it’s the third parties who come after the transactions and, by trading with the pool, revert the price to the market price.

Traders are retailers who transact tokens at the price that is set by the AMM. They have no specific knowledge about the price position in the market. As for the third parties, they are bots programmed to detect profitable trades.

Fees on swaps and referrals

Mooniswap makes use of a 0.3% swap fee for a start, which gets lowered to zero as time goes by to offer more competitive market prices. Furthermore, it also brings into play the referral fees to motivate collaborations with wallets and other services that boost the volumes of trade and extra revenue for liquidity providers. Referral fees are only charged when the referral wallet is pointed out in transaction arguments.

Moreover, the referral fee is fixed and is equivalent to 5% of the revenue earned by liquidity providers on the transactions. Other than the swap and referral fees, Mooniswap doesn’t charge any additional fees.

Volume-weighted Average Price oracles (VWAP)

The price of oracle data is kept as a total of all transaction inputs and outputs in both ways. It is updated after each transaction. Due to the virtual balances, VWAP oracles are difficult to influence by malicious parties.

Hurdles experienced by current AMMs

The most relevant open evidence of the formula in action is seen in Uniswap’s AMM. The Uniswap AMM works independently of any external influence from oracles and has no other effect on the prices apart from the transactions engineered against it. The problem is that liquidity providers experience losses when they pull out from situations that don‎’t favour them.

Curve was created to offer better prices on stablecoins. As a result, Uniswap’s retail traders and liquidity providers moved to sources with minimal losses. Curve creates a specific pricing formula that comprises of a constant product and sum.

Curve can quote prices with much more ease. Curve’s innovation offers a significant contribution but doesn’t solve some of the major issues. As the leaders in the AMM space, Bancor tried to find an answer to the high slippage on large transactions and temporary losses with liquidity boosting and changing weights process in their V2 upgrade.

Many projects tried to make improvements in the AMM, but they weren’t entirely on point, and that’s when the 1 inch team was motivated to design an AMM that allows providers to catch a portion of price slippage profits. That is Mooniswap.

Bonus link: 1inch Review by The Crypto Basic

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