vAMM

Consider the pros and cons of a decentralized order book (DOB) and a virtual AMM (vAMM).

	Pros	Cons
vAMM	-Simple to implement	-Scalability issues with high transaction volumes -Limited order customization options -Requires dynamic parameter updates -Long-short imbalances are costly
DOB	-Can support high transaction volumes -Generally lower slippage in liquid markets -Efficient price discovery -Offers various order types -No long-short imbalances -No dynamic parameter update	-Difficult to implement -Market maker would be important to help improve the user experience

vAMMs are awesome for bootstrapping a perps protocol. vAMMs are vastly simpler to implement compared to order books. However, vAMMs suffer from some fundamental problems:

• vAMMs require dynamic parameter updates for a better user experience.

  • For example, the parameters of a constant-product vAMM can be translated and scaled to repeg mark price to index price and adjust apparent depth of liquidity. These parameter updates come at a cost to the protocol. If not done carefully, insurance funds can become drained.

• vAMMs are vulnerable during periods of long-short imbalance.

  • Long-short imbalances are scenarios where there are significantly more open interest for longs than shorts (or vice versa). Usually, funding rates are paid from traders on one side of a position to traders on the other side of a position to mitigate this issue. For example, if mark price is $10 and index price is $11, then traders who are short will pay funding rate to traders who are long. This encourages traders to open more long positions (or close existing short positions), which creates upward pressure on mark price and hopefully causes mark price to converge to index price.

  • This doesn’t always happen in practice, however. When long-short imbalances persist and the mark price is against the protocol’s favor, the protocol has to pay the funding rate. During times of prolonged long-short imbalance, this can be devastating to the protocol’s funds.

• vAMMs cannot support limit orders.

  • This is just the nature of vAMMs. Limit orders require an order book to organize and match traders' orders against each other.