Market Making

Market Making

Equity Providers are the backbone of the market. They support the demand for tokens. Tokens get matched with liquidity that, in this presentation, gets referred to as “base.” “Base” gets used to fulfill an Equity-to-Base order on the exchange. The two pools come together to establish the exchange rate for the token. “Base” can get exchanged for USD. Equity can get Exchanged for “Base.” When “Base” gets exchanged for equity, it raises the price of the equity in USD. For example; a market with 100 Equity, 100 Base, a 1-to-1 exchange rate, a Base cost of 1$, and an Equity price of 1$ that receives a Base-to-Equity order for 1 Equity will become a market with 99 Equity, 101 Base, a 1 Equity-to-1.0202 Base exchange rate, a Base price of 1$, and an Equity price of 1.02$. The Market Maker “smart contract” sets the exchange fees automatically to 1% and reconverts the base fees into equity, effectively reducing supply while increasing demand creating a positive impact on the token price.
For example, beginning from where we left on the last exchange, a 1% base fee was created, then got used purchasing the wrapped token. Creating a new exchange rate reducing the supply by 0.01, and increasing the demand by 0.01 leaves us with a 1-to-1.0222 exchange rate, a base value of 1$, and a token price of 1.0222$. Suppose the same individual who placed the order decided to reverse their decision and make an Equity-to-Base exchange order for 1 Equity. Using our current exchange rate and accounting for the fees, we end up with a market holding 99.9 Equity, 100.1 Base, an exchange rate of 1 Equity-to-1.002 Base, a base price of 1$, and a token value of 1.002$ netting a profit of 0.02% for the Market Makers. The Market Maker Smart Contract, the Equity provider, and the Base provider split ownership on the contracts token balance. 10% Goes to the smart contract, 45% goes to the Equity Provider, and 45% to the Base provider. The Equity providers split ownership of the equity pool. The Base providers split ownership of the contract’s base liquidity positions.
All fees are either wrapped tokens or get converted into wrapped tokens increasing the tokens value. The fees can then get withdrawn and exchanged for “Base” proportional to the ownership of the entire liquidity pool for a given address. Base fees get exchanged for wrapped tokens out of the equity portion of the liquidity pool. We wrap the tokens sent to the market maker smart contract to reduce gas, control supply arbitrage, and allow for independent equity markets free of unpredictable inflation. When liquidity gets added to the pool, the minimum price exchange orders can use the liquidity at gets set to the current market price of the wrapped tokens.
In contrast, the maximum price exchange orders can use the liquidity sets to the max token price. As the token price increases, liquidity gets continuously added and re-contributed at higher and higher exchange rates. It increases the market size and stabilizes the token value that got accrued, and provides higher volume increasing the fees and, in turn, the token price. The Smart Contract protects this value further by establishing a 25% maximum all-time arbitrage against the USD value of the equity portion of the existing liquidity pool. Contributing to the market’s stability as the token price grows while also incentivizing the funding of Escrow Agreements that settle debts, pay for improvements, and finance acquisitions for the Exist Community. Providing equity matched liquidity to the smart contract, or arbitraging escrow agreements is the only way other than buying from the supply on the exchange to acquire tokens. These principles mathematically protect against centralized arbitrage, supply hoarding, and market crashes while driving the price of the tokens up. The model allows for a 25% withdrawal of its current deposits proportional to a given wallet’s ownership of the liquidity pool. Suppose the base price goes up or down in USD, affecting the dollar value of the wrapped tokens, making it essential to pair with a high-value base. The dollar’s inflation also eventually tends to drip down, filling the base market with USD except in the case of Stable Coins that got designed for a constant market price. Stable Coins should be considered late-term supporting markets that provide stability to a high token price in USD. The wrapped token market-making guidelines outlined here should help you understand and visualize how market conditions can affect the protocol of the market maker smart contract.

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