Mooniswap is the next generation of an automated market maker with virtual balances — enabling liquidity providers to capture profits otherwise captured by arbitrageurs
Puzzled by the front-running problem, Vitalik Buterin proposed using “virtual quantities” but in a slightly different context.
The idea is fully realized in the Mooniswap design. The new AMM is capable of keeping most of the slippage revenue in the pool by maintaining virtual balances for different swap directions. When a swap happens, a market maker does not automatically apply the invariant algorithm and displays the new prices for upcoming trades. The AMM improves exchange rates for arbitrage traders slowly, over approximately a 5-minute time period. As a result, they will be able to collect only a portion of slippage, while the rest will remain in the pool shared among liquidity providers. This we believe is a game changer.
High competition among arbitrageurs would not allow them to wait for the point at which the price would maximize their profit. By such a delay in price updates, the market maker would create a highly competitive environment for arbitrageurs forcing them to perform trades at less profitable prices, which in turn would add value to the liquidity providers’ side.