In this guide, we'll walk you through the definitions, use-cases, and how to access the various types of AMM Pools available.
Understanding AMM pools
Before we delve into Magic Eden's AMM Pools, let's familiarize ourselves with some essential terms:
Buy quantity: An intention to buy a set quantity of NFT's at a specific price.
Start buy price: An intention to buy an NFT at a designated price, posted by the buyer on the marketplace.
Sell quantity: An intention to sell a set quantity of NFT's at a specific price.
Start sell price: An intention to sell an NFT at a designated price, posted by the seller on the marketplace.
LP fee: Designated liquidity pool fee per transaction.
Change by: % or SOL amount changed per NFT sold/bought.
Use-cases
Handling single-item orders may be manageable, but as your trading activities grow, managing multi-item orders (LPs) can become overwhelming. Magic Eden's AMM Pools provide a solution for handling double-sided LPs, regardless of their size.
Accessing Magic Eden's AMM pools
To access Magic Eden's AMM Pools, follow these steps:
From "My Items" tab, click on the NFT's you wish to create a pool with and click "Create Pool".
The Market-Making option will appear where you can set buy/sell quantity, start buy/sell price, LP fee and change by %.
All advanced orders are completed by selecting the 'Create Pool' button.
Buy-side LP
A buy-side LP allows you to set up multiple collection offers with different prices effortlessly. Instead of inputting prices one by one, you can describe the entire buy-side LP using the following terms:
Pricing curve type: Linear or exponential
Highest buy price on the curve
Number of single buy orders on the curve
Incremental delta amount on the curve: Difference between two consecutive price values as a percentage change (for exponential curve) or an additive amount (for linear curve) going from lowest to highest.
Example
A buy-side LP with an exponential pricing curve type, 10.5 SOL highest buy price, 5 single buy orders on the curve and 5% incremental delta amount enabled means that the LP creator pays the net prices to lock in the buy-side LP. The marketplace calculates an adjusted price for potential sellers, budgeting royalty amounts and other fees.
Sell-side LP
A sell-side LP is similar to multiple listings with different prices, but you only need to describe the entire sell-side LP using the following terms:
Pricing curve type: Linear or exponential
Lowest sell price on the curve
Set of NFTs for the sell-side LP
Incremental delta amount on the curve: Difference between two consecutive price values as a percentage change (for exponential curve) or an additive amount (for linear curve) going from lowest to highest.
Example
A sell-side LP with an exponential pricing curve type, 11.025 SOL lowest sell price, 4 NFTs in the sell-side LP and 5% incremental delta amount means that the LP creator selects 4 NFTs for the sell-side LP. The marketplace calculates an adjusted price for potential buyers, budgeting marketplace fees.
Double-sided LP: The power of market making
A double-sided LP is the pinnacle of market-making functionality on Magic Eden. By combining both buy-side and sell-side liquidity, users gain unprecedented control and flexibility in their NFT trading. The double-sided LP essentially functions as a complete market maker, allowing users to trade both sides of the market effortlessly.
How it works
Selecting NFTs to buy and sell
As a creator of a double-sided LP, you have the freedom to specify the number of NFTs you want to buy and sell. This enables you to actively manage your inventory while ensuring a balanced and liquid market.
Setting the start price
For both buying and selling, you can set the initial price point at which you are willing to engage in transactions. This establishes a foundation for your LP and helps determine the initial market sentiment.
Defining the LP fee
With a double-sided LP, you have the unique opportunity to collect fees from every transaction that occurs within the liquidity pool. You can set the LP Fee as a percentage of the value for each buy or sell transaction. This feature empowers LP owners to earn additional income based on the trading activity within their LP.
Adjusting the price dynamics
To account for market fluctuations and optimize your LP's performance, you can set the 'Change By' variable. This value can be measured in SOL value or percentage, allowing you to fine-tune the responsiveness of your LP to market changes.
Visualizing the price curves
Once you configure your double-sided LP, the system will display the buy and sell orders as distinct lines or curves on the interface. The buy orders will be represented by a grey line, while the sell orders will be shown in green. The gap between the two lines will vary based on the 'LP Fee' you've set.
Example
The LP owner can set the number of NFTs to buy and sell, the 'Start Price' for buying or selling, the 'LP Fee' (a percentage of every buy and sell), and the 'Change By' variable (measured in SOL value or percentage). The prices for buying and selling NFTs are displayed as green and red lines, respectively, with the gap between them varying based on the 'LP Fee'.
Addressing impermanent loss
Impermanent Loss is an important consideration for double-sided LP pools. Impermanent Loss occurs when the price of the tokens in the LP diverges from the initial state. However, with a well-designed strategy and careful monitoring, users can minimize the impact of impermanent loss and make the most of their double-sided LP.
For more information, explore our FAQs or reach out to our dedicated support team.