Payments DEX Stellar First L1 to Offer Integrated Automated Market Making

After years of exclusively maintaining an order book-based decentralized exchange, Stellar (XLM) has launched automated market-maker (AMM) functionality native to its protocol.

Stellar’s Protocol 18 upgrade went live following a successful community on Nov. 3, enabling developers to launch front-ends and other applications utilizing the new AMM functionality. The Stellar Development Foundation (SDF) has urged devs to ensure all up-to-date software and SDKs are installed as previous versions are not compatible with Protocol 18.

Permissionless Creation

AMMs are decentralized exchange protocols that allow the permissionless creation of liquidity pools comprising two assets. An underlying mathematical formula is used to value the two assets against each other, while traders execute orders against the entire pool, and to which any user can provide liquidity.

Compared to order books, AMMs simplify the operations of market makers, reduce market spreads, and facilitate improved capital efficiency. Jack Saracco of Stellar-based Latin American digital asset cross-border payment settlement Settle Network, stated:

“The creation of this protocol is a very key factor for us since we are constantly involved in the order books, in the DEX, providing liquidity for orders and spreads. We’re constantly monitoring our trades and the availability of being able to trade in a pool. AMMs could lower the spread drastically, and I see how the community is going to really benefit from having AMMs interact with stablecoins and the Stellar ecosystem itself.”

“AMMs on Stellar have the potential to provide easy-to-access liquidity at scale, especially for new markets and markets currently overlooked by market makers,” Justin Rice, SDF’s head of ecosystem, wrote in July.

“Ultimately, what we’re doing is creating tooling for developers to build products and services that end-users touch and already with the development of automated market makers,” Rice said during the LA Blockchain Summit on Nov. 2.

Since launching in July 2014, Stellar has positioned itself as a platform enabling the issuance and transfer of assets for near-instant cross-border settlement. Stellar was co-founded by Jed McCaleb, who also-co-founded Ripple Labs, the cross-border payment pioneer.

Liquidity Pools

Stellar’s AMM infrastructure will feature similar functionality to Uniswap v2, allowing liquidity pools to be created between any two assets while fees are fixed at 0.3% per trade. Stellar claims the upgrades will make it “the first [layer-one] blockchain to integrate AMM capabilities directly into its protocol.”

Stellar launched Proposal 18 on its testnet on Oct. 6. The SDF has also noted that “several ecosystem-built products and services are poised for a November launch” to coincide with Proposal 18 going live. The protocol was deemed ready for implementation in late June.

Rice also praised AMMs for having “done a great job for democratizing liquidity provision.” When asked if “household-name AMMs” are likely to deploy on Stellar, Rice said: “I’m for it.”