Dynamic Market Maker

The Dynamic Market Maker serves as the primary liquidity layer during normal market conditions. Rather than spreading liquidity across a wide price range as traditional automated market makers do, the DMM concentrates capital in a narrow band around the current oracle-referenced price. This concentrated approach delivers approximately 200 times the capital efficiency of a full-range market maker, meaning the same liquidity depth can be maintained with significantly less capital.

The DMM operates within a defined band, typically set at plus or minus 0.25 percent around the reference price during market hours and slightly wider during off-hours when underlying markets are closed. When the market price approaches the edges of this band, the DMM automatically recenters its liquidity range to track the new price level. This recentering happens frequently during volatile markets and rarely during stable periods, with the gas costs of recentering operations factored into the overall economic design.

Users trading within the DMM's active range experience tight spreads and minimal price impact. The concentrated liquidity means that typical trade sizes can be executed with slippage measured in basis points rather than percentage points. This first layer handles the vast majority of normal trading activity without requiring intervention from deeper stability mechanisms.