A VMM ensures high liquidity and lower slippage necessary for trading derivatives.
A VMM uses a constant-product curve for price discovery and provides guaranteed on-chain liquidity similar to Uniswap. The core difference is that it does not need any liquidity provider and thus, no liquidity pool. The pool is bootstrapped virtually within the protocol.
A VMM model has higher capital efficiency and is most suitable for under-collateralized derivative products as compared to the AMM model.
The salient features of the VMM model are as follows:
VMM does not require liquidity providers (LPs); the liquidity pool is virtual. A lower pool size results in higher slippage, as seen in AMMs. It introduces a lot of dependency on LPs. No dependency on LPs helps to offer higher liquidity and lower slippage necessary for trading derivatives
Price discovery happens using a constant-product curve; the protocol does not require an order book
The on-chain price reflects trades on protocol - the price only moves when positions are opened or closed
No actual swapping occurs. Unlike Uniswap, for example, where traders arrive with asset A and leave with asset B, on Polysynth traders arrive with stablecoin and leave with the same. All settlement happens between traders trading on the platform
VMM is market neutral and fully collateralized at all times
Polysynth uses an advanced version of the constant-product curve where the liquidity is adaptive to trading volume on the protocol, thus offering lower slippage at all times. This makes Polysynth superior to all existing offerings.