Overview
Last updated
Last updated
The AMM is a key module in RAMM. Users can (leverage) trade longZCB and shortZCB. When buying a longZCB token, either from the protocol during assessment or a counterparty post assessment, a user is automatically taking up a junior tranche position of the underlying instrument.
The AMM serves to
a) aggregate individual decisions that price the risk of an instrument
b) allows participants to speculate or hedge on an instrument’s returns
c) in cases where the underlying instrument is a loan, extracting market-driven interest rates.
An AMM instance is deployed for each proposed Instrument, which goes through two phases;
assessment phase: A positive-sum prediction market where the utilizer is the sole longZCB issuer and market maker. This is where the managers purchase longZCB If the managers deem the underlying instrument to have a favorable risk-reward profile. A VT holder, who is a passive investor, can "disagree" with the manager if he deems that the risk is underpriced, by buying, thereby relinquishing all potential returns generated by the Instrument
post-assessment phase: After the proposedInstrument is approved, the AMM morphs into a zero-sum prediction market where any traders can submit limit/taker orders on longZCB and shortZCB.
To prevent certain attacks, there are restrictions set in place when buying shortZCB tokens. Most importantly, every buyer needs to have invested in and locked its parent vault.
The value of shortZCB is set to be maxPrice - the value of longZCB. By buying this token, users can choose to hedge their exposure to the instrument.
Example usage: A borrower proposes a loan with an NFT as collateral. The loan is approved by the protocol. You, a passive vault investor, are bearish on that specific NFT and do not think the borrower will repay once its value plummets. You can purchase shortZCB tokens to hedge against this risk, which will pay off positively when the borrower defaults. If the borrower does not default, you just lose out on some of the profit to be generated from the borrower's repaid interest.
How does shorting work?
You can imagine buying longZCB of (C2-C1) amount as providing collateral with an amount equal to the area labeled with blue. When price of longZCB is A, a manager would increment the price from A to B when he does so, and gain (C2-C1) amount of longZCB.
For a shortZCB buyer willing to buy the same amount C2-C1 of shortZCB, he would provide collateral with an amount equal to the area labeled with green, and decrement the price from B to A. (Assuming the price of longZCB was at B). When the redemption price of shortZCB at maturity is at 0, the entire blue area will be used to capitalize the profit of the C2-C1 shortZCB buyer.
The slope of the curve is the inverse liquidity coefficient, a. a and the initial price b are both determined as a function of proposal parameters when the instrument is proposed and is used to parametrize the AMM during the assessment phase.
