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## **ALEX’s Automated Market Maker (AMM) — Short Version**
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_ALEX’s_ core product is essentially a zero-coupon bond in conventional finance. A key benefit of this product is reduced uncertainty about a loan’s interest rate, resulting in better financial planning. Specifically, prior to entering a loan contract, borrowers and lenders secure the loan’s interest rate and tenor on _ALEX_.
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ALEX’s core product is essentially a zero-coupon bond in conventional finance. A key benefit of this product is reduced uncertainty about a loan’s interest rate, resulting in better financial planning. Specifically, prior to entering a loan contract, borrowers and lenders secure the loan’s interest rate and tenor on ALEX.
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## **1. Automated Market Making (AMM) Protocol**
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When designing AMM, _ALEX_ believes in the following:
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When designing AMM, ALEX believes in the following:
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(i) AMMs are mathematically neat and reflect economic supply and demand. For example, price should increase when supply is low or when demand is high;
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(ii) AMMs are a type of mean which remains constant during trading activities. This approach is adopted by popular platforms, such as _Uniswap_, which employ algorithmic means; and
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(iii) AMM can be interpreted through the lens of modern finance theory. Doing so enables _ALEX_ to grow and draw comparisons with conventional finance.
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(iii) AMM can be interpreted through the lens of modern finance theory. Doing so enables ALEX to grow and draw comparisons with conventional finance.
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After extensive research, our beliefs led us to the AMM first proposed by _YieldSpace_. While we appreciate the mathematical beauty of their derivation, we adapt it in several ways with _ALEX_. For example, we replace a simple interest rate with a compounding interest rate. This change is in line with standard uses in financial pricing and modeling since the adoption of the Black-Scholes model. We also introduce a new capital efficiency scheme, as explained below.
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After extensive research, our beliefs led us to the AMM first proposed by _YieldSpace_. While we appreciate the mathematical beauty of their derivation, we adapt it in several ways with ALEX. For example, we replace a simple interest rate with a compounding interest rate. This change is in line with standard uses in financial pricing and modeling since the adoption of the Black-Scholes model. We also introduce a new capital efficiency scheme, as explained below.
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In mathematical terms, our AMM can be expressed as:
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## **2. Liquidity Providers (LP) and Capital Efficiency**
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LPs deposit both ayToken and Token in a pool to facilitate trading activities. LPs are typically ready to market-make on all possible scenarios of interest rate movements ranging from _−∞_ to _+∞._ However\*,\* part of the interest rates curve or movements will never be considered by market participants. One example of this occurs when the interest rate is negative. Although negative rates can be introduced in the fiat world by central bankers as a monetary policy tool, yield farmers in the crypto world are still longing everything to be positive. In _ALEX_, a positive rate refers to the spot price of ayToken not exceeding 1 and ayToken reserve being larger than Token.
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LPs deposit both ayToken and Token in a pool to facilitate trading activities. LPs are typically ready to market-make on all possible scenarios of interest rate movements ranging from _−∞_ to _+∞._ However\*,\* part of the interest rates curve or movements will never be considered by market participants. One example of this occurs when the interest rate is negative. Although negative rates can be introduced in the fiat world by central bankers as a monetary policy tool, yield farmers in the crypto world are still longing everything to be positive. In ALEX, a positive rate refers to the spot price of ayToken not exceeding 1 and ayToken reserve being larger than Token.
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Inspired by _Uniswap v3_, _ALEX_ employs virtual tokens — part of the assets that will never be touched, hence they are not required to be held by LPs.
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Inspired by _Uniswap v3_, ALEX employs virtual tokens — part of the assets that will never be touched, hence they are not required to be held by LPs.
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## **3. Yield Curve and Yield Farming**
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By expressing interest rate as _pₜ =1/eʳᵗ_, i.e. r = (-1/_t)_ log _pₜ_, we can obtain a series of interest rates from trading pool prices with respect to various maturities based on which we are able to build a yield curve. The yield curve is the benchmark tool for modeling risk-free rates in conventional finance. The shape of the curve dictates the expectation of future interest rate paths, which helps market participants understand market behaviors and trends. Currently, we might be able to build a Bitcoin yield curve from Bitcoin futures listed on Chicago Mercantile Exchange (CME). However, not only is the exchange heavily regulated, its trading volume is skewed to the very short-dated front-end contracts lasting several months only. _ALEX_ aims to offer futures contracts up to 1y when the platform goes live. Should markets mature, _ALEX_ may extend to longer tenors.
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By expressing interest rate as _pₜ =1/eʳᵗ_, i.e. r = (-1/_t)_ log _pₜ_, we can obtain a series of interest rates from trading pool prices with respect to various maturities based on which we are able to build a yield curve. The yield curve is the benchmark tool for modeling risk-free rates in conventional finance. The shape of the curve dictates the expectation of future interest rate paths, which helps market participants understand market behaviors and trends. Currently, we might be able to build a Bitcoin yield curve from Bitcoin futures listed on Chicago Mercantile Exchange (CME). However, not only is the exchange heavily regulated, its trading volume is skewed to the very short-dated front-end contracts lasting several months only. ALEX aims to offer futures contracts up to 1y when the platform goes live. Should markets mature, ALEX may extend to longer tenors.
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Yield farmers can benefit from understanding the yield curve by purchasing ayToken whose tenor corresponds to high interest rates and selling ayToken whose tenor associates with low interest rates. This is a typical “carry” strategy.
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Last but certainly not least, based on the development of a yield curve and the solid design work of our AMM, _ALEX_ is able to provide more products. Specifically, _ALEX_ will be able to offer derivatives, including options and structured products, building on and extending a large number of influential works of literature and applications in conventional finance.
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Last but certainly not least, based on the development of a yield curve and the solid design work of our AMM, ALEX is able to provide more products. Specifically, ALEX will be able to offer derivatives, including options and structured products, building on and extending a large number of influential works of literature and applications in conventional finance.
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The pool owner is the initial liquidity provider and will receive the corresponding LP tokens upon successful pool creation. Once the pool is live and operational, the owner can withdraw funds just like any other liquidity provider.
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{% hint style="info" %}
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Avaiblable Anchor Tokens: Native _STX_ token, _ALEX_ token and _aBTC_ token.
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Avaiblable Anchor Tokens: Native STX token, ALEX token and aBTC token.
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{% endhint %}
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The trading pool operates under the [ALEX Automated Market Maker (AMM)](../../detailed-information/alexs-automated-market-maker-amm.md) algorithm, which dynamically determines the exchange rate (price) based on the trades.
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👉 **Token Deployment.** Ensure your token is deployed on the Stacks blockchain, as you will need to provide the token contract.
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👉 **Select an Anchor Token.** Choose an anchor token from the available options: Stacks native token _STX_, _ALEX_ token, or _aBTC_ token. Ensure you have at least 1,800 _STX_ or an equivalent value in _ALEX_ or _aBTC_ token to create the pool—this is the minimum anchor token liquidity.
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👉 **Select an Anchor Token.** Choose an anchor token from the available options: Stacks native token STX, ALEX token, or aBTC token. Ensure you have at least 1,800 STX or an equivalent value in ALEX or aBTC token to create the pool—this is the minimum anchor token liquidity.
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👉 **Determine Initial Price.** Decide the initial price for your listing token in terms of anchor token units. This should answer the question: how many anchor tokens do users need to buy one listed token?
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- **Do not lock LP 🔓**: There will be no lock-up period and the initial liquidity provider (the pool creator) will receive the corresponding LP tokens once the pool is live and operational. Since the pool is unlocked, the owner will be able to withdraw liquidity at any time.
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- **LP is locked for 6 months 🔒** : This is the default option. It locks liquidity within decentralized smart contracts for a 6 month period, requiring a manual LP claim after maturity. When the period concludes, the pool owner can withdraw liquidity as any other provider. This prevents unexpected withdrawals and protects liquidity providers from rug pulls.
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- **LP is locked for 6 months 🔒** : This is the default option. It locks liquidity within decentralized smart contracts for a 6 month period, requiring a manual LP claim upon maturity. When the period concludes, the pool owner can withdraw liquidity as any other provider. This prevents unexpected withdrawals and protects liquidity providers from rug pulls.
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- **Burn LP 🔥** : Permanently burns a portion of tokens, ensuring that they can never be recovered or withdrawn. Since the initial liquidity vanishes, this option protects future liquidity providers from rug pulls and enhances trust and transparency.
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### Step 3: Contract creation
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Once the transaction from Step 1 is completed, you will see the checkbox labeled `Deposit Anchor Token ✅` marked as done. The ALEX team will review the submitted information and create a specific contract (a wrapped version) for your token to interact with the AMM DEX. This process may take between 24 and 48 hours.
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Once the transaction you executed in Step 1 is completed, you will see the checkbox labeled `Deposit Anchor Token ✅` marked as done. The ALEX team will review the submitted information and create a specific contract (a wrapped version) for your token to interact with the AMM DEX. This process may take between 24 and 48 hours.
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### Step 4: Deposit listing token
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You can think of $ALEX staking as depositing money into an interest-earning account. The longer you keep the money in the account, the more interest you earn. Similarly, the longer you stake $ALEX, the more rewards you earn.
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ALEX provides two different forms of staking to suit every user's need: [Manual Staking]() with $ALEX and [Liquid Staking]() with LiALEX.  
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ALEX provides two different forms of staking to suit every user's need: [Manual Staking]() with $ALEX and [Liquid Staking](https://app.lisalab.io/li/alex/staking) with LiALEX.  
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Lisa Protocol([https://www.lisalab.io/](https://www.lisalab.io/)) is now providing liquid staking for ALEX Staking ($LiALEX) 
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<details>
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<summary>How does staking help validate transactions?</summary>
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In a Proof of Stake (PoS) network, validators lock up a certain amount of tokens as proof of their good faith. They are selected to validate transactions according to how many tokens they have staked in the network. Delegators don't perform the operations necessary to validate transactions, and instead stake tokens which are 'delegated' to validators. In exchange for this, they receive a portion of the rewards accrued to validators. If a blockchain has a large amount of staked tokens, that means that there is a large base of good-faith actors behind the network, which is proof its security.
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</details>
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<details>
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<summary>How is staking different from farming?</summary>
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Staking involves holding cryptocurrency from a PoS network in a wallet to help validate transactions. It is generally safer and the returns tend to be lower, as it only involves holding tokens in a wallet.
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Staking involves locking cryptocurrency in a smart contract for a set amount of time in exchange for rewards. During that period, the tokens won't be accessible to the user. It is generally safer and the returns tend to be lower.
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Farming involves lending or staking crypto holdings in DeFi protocols to supply liquidity. The tokens must be deposited into a liquidity pool, and depositors receive LP tokens, representing their share of the pool. They can earn additional tokens by participating in DeFi activities such as lending, borrowing, or trading.
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#### Staking Metrics
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* **Manual Staking:** The amount of $ALEX you are currently staking. 
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* **APR:** The Annual Percentage Rate of your investment. It is the interest you would earn by staking for one year
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* **APR:** The Annual Percentage Rate of your investment. It is the interest you would earn by staking for one year.
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* **Liquid Staking:** The amount of $ALEX you are currently staking through LISA.
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* **APY:** The Annual Percentage Yield of your investment. It is the interest you would earn by staking for one year, including compounding interest from re-staking your rewards.
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* **APower to be Distributed**: The amount of APower you will earn as a result of your investment.
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* **APower to be Distributed:** The amount of APower you will earn as a result of your investment.
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#### Cycles
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### Step 5: Confirm Transaction on Your Wallet
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Your Stacks wallet will validate your identity and ask you to confirm the transaction. After that, wait for your transaction to be confirmed on the network.
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Your Stacks wallet will request your password and ask you to confirm the transaction. After that, wait for your transaction to be confirmed on the network.
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<figure><img src="../../.gitbook/assets/farming/stake-tokens-function-args.png" alt="" width="375"><figcaption><p>Wallet pop-up with function arguments and confirmation button.</p></figcaption></figure>
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## Staking Basics
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Staking consists of locking your ALEX tokens temporarily to secure the network and earn rewards in return. In a Proof of Stake (PoS) consensus mechanism, such as the one used by ALEX Lab, validators stake their tokens as collateral and earn rewards in the form of newly minted tokens and transaction fees.
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Staking consists of locking your ALEX tokens temporarily to earn ALEX and APower tokens as rewards. Users can stake their tokens to earn passive income in the form of newly minted tokens and transaction fees.
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The ALEX staking pool offers two main options, each one rewarding stakers with a different token: manual staking with $ALEX or liquid staking with LiALEX.
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### Proof of Stake (PoS)
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Proof of Stake (PoS) is a consensus mechanism for processing transactions and securing a blockchain network. Unlike Proof of Work (PoW), which requires miners to expend computational effort to solve a cryprographic puzzle, PoS selects validators based on their stake in the network: the larger their stake, the more likely they are to be selected for validation.
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The ALEX Lab network is secured by validators and delegators.
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* **Validators:** They are node operators that verify transactions and create new blocks while staking their own $ALEX. The stake acts as collateral, encouraging validators to behave honestly, since they risk losing their staked tokens if they validate fraudulent blocks.
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* **Delegators:** They lock up their $ALEX for a predetermined period and delegate their stake to validators. This way, they can earn a portion of rewards from transaction fees without meeting the full requirements of validators.
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### Rewards
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Staking rewards are the compensation that validators and delegators receive in return for their contribution to the network's security. They are obtained from transaction fees and newly minted tokens.
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Staking rewards are the compensation that you can receive in return for locking up your $ALEX tokens for a certain amount of staking cycles. The longer you stake your $ALEX, the greater the rewards. They are obtained from transaction fees and newly minted tokens.
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The network calculates each participant's reward share based on their staked amount. Rewards are either automatically reinvested in the case of **Liquid Staking** or can be claimed after **every cycle** in the case of **Manual Staking.** This means that, even if you decided to stake your tokens for 8 cycles, you will be able to claim rewards after each cycle concludes.
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Staking is measured in cycles. Cycles are **525 Stacks blocks** or about **3.5 days long**, and both manual and auto-staking receive rewards when each cycle concludes. When you decide to stake your ALEX tokens, you need to select the amount of cycles you wish to stake for. In the case of **Manual Staking**, your $ALEX won't be accessible during that period.
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After the chosen cycles expire, you can claim your rewards and withdraw your staked tokens, or re-stake them for however many cycles you choose. Bear in mind that, once your custom-selected number of cycles ends, there will be a **cooldown cycle** with no rewards received, after which you may re-stake and resume earning rewards. For that reason, if you stake ythe longer you stake, the fewer cool-down cycles you will have, resulting in greater returns overall.
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After the chosen cycles expire, you can claim your rewards and withdraw your staked tokens, or re-stake them for however many cycles you choose. Bear in mind that, once your custom-selected number of cycles ends, there will be a **cooldown cycle** with no rewards received, after which you may re-stake and resume earning rewards. For that reason, the longer you stake, the fewer cool-down cycles you will have, resulting in greater returns overall.
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## Manual Staking
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