The Virtual Market Maker (VMM) is the decentralized liquidity engine at the heart of VDEX, designed to provide round-the-clock, low-slippage liquidity across all trading pairs. Unlike traditional market makers which are often private, opaque, and privileged, the VMM operates transparently and will be community-owned and governed by the Virtual DAO.
The VMM ensures that VDEX maintains tight spreads, efficient execution, and market stability, even in volatile environments. It also plays a critical role in maintaining the solvency of the system by carrying out liquidations, ensuring that undercollateralized positions are resolved promptly and without systemic risk.
Its actions are verifiable onchain, and it functions as a key layer within VDEX's Virtual Rollup architecture, which enables ultra-fast, ZeroGas trading without compromising on self-custody or decentralization.
Why Open Up Market Making to the Community?
In most exchanges, market making profits are privatized. Early-stage DeFi projects often strike exclusive deals with centralized firms to provide liquidity, surrendering control and transparency. VDEX rejects this model.
Instead, the protocol is structured to allow the community to benefit from market making PnL via the VMM and forthcoming vault-based strategies. This aligns incentives between the protocol and its users, avoiding the extractive behavior that plagues other platforms.
The VMM is designed as a public good, not a proprietary engine. It will be governed and extended by the Virtual DAO, where active users, contributors, and strategists drive its direction. Control is earned through participation not granted by default ensuring the system remains transparent, meritocratic, and community-aligned.
How Does the VMM Work?
The VMM uses real-time tick data from the VDEX Decentralized Limit Order Book (DLOB) and external reference markets to compute fair prices. Based on these, it places and updates orders algorithmically to facilitate execution and provide deep liquidity.
The VMM runs on a high-performance P2P architecture, enabling low-latency execution and global coordination without sacrificing transparency. Its orders, fills, NAV, and balances are synced on the Virtual Rollup, ensuring that its internal state remains fully auditable.
Under the hood, a Schnorr-signature-based state channel system guarantees that all updates such as trades, balance changes, and escrow claims are provable and dispute-resilient on the Settlement Layer.
As external market makers join the protocol through open APIs and SDKs, the VMM will evolve from being the primary liquidity provider to one of many, helping maintain liquidity while benefiting from diversified risk.
Key Design Advantages
- Zero Impermanent Loss: Unlike AMMs, the VMM pays out both yield and principal in USDT, regardless of the original escrowed asset.
- Self-Custody Preserved: Liquidity providers retain control over their funds and interact through isolated vaults.
- Sustainable Bitcoin Yield (SBY): Users can earn BTC-denominated yield derived from actual trading activity and fees, not inflation.
- ZeroGas: All interactions with the VMM :including deposits, NAV syncs, and withdrawals are ZeroGas within the Virtual Rollup.
Withdrawal and NAV Mechanics
When users deposit into the VMM, they receive exposure proportional to its Net Asset Value (NAV), which is calculated and synced Virtual Rollup every 10 minutes.
Withdrawals follow a simple process:
- A user initiates a withdrawal request.
- Funds become available to claim 24 hours later, based on the most recent NAV at the time of submission.
This mechanism ensures capital stability and gives the VMM time to unwind positions without slippage or forced exits.
Systemic Risk Mitigation Architecture
As with any liquidity provision strategy, the VMM may experience trading losses during periods of extreme volatility or market dislocation. While no system can eliminate all risk, the VMM is built to be adaptive, resilient, and transparent by design.
VDEX mitigates systemic and user-level risk through several layered safeguards:
- Transparent Onchain Accounting
- Every trade, balance update, and NAV calculation is synced to the blockchain, enabling full auditability and verifiability.
- Vaults of Isolated Users (VIUs)
- Each user’s capital is isolated in its own vault, protecting their funds from contagion risk. Even if another user’s vault is liquidated, yours remains untouched, sanctifying deposits onchain through strict isolation.
- The Virtual Insurance Pool (VIP)
- A protocol-level safety net that absorbs losses when liquidation thresholds are breached, helping protect users from black swan scenarios and severe drawdowns.
Market making is no longer reserved for institutions, it’s becoming a public utility.
By opening access and aligning incentives, protocols can build more resilient, community-owned liquidity.
This shift marks a new era in onchain finance: transparent, participatory, and sustainable.
