Fixed-Price Market Makers (FPMMs)
Last updated
Last updated
Mento's exchange infrastructure enables users to swap between stable assets and collateral at predictable rates. Through Fixed-Price Market Makers (FPMMs) and modular liquidity strategies, the protocol provides deep liquidity while maintaining price stability.
FPMMs are Mento's approach to on-chain foreign exchange. Unlike traditional AMMs that shift prices along bonding curves, FPMMs quote constant exchange rates anchored to oracle prices. This design delivers several key benefits:
Low Slippage: Trades execute at the oracle rate regardless of size. Whether swapping $100 or $1 million, users receive the same price.
Capital Efficiency: Liquidity concentrates at the target price rather than spreading across curves. This maximizes available depth at the rates that matter.
Predictable Execution: Traders know exact exchange rates before submitting transactions. No surprises from price impact or front-running.
24/7 Availability: Pools operate continuously, providing liquidity even when traditional FX markets close.
Each FPMM manages a pool of two tokens, typically a stablecoin and its collateral. The pool maintains reserves of both assets and facilitates swaps between them at oracle-determined rates.
When users swap:
Oracle Query: The pool fetches the current exchange rate from decentralized oracles
Fee Calculation: A small protocol fee is deducted from the input amount
Rate Application: The output amount is calculated using the oracle rate
Transfer Execution: Assets transfer at the calculated amounts
The key innovation: price remains fixed while inventory floats.
This inverts the traditional AMM model where inventory stays constant while price moves.
FPMMs implement several critical functions:
Swaps: Users exchange tokens at the oracle rate minus fees. The pool validates that sufficient liquidity exists and that trading isn't suspended by circuit breakers.
Minting: Liquidity providers add balanced amounts of both tokens to receive LP tokens. Initial liquidity follows a square root formula, while subsequent additions are proportional.
Burning: LPs can withdraw their share of the pool by burning LP tokens, receiving a proportional amount of both underlying assets.
Value Preservation: Every swap must maintain or increase the pool's total value (measured in oracle terms). This invariant prevents value extraction through manipulation.
One-sided trading creates inventory imbalances. When traders consistently buy one asset, pools would eventually exhaust their reserves. Mento solves this through automated rebalancing:
Drift Detection: Pools continuously monitor the ratio between their reserves and the oracle price. When this "reserve price" drifts beyond configured thresholds, rebalancing becomes available.
Flash Swaps: Authorized liquidity strategies can execute atomic rebalancing transactions. These simultaneously withdraw the surplus asset and inject the deficit asset, restoring balance.
Keeper Incentives: Permissionless bots can trigger rebalances and earn rewards. This ensures pools maintain healthy inventories.
Safety Checks: Rebalancing must improve the price deviation, avoid overshooting the target, and limit value loss to the allowed incentive amount.
Different stablecoin architectures require different liquidity sources. Mento implements three modular strategies:
For fully-backed stablecoins:
Expansion: Mints new stablecoins against deposited collateral
Contraction: Burns excess stablecoins and releases collateral
Maintains 1:1 backing through the Mento Reserve
For synthetic stablecoins created through collateralized positions:
Stability Pool Integration: Borrows from or repays to the Stability Pool
Atomic Operations: All rebalancing happens in single transactions
Supports over-collateralized synthetic assets
For externally-created stablecoins:
Custom Implementation: Issuers provide their own rebalancing logic
Value Preservation: Protocol ensures no value loss during operations
Enables integration of fiat-backed or other external stables
Each FPMM operates with carefully tuned parameters:
Protocol Fee: Trading fee retained by the protocol
Rebalance Incentive: Maximum value loss allowed during rebalancing
Rebalance Thresholds: Price deviation triggering rebalancing eligibility
Oracle Configuration: Which price feed to use and how to interpret it
Circuit Breaker Integration: Connection to the BreakerBox for safety checks
These parameters are governed by MENTO token holders and can be adjusted per pool based on asset characteristics and risk profiles.
Anyone can provide liquidity to FPMMs:
Deposit: Add both assets in proportion to current reserves
Receive LP Tokens: Get pool shares representing your contribution
Earn Fees: Collect a portion of all trading fees
Withdraw: Burn LP tokens to reclaim your share of reserves
Unlike traditional AMMs where LPs suffer from impermanent loss, FPMM liquidity providers benefit from:
Fixed exchange rates that eliminate adverse selection
Rebalancing mechanisms that maintain inventory health
Fee accumulation from consistent trading volume
FPMMs are implemented as upgradeable smart contracts with several design principles:
Modular Design: Core pool logic separates from liquidity strategies, oracle integration, and safety mechanisms. This enables upgrading individual components without system-wide changes.
Gas Optimization: Efficient storage patterns and calculation methods minimize transaction costs. State updates batch together to reduce storage operations.
Decimal Handling: Explicit management of token decimals ensures accurate conversions between assets with different precision levels.
Event Emission: Comprehensive events enable off-chain monitoring, indexing, and analytics of pool activity.
FPMMs integrate seamlessly with the broader DeFi ecosystem:
Aggregators: DEX aggregators can route through FPMMs for optimal pricing
Flash Loans: The swap callback mechanism enables flash loan patterns
Automation: Keeper networks can build on top of rebalancing incentives
Cross-Chain: The design supports deployment across multiple chains
To explore how FPMMs enable Mento's ecosystem:
Stability Mechanisms - How fixed prices maintain pegs
The Reserve - Collateral backing for exchanges
Oracles & Price Feeds - Price discovery for FPMMs
Trading Limits & Circuit Breakers - Safety mechanisms for pools