DODO and Proactive Market Making (PMM)

Chaz Schmidt
Jul 14, 2021
|4 minutes read

DODO is a decentralized exchange (DEX) platform powered by a unique Proactive Market Making (PMM) algorithm. DODO’s PMM algorithm was developed entirely in-house by the DODO team iterating on the design of Automated Market Makers (AMMs) to improve capital efficiency, reduce impermanent loss, and minimize slippage for traders. Inspired by their previous work on DDEX, the DODO team set out to abstract the proactive market making concepts popular on order book-based exchanges into a permissionless on-chain liquidity protocol.

DODO’s Proactive Market Making (PMM) algorithm in action

To fully grasp what makes proactive market making different, take a step back and ask yourself: what is a market? A simple definition of a market is a place where you can exchange assets. A single trade doesn’t make a market; it is the constant distillation, distribution, and reaction to the data produced by buyers and sellers’ orders and trades that makes a market. Much of this data is typically represented by the ever-changing collection of orders being placed, removed, and executed from an exchange’s order books.

Traditional Automated Market Maker (AMM) DEXes automate the process of market making by pooling liquidity for two assets and replacing the order books with a simple fixed curve to determine the current price based on the current amount of each asset held. As the name implies, DODO’s Proactive Market Making algorithm is capable of proactively adjusting parameters such as asset ratio and curve slope in anticipation of market conditions, resulting in DODO pools that are adaptable and flexible for all sorts of use cases. 

DODO’s PMM pools can even be configured to utilize external price oracles to minimize impermanent loss and achieve higher capital efficiency. This configurability makes DODO’s PMM suitable for use cases varying from single-sided liquidity for bootstrapping pools to fully customizable market making strategies that adapt to market conditions in realtime.

Instead of breaking down the math, let’s explore the DODO Private Pool (DPP), a feature aimed at professional market makers that best illustrates what makes DODO’s PMM algorithm special. If you’re interested in the formula behind DODO’s PMM, you can dig into the math here.

DODO Private Pool (DPP) puts you, the market maker, in control

DODO Private Pools put the full power of DODO’s PMM configurability at your fingertips empowering anyone to be a professional market maker. DPP allows market makers to do the following:

  1. Make one-sided deposits / withdrawals
  2. Change the pricing curve at any time
  3. Have liquidity everywhere in the price range from zero to infinity

Imagine you want to be a market maker for ETH/USDC but you’re worried about ETH popping off and selling all your ETH to traders on the way up. With a DPP, you can perform a one-sided withdrawal to withdraw some of your ETH from the pool for safekeeping. This one-sided reduction of liquidity causes traders to go through the remaining ETH liquidity quickly driving up the price curve quicker than before. This sort of one-sided withdrawal can protect market makers against excessive risk. You can also do the opposite: withdraw USDC in anticipation of ETH’s price falling thus protecting you against the downside risk.

Unlike a simple AMM, DODO Private Pools allow you as a market maker to customize your strategy, taking advantage of your human brain to actively influence a pool’s behavior.

Say, for example, you feel the current market price of an asset doesn’t reflect its true value. In this scenario, you aren’t likely to provide liquidity for a simple AMM pool and may even remove liquidity for that asset to avoid impermanent loss. This is because you cannot directly influence the price at which the pool is selling the asset. DODO Private Pools provide a better way with a process called ‘active price discovery’ which allows you to adjust the market price inside the DPP directly. Ultimately, market makers’ ability to actively influence the price discovery process allows them to utilize their knowledge, experience, and intuition to craft a more efficient market.

DODO Private Pools can even allow you to create specialized markets like constant price markets for low slippage stable asset swaps.

This is achieved by market makers setting a DPP’s k value to a very small non-zero value (e.g. k = 0.001) to get an “approximately constant” pricing curve not dissimilar to stablecoin swaps on Curve Finance.


While DODO’s PMM and Private Pools sure are interesting, this dodo isn’t nearly finished evolving. DODO has lots more features and upgrades planned for this year. We’ll be covering more DODO features in the future. In the meantime, you can always learn more by exploring DODO, following DODO on Twitter, and joining in the discussion happening in the DODO community on Telegram and Discord.

Disclosure: This post is part of our paid promotional DeFi Pulse Partner Program; We’ve partnered with DODO to help educate and inform the community about DODO’s PMM technology. As always, we’re committed to providing the entire community with quality, objective information, and any opinions we express are our own.