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Automated market making bots to provide liquidity for hydro relayers
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README.md

This repository is a Liquidity Module for the Hydro SDK.

Liquidity Modules allow relayers to instantly fill their orderbooks and bootstrap liquidity with minimal effort. This particular module uses a Constant Product Market Making Model, discussed in greater detail below.

Using this repository

This repository is a subset of https://github.com/HydroProtocol/hydro-scaffold-dex. It is designed to start a market making bot to provide liquidity on an existing Hydro Relayer.


AMM Bots

Automated Market Making (AMM) bots provide liquidity to a marketplace through use of algorithmic market making.

Running the AMM Bot

This repository is setup to run naturally on the Hydro Dex Scaffold. For use on other marketplaces, you could modify the code snippets below.

Running from source

BOT_TYPE=CONST_PRODUCT \
BOT_PRIVATE_KEY=0x............... \
BOT_BASE_TOKEN=HOT \
BOT_QUOTE_TOKEN=DAI \
BOT_BASE_URL=http://127.0.0.1:3001 \
BOT_MIN_PRICE=0.8 \
BOT_MAX_PRICE=1.2 \
BOT_PRICE_GAP=0.02 \
BOT_EXPAND_INVENTORY=2 \
BOT_WEB3_URL=http://127.0.0.1:8545 \
go run main.go

Running from a docker image

docker run --rm -it \
  -e BOT_TYPE=CONST_PRODUCT \
  -e BOT_PRIVATE_KEY=0x............... \
  -e BOT_BASE_TOKEN=HOT \
  -e BOT_QUOTE_TOKEN=DAI \
  -e BOT_BASE_URL=http://127.0.0.1:3001 \
  -e BOT_MIN_PRICE=0.8 \
  -e BOT_MAX_PRICE=1.2 \
  -e BOT_PRICE_GAP=0.02 \
  -e BOT_EXPAND_INVENTORY=2 \
  -e BOT_WEB3_URL=http://127.0.0.1:8545 \
  hydroprotocolio/amm-bots

Environment Variables

Basic Variables

  • BOT_TYPE Type of bot
  • BOT_BASE_URL Hydro relayer api base url
  • BOT_WEB3_URL Ethereum json rpc url
  • BOT_BASE_TOKEN Symbol of base token (e.g HOT)
  • BOT_QUOTE_TOKEN Symbol of quote token (e.g WETH)

Secret Variables

  • BOT_PRIVATE_KEY Ethereum address for place order

Algorithm Variables

Constant Product AMM

This bot runs a "constant product market maker model" (popularized in the DeFi community by Uniswap). In short, this model generates a full orderbook based on an initial price for the market. Every transaction that occurs on this market will adjust the prices of the market accordingly. It's a basic supply and demand automated market making system.

  • Buying large amounts of the base token will increase the price
  • Selling large amounts of the base token will decrease the price

A typical Constant Market Making model has a continuous price curve. This bot discretizes the continuous price curve and creates a number of limit orders to simulate the curve. The order price is limited between BOT_MAX_PRICE and BOT_MIN_PRICE. The price difference between adjacent orders is BOT_PRICE_GAP.

Image (Image Source)

Constant product algorithms have a disadvantage of low inventory utilization. For example, by default it only uses 5% of your inventory when the price increases 10%. BOT_EXPAND_INVENTORY can help you add depth near the current price.

  • BOT_MAX_PRICE Max order price
  • BOT_MIN_PRICE Min order price
  • BOT_PRICE_GAP Price difference rate between adjacent orders. For example, ask price increases by 2% and bid price decreases by 2% if BOT_PRICE_GAP=0.02.
  • BOT_EXPAND_INVENTORY Multiply your order sizes linearly. For example, all order sizes will be tripled if BOT_EXPAND_INVENTORY=3.

Liquidity Sourcing In Constant Product AMM

Constant Product AMM requires a single source of funds for both the base and quote token. As such, the general flow of setting up the AMM bot from scratch is:

  • Prepare an address that holds both the BASE and QUOTE token of the trading pair you want to provide liquidity for
  • Set the initial parameters for the bot
    • This determines the initial price, spread, sensitivity, etc.
  • Run the bot

Upon running the bot, it will generate an orderbook for your marketplace. The orderbook will appear to be static, but every trade will shift the market accordingly.

Further Information On Constant Product AMM

For more information on these models, Scalar Capital provided a detailed analysis of constant market making.

License

This project is licensed under the Apache 2.0 License - see the LICENSE file for details

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