AMM Liquidity
Liquidity inside an Automated Market Maker (AMM) refers to the amount of capital held in its reserves.
In AMM-based settlement systems, liquidity determines:
- how much value the pool can process
- how sensitive prices are to incoming trades (slippage), and
- whether the system remains stable under stress.
Unlike traditional markets, AMM liquidity requirements grow non-linearly, meaning small reductions in reserves can cause large increases in slippage or system instability.
--
Directional Flow Imbalance
Directional Flow Imbalance measures how much more payment volume is moving in one direction than the other within a corridor.
If significantly more payments flow from A → B than B → A, the AMM becomes unbalanced, draining one reserve while overfilling the other.
This imbalance is one of the primary drivers of reserve depletion in AMM settlement systems and directly influences liquidity requirements and risk levels.
--
Hawkes Process
A Hawkes Process is a statistical model that describes self-exciting events — meaning one event increases the likelihood of another event occurring shortly afterwards.
In payment systems, this models real-world behaviour where transactions cluster in bursts, especially around deadlines or liquidity cycles.
Hawkes-driven flows create intraday liquidity spikes that dramatically increase AMM stress and liquidity demand.
--
Poisson Arrivals
Poisson arrivals represent random, independent events occurring at a constant average rate.
In AMM settlement modelling, Poisson flows describe calm, steady-state corridor behaviour without clustering.
Poisson is useful for baseline analysis but tends to underestimate real-world liquidity risk compared to Hawkes clustering.
--
Slippage Tolerance (ε)
Slippage tolerance is the maximum acceptable deviation between the expected price and actual execution price of a trade inside an AMM.
Lower tolerance values (tight ε) require deeper liquidity, because even small trades must cause minimal price movement.
In the Jackson Liquidity Framework, slippage tolerance directly affects the minimum liquidity requirement (JLR).
--
Liquidity Coverage Ratio (LCR)
Part of the Basel III regulatory framework, the Liquidity Coverage Ratio requires banks to maintain enough High-Quality Liquid Assets to survive 30 days of stress outflows.
In AMM-based settlement, reserves locked inside AMM pools may affect LCR calculations because prefunded liquidity is encumbered and cannot be freely used elsewhere.
Understanding how AMM reserves interact with LCR is essential for regulatory compliance.
--
PFMI Principle 7
Principle 7 of the CPMI-IOSCO Principles for Financial Market Infrastructures requires FMIs to maintain sufficient liquid resources to withstand extreme but plausible market conditions.
The Jackson Liquidity Framework maps AMM liquidity requirements directly to this principle, offering a quantitative method to validate whether AMM-based corridors meet PFMI standards.
--
Pre-Funded Liquidity
Pre-funded liquidity refers to capital that must be deposited into settlement pools or corridors before transactions occur.
In AMM-based CBDC and FX systems (e.g., BIS Project Mariana), this prefunding ensures instant settlement but introduces a new question:
How much liquidity must the system hold at all times to operate safely?
The JLF provides the first quantitative answer to that question.
--
JLR — Jackson Liquidity Requirement
JLR defines the minimum reserve depth needed for safe AMM operation under slippage constraints, flow imbalance, intraday liquidity stress, and Basel III encumbrance rules.
It combines multiple risk measures into a single liquidity benchmark.
--
JSI — Jackson Stability Invariant
JSI is a solvency-style condition that determines whether an AMM reserve configuration is in the stable or unstable region.
It relates liquidity depth to volatility and flow dynamics, marking a critical threshold for corridor viability.
--
JLS — Jackson Liquidity Surface
JLS is a 3D map showing how liquidity requirements scale as arrival rates, payment volatility, and flow conditions change.
It reveals the nonlinear nature of AMM liquidity demand — small increases in volatility or flow can lead to massive increases in required liquidity.
--
J-Score — Jackson Corridor Stress Metric
The J-score is a single, real-time metric summarising the stress level of an AMM corridor.
High J-scores indicate elevated risk due to:high arrival rates,large payment sizes,strong directional skew, orclustering events.
It allows FMIs and banks to monitor corridor health just like a stress gauge.
Try the Tools That Power the Research
