Background - AMM Dilemma

Unlike order book based exchanges, automated market makers (AMMs) generally provide immediate liquidity to takers. In Chromatic Protocol, takers have the flexibility to set their desired payoff. On the other hand, makers are placed under the disadvantageous condition of having to accept trades within the liquidity they provide without any choice.

To address this, AMM relies on the mechanism of takers paying fees to makers. This fee arrangement aims to strike a balance between the two parties.

AMM offers the advantage of structural simplicity, making them efficient to implement on distributed ledgers. However, existing AMMs derive fees based on discretionary and deterministic formulas. To overcome the limitations of existing AMMs that often deviate from market conditions, Chromatic Protocol introduces a mechanism where fees vary based on market demand and supply, instead of relying on deterministic formulas.