Token Price & Market Liquidity

Token Price & Market Liquidity

The token market is modeled as a single AMM (Automated Market Maker) pool that represents all the aggregated liquidity available from the various CEX and DEX in which the token may be traded. The pool is between the protocol native token and an arbitrary USD-valued token, with an AMM law of X*Y = K, where K remains constant for a certain liquidity.

All token purchases and sales are executed against this pool, which alters the amount X of protocol token and Y of USD so that K remains the same, K = X’*Y’. These trades cause a change in the token price, defined as P = Y/X.

Some of the agents in the simulation (like market makers) may add liquidity to the market (as both tokens and USD) and own part of the pool through the use of the Liquidity provision column in the Agents table. Thus, the pool tokens (X) count towards the total supply of the token and are a full part of the token economy.

Note that the Liquidity provision is defined as a ratio of the total tokens owned by an agent. If the amount of tokens owned by the agent increases or decreases as the simulation advances (due to a vesting schedule, purchases, sales, or transfers), the liquidity provided will be rebalanced in order to match the specified ratio.

This might have an impact on the slippage of that pool and as a result in the price movement of the token.

Token liquidity

Agents in the simulation may provide liquidity to the market. This is defined in the “Liquidity provision ratio” column on the “Agents” sheet. When greater than 0, agents will seek to provide a percentage of their tokens on as liquidity for the token market. Every time step in the simulation they will adjust their liquidity provision so that the percentage of tokens provided as liquidity out of those they own will match their liquidity provision objective. This may result in adding or subtracting tokens from the liquidity pool.

Token price

The simulation keeps track of a token price as the simulated time advances as the equilibrioum point of the aggregated AMM.

This is updated by taking into account all of the buying and selling trades against the aggregated market described above, with the provided liquidity. At higher market liquidities, the token price will move less for a given buying or selling pressure, and vice-versa.