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Thales AMM Mechanics

Thales has built a completely novel AMM (Automated market maker) contract that offers users on-demand liquidity of Positional Tokens from the Positional Markets in the trading phase.
Traders can now buy/sell Positional Tokens from/to the AMM, which uses a Black–Scholes pricing algorithm in combination with spread and price impact logic.

Orderbook trading-> Peer versus Peer AMM trading -> Peer versus AMM

Thales AMM Mechanism

Thales AMM uses the Black–Scholes algorithm to derive a realistic price for a certain Positional Token of a specific asset's Positional Market.
The Thales AMM algorithm uses the following inputs to price Positional Tokens:
  • Current Asset Price
  • Strike Price
  • Time to Maturity
  • Implied Market Volatility
In addition to these inputs, Thales AMM also uses novel inputs that are needed to offset the risk the AMM takes on when offering on-demand liquidity on both ends of a Positional Market. These inputs are:
  • min_spread - Minimal price impact possible on a derived price for a trade using Thales AMM
  • max_spread - Maximal price impact possible on a derived price for a trade using Thales AMM (In case a trade depletes all liquidity of a certain side of the AMM)
These last two parameters introduce a Skew mechanism that serves as an incentive to keep the AMM liquidity balanced between UP and DOWN side. The Skew makes "overbought" Positional Tokens from a certain market more expensive than their opposite side, keeping the AMM in balance and unexposed to risk of market maturing in an unfavorable direction for the AMM.
Additional safety mechanisms that are introduced are Cap per Market and Price Range Limits.
  • Cap per Market is introduced for the first iteration of the AMM to keep the AMM's exposure to individual markets limited. It is denominated in how much USD per market the AMM is risking.
  • Price Range Limits are set to a range between 0.10 USD <-> 0.90 USD per Positional Token to avoid potential edge cases in large market swings and front-running instances.
Important disclaimer: AMM trading is disabled 24h before Market Maturity of any given market since the pricing algorithm cannot provide optimal results in such short timeframes until Market Maturity, as it could lead to potential front-running opportunities and edge-case exploits.

Discounted Positions

​Tip-51 introduced discounted positions on skewed markets. Discounted positions incentivize traders to balance the AMM's exposure to overbought positions by offering a discount to the calculated price for a position that is underbought. These discounts are available for markets on Optimism, Arbitrum and Polygon.
Discounted positions provide a maximum discount of up to 10% for underbought positions. For example, if UP is overbought then the DOWN side of the market is discounted. The Home Page includes the most discounted positions at the top, with discounts for all markets included in the second column labeled “discount”.