Skip to main content

​
Liquidity is a function of adverse selection

The more toxic flow a market maker faces from sophisticated takers picking off stale quotes during price moves, the wider their spreads must be and the less size they can show. On a price-time priority order book this becomes a latency race: when the reference price moves, makers must cancel stale quotes and repost before a faster trader snipes them. The industry has spent enormous sums on fiber, microwave networks, FPGAs, and colocation chasing that edge.

​
Logic inside the exchange

A propAMM places the market making logic onchain, inside the exchange’s execution environment itself. The quote is no longer a static object posted in advance; it is a function evaluated at the moment of the trade. Book construction, fees, inventory management, and defensive controls all react within the same transaction as the fill. This makes in-block defense possible. After a fill, the program can deplete the levels just hit, widen its offsets, or withhold depth before the next trade in the same block executes. The book defends itself as flow arrives, rather than waiting for the maker to observe the fill and resubmit from outside. The result is that makers can quote tighter spreads and deeper books than they otherwise safely could.

​
Built-in protection from toxic flow

Because the maker’s logic is the matching logic, a propAMM has defenses no order book can offer:
  • Venue scoring. The program scores the routing path an order arrives through by the historical quality of its flow, showing clean retail routes the full book and giving adverse paths wider offsets or less depth.
  • Priority-fee analysis. Since oracle updates and swaps compete in the same fee market, a taker paying aggressively to land ahead of the next update is more likely picking off a stale quote, and can be priced or filtered accordingly.
  • Known counterparties. Operators can decline to quote for known snipers and toxic addresses.
  • Freshness. As the oracle ages, the program widens spreads and withholds depth until the next update lands.
  • Inventory. When reserves drift from target, the program skews quotes to attract rebalancing flow and penalizes trades that push inventory further out of line.
By competing on pricing models, inventory management, and defensive logic rather than on latency and infrastructure spend, a small team can outcompete incumbents.