Introduction
This tutorial will guide you through the process of building an Automated Market Maker (AMM) on the Celo blockchain.
This tutorial provides guidance on using Remix IDE to write, test, and deploy the smart contract to the Celo network. Also showcasing how to interact with the Automated Market Maker (AMM) using web3.js, and demonstrate how to create a simple user interface to interact with the AMM.
You can find the repository for this tutorial here
Prerequisites
To begin, you should have a fundamental understanding of the following before you can build an automated market maker (AMM) on the Celo Blockchain
- Solidity, which is the programming language used to write smart contracts on the Ethereum and Celo blockchains.
- understanding of the Javascript programming language.
- understanding and workings of smart contract development
- knowledge of web 3
Requirements
The following tools and technologies will be required to build an automated market maker (AMM) on the Celo Blockchain
-
HDWalletProvider: HDWalletProvider is a tool that allows the integration of Ethereum and Celo wallets into the development environment. It is used in the Truffle deployment script to specify the accounts for deploying the AMM contract.
-
Bootstrap: Bootstrap is a popular CSS framework that provides pre-styled components and responsive design. It is used in the React application for styling the user interface
-
React.js: React is a JavaScript library for building user interfaces. It is used in this case to develop the user interface for interacting with the AMM contract.
-
Truffle: Truffle provides a testing framework for writing and executing tests for the AMM smart contract.
-
Web3.js: Web3.js is a JavaScript library that provides an interface for interacting with Ethereum and Celo blockchains. It is used in the React application to connect to the Celo network and interact with the AMM contract.
-
Remix IDE: Remix is an online integrated development environment (IDE) for smart contract development. It provides a browser-based environment for writing, compiling, and deploying smart contracts. It can be used for writing and testing the AMM smart contract.
-
Bootstrap: Bootstrap is a popular CSS framework that provides pre-styled components and responsive design. It is used in the React application for styling the user interface.
Steps and processes for Building an automated market maker (AMM) on Celo
Step 1 Set up the Development Environment:
The first step in building an automated market maker on the celo Blockchain is setting up a development environment.
The following commands will help install the Celo Development Kit (CDK):
npm install -g celocli
npm install -g @celo/contractkit
Step 2 Understand AMM Concepts:
As mentioned earlier, an AMM is a decentralized trading protocol that allows users to trade assets on a liquidity pool. The pool determines the price of each asset based on the amount of liquidity available. A common pricing formula used in AMMs is the constant product formula.
Here is an example of the constant product formula:
x * y = k
where x and y represent the amount of two different assets in a liquidity pool, and k represents the constant product of the two assets. When a user wants to trade one asset for another, the price is determined based on the amount of liquidity in the pool.
Step 3 Design the AMM:
in designing the AMM, we need to determine which asset pairs to support and the fees to charge for trades. We will also decide on the additional features to implement, such as limit orders or flash loans.
Here is the code sample of the liquidity pool contract in Solidity:
contract LiquidityPool {
// Address of each asset in the pool
address public asset1;
address public asset2;
// Reserves of each asset in the pool
uint256 public reserve1;
uint256 public reserve2;
// Constructor
constructor(address _asset1, address _asset2) {
asset1 = _asset1;
asset2 = _asset2;
}
// Add liquidity to the pool
function addLiquidity(uint256 amount1, uint256 amount2) public {
// Transfer the assets to the pool
IERC20(asset1).transferFrom(msg.sender, address(this), amount1);
IERC20(asset2).transferFrom(msg.sender, address(this), amount2);
// Update the reserves
reserve1 += amount1;
reserve2 += amount2;
}
// Remove liquidity from the pool
function removeLiquidity(uint256 liquidity) public {
// Calculate the amounts to withdraw
uint256 amount1 = (liquidity * reserve1) / (reserve1 + reserve2);
uint256 amount2 = (liquidity * reserve2) / (reserve1 + reserve2);
// Transfer the assets to the user
IERC20(asset1).transfer(msg.sender, amount1);
IERC20(asset2).transfer(msg.sender, amount2);
// Update the reserves
reserve1 -= amount1;
reserve2 -= amount2;
}
// Swap one asset for another
function swap(address fromAsset, address toAsset, uint256 amount) public {
// Determine the amount to receive based on the reserves
uint256 toAmount = (amount * reserve2) / reserve1;
// Transfer the assets to the pool
IERC20(fromAsset).transferFrom(msg.sender, address(this), amount);
IERC20(toAsset).transfer(msg.sender, toAmount);
// Update the reserves
reserve1 += amount;
reserve2 -= toAmount;
}
}
Step 4 Smart Contract Development:
In addition to the basic functionality of adding liquidity, removing liquidity, and swapping assets, you may want to incorporate more advanced features into your AMM. Here are a few examples:
Fee Collection: Implement a mechanism to collect fees from trades and distribute them to liquidity providers or other beneficiaries. You can define a fee percentage and deduct it from each trade.
Slippage Protection: Consider implementing slippage protection mechanisms to protect traders from significant price changes during trade execution. This ensures that the executed trade price remains within an acceptable range based on the pool’s liquidity.
Time-Weighted Average Price (TWAP): Calculate and provide the TWAP for a given asset pair over a specified time period. This feature can be useful for traders and liquidity providers who want to evaluate historical trading prices.
Dynamic Fee Structure: Allow for a dynamic fee structure based on factors such as the liquidity pool’s total value or volume. This flexibility can help optimize fee collection and incentivize liquidity provision.
Limit Orders: Extend your AMM to support limit orders, which enable traders to set specific price targets and execute trades when the market reaches those prices.
These additional features require more complex smart contract logic and may involve integrating with external oracle systems for obtaining accurate pricing data.
Copy code
contract LiquidityPool {
// Address of each asset in the pool
address public asset1;
address public asset2;
// Reserves of each asset in the pool
uint256 public reserve1;
uint256 public reserve2;
// Fee percentage
uint256 public feePercentage;
// Constructor
constructor(address _asset1, address _asset2, uint256 _feePercentage) {
asset1 = _asset1;
asset2 = _asset2;
feePercentage = _feePercentage;
}
// Add liquidity to the pool
function addLiquidity(uint256 amount1, uint256 amount2) public {
// Transfer the assets to the pool
IERC20(asset1).transferFrom(msg.sender, address(this), amount1);
IERC20(asset2).transferFrom(msg.sender, address(this), amount2);
// Update the reserves
reserve1 += amount1;
reserve2 += amount2;
}
// Remove liquidity from the pool
function removeLiquidity(uint256 liquidity) public {
// Calculate the amounts to withdraw
uint256 amount1 = (liquidity * reserve1) / (reserve1 + reserve2);
uint256 amount2 = (liquidity * reserve2) / (reserve1 + reserve2);
// Transfer the assets to the user
IERC20(asset1).transfer(msg.sender, amount1);
IERC20(asset2).transfer(msg.sender, amount2);
// Update the reserves
reserve1 -= amount1;
reserve2 -= amount2;
}
// Swap one asset for another
function swap(address fromAsset, address toAsset, uint256 amount) public {
// Determine the amount to receive based on the reserves
uint256 toAmount = (amount * reserve2) / reserve1;
solidity
// Deduct fee from the trade amount
uint256 feeAmount = (amount * feePercentage) / 100;
uint256 actualAmount = amount - feeAmount;
// Transfer the assets to the pool
IERC20(fromAsset).transferFrom(msg.sender, address(this), amount);
IERC20(toAsset).transfer(msg.sender, toAmount);
// Update the reserves
reserve1 += actualAmount;
reserve2 -= toAmount;
}
}
Step 5: Testing and Deployment
Testing
Testing your AMM is crucial to ensure its functionality, reliability, and security. You can use various testing frameworks and tools to write and execute test cases. Let’s use Truffle and the Solidity testing framework here.
Install Truffle:
npm install -g truffle
Create a new test file, e.g., amm.test.js, and define your test cases:
const LiquidityPool = artifacts.require('LiquidityPool');
contract('LiquidityPool', (accounts) => {
let liquidityPool;
before(async () => {
// Deploy the LiquidityPool contract
liquidityPool = await LiquidityPool.new(accounts[0], accounts[1]);
});
it('should add liquidity to the pool', async () => {
const amount1 = 100;
const amount2 = 200;
// Call the addLiquidity function
await liquidityPool.addLiquidity(amount1, amount2, { from: accounts[2] });
// Get the updated reserves
const reserve1 = await liquidityPool.reserve1();
const reserve2 = await liquidityPool.reserve2();
// Assert the reserves are updated correctly
assert.equal(reserve1, amount1, 'Reserve 1 not updated correctly');
assert.equal(reserve2, amount2, 'Reserve 2 not updated correctly');
});
it('should swap assets', async () => {
const fromAsset = accounts[0];
const toAsset = accounts[1];
const amount = 50;
// Call the swap function
await liquidityPool.swap(fromAsset, toAsset, amount, { from: accounts[2] });
// Get the updated reserves
const reserve1 = await liquidityPool.reserve1();
const reserve2 = await liquidityPool.reserve2();
// Assert the reserves are updated correctly
assert.equal(reserve1, amount, 'Reserve 1 not updated correctly');
assert.equal(reserve2, amount, 'Reserve 2 not updated correctly');
});
});
In the above code, we defined two test cases using the contract function provided by Truffle. The before hook is used to deploy the LiquidityPool contract before running the tests. We then define individual test cases, such as adding liquidity to the pool and swapping assets, using the it function. Within each test case, we call the relevant functions of the AMM contract and assert the expected results using assert statements.
To run the tests, use the following command:
truffle test
Deployment:
We have thoroughly tested our AMM and are satisfied with its functionality, we can deploy it to the Celo Blockchain. Here’s an example of how to deploy our AMM using Truffle:
Update the truffle-config.js file with the Celo network configuration:
module.exports = {
networks: {
celo: {
provider: new HDWalletProvider(mnemonic, 'https://celo-alfajores--rpc.datahub.figment.io/apikey/{YOUR_API_KEY}'),
network_id: 44787,
gas: 8000000,
gasPrice: 1000000000,
skipDryRun: true,
},
},
};
Make sure to replace {YOUR_API_KEY} with your actual API key from a provider.
We are going to use Truffle migration scripts to deploy our AMM contract.
Create a new migration file, 2_deploy_amm.js:
const LiquidityPool = artifacts.require('LiquidityPool');
module.exports = function (deployer, network, accounts) {
const asset1 = accounts[0];
const asset2 = accounts[1];
deployer.deploy(LiquidityPool, asset1, asset2);
};
In the migration file, you specify the assets to use for the LiquidityPool contract. You can modify this based on your specific implementation.
Run the migration to deploy the AMM contract:
truffle migrate --network celo
Ensure that you select the correct network (celo in this example) based on the network configuration provided in truffle-config.js.
Upon successful deployment, you will receive a transaction hash and the deployed contract address on the Celo Blockchain.
Remember to review and test your deployment configuration thoroughly before deploying to the mainnet. Consider security best practices, such as using secure key management systems and auditing your contract code, to ensure the safety of users’ funds and the overall system.
Step 6 User Interface Development:
Here’s how you can set up a simple user interface using React and Web3.js to interact with our AMM contract:
Set up a new React project:
npx create-react-app amm-ui
cd amm-ui
Install the required dependencies:
npm install web3@1.5.1 react-bootstrap@1.6.3
Create a new file called AMM.js to interact with your AMM contract:
import Web3 from 'web3';
import LiquidityPoolContract from './contracts/LiquidityPool.json';
class AMM {
constructor() {
this.web3 = null;
this.contract = null;
this.contractAddress = 'YOUR_CONTRACT_ADDRESS';
}
async init() {
if (window.ethereum) {
this.web3 = new Web3(window.ethereum);
await window.ethereum.enable();
const networkId = await this.web3.eth.net.getId();
const networkData = LiquidityPoolContract.networks[networkId];
if (networkData) {
this.contract = new this.web3.eth.Contract(
LiquidityPoolContract.abi,
this.contractAddress
);
} else {
throw new Error('Contract not deployed on the current network');
}
} else {
throw new Error('Web3 provider not found');
}
}
async getReserve1() {
return this.contract.methods.reserve1().call();
}
async getReserve2() {
return this.contract.methods.reserve2().call();
}
async addLiquidity(amount1, amount2) {
const accounts = await this.web3.eth.getAccounts();
return this.contract.methods.addLiquidity(amount1, amount2).send({
from: accounts[0],
});
}
async removeLiquidity(liquidity) {
const accounts = await this.web3.eth.getAccounts();
return this.contract.methods.removeLiquidity(liquidity).send({
from: accounts[0],
});
}
async swap(fromAsset, toAsset, amount) {
const accounts = await this.web3.eth.getAccounts();
return this.contract.methods.swap(fromAsset, toAsset, amount).send({
from: accounts[0],
});
}
}
export default AMM;
Replace 'YOUR_CONTRACT_ADDRESS' with the actual address of your deployed AMM contract.
Create a new file called App.js as the main component of your React app:
//javascript
import React, { useEffect, useState } from 'react';
import AMM from './AMM';
import 'bootstrap/dist/css/bootstrap.min.css';
function App() {
const [reserve1, setReserve1] = useState('');
const [reserve2, setReserve2] = useState('');
const [amount1, setAmount1] = useState('');
const [amount2, setAmount2] = useState('');
useEffect(() => {
const initAMM = async () => {
const amm = new AMM();
await amm.init();
const reserve1 = await amm.getReserve1();
const reserve2 = await amm.getReserve2();
setReserve1(reserve1);
setReserve2(reserve2);
};
initAMM();
}, []);
const handleAddLiquidity = async (e
) => {
e.preventDefault();
const amm = new AMM();
await amm.init();
await amm.addLiquidity(amount1, amount2);
// Update reserves
const reserve1 = await amm.getReserve1();
const reserve2 = await amm.getReserve2();
setReserve1(reserve1);
setReserve2(reserve2);
// Clear input fields
setAmount1('');
setAmount2('');
};
return (
<div className="container">
<h1>Automated Market Maker (AMM) UI</h1>
<h2>Liquidity Pool Information</h2>
<p>Reserve 1: {reserve1}</p>
<p>Reserve 2: {reserve2}</p>
<h2>Add Liquidity</h2>
<form onSubmit={handleAddLiquidity}>
<div className="form-group">
<label>Amount 1</label>
<input
type="number"
className="form-control"
value={amount1}
onChange={(e) => setAmount1(e.target.value)}
/>
</div>
<div className="form-group">
<label>Amount 2</label>
<input
type="number"
className="form-control"
value={amount2}
onChange={(e) => setAmount2(e.target.value)}
/>
</div>
<button type="submit" className="btn btn-primary">
Add Liquidity
</button>
</form>
</div>
);
}
export default App;
Update the src/index.js file:
javascript
import React from 'react';
import ReactDOM from 'react-dom';
import App from './App';
ReactDOM.render(
<React.StrictMode>
<App />
</React.StrictMode>,
document.getElementById('root')
);
Run the React app:
npm start
This will start the development server, and you should see your AMM UI running in the browser.
Step 7 Security Audits:
Security is a critical aspect of any software application. Therefore, it is essential to conduct a security audit to identify and address any potential vulnerabilities in the application. This involves assessing the application’s security features, analyzing the code for potential vulnerabilities, and verifying that the application is in compliance with industry security standards.
Here are the key steps to perform a security audit:
Conduct a threat modeling exercise to identify potential security threats and risks.
Perform a code review to identify any potential vulnerabilities in the application’s code.
Perform a vulnerability scan of the application’s infrastructure and systems to identify any potential vulnerabilities.
Conduct penetration testing to identify any potential vulnerabilities in the application’s security controls.
Review compliance with industry security standards such as OWASP, NIST, or ISO/IEC 27001.
Here are some code samples for each of the key steps:
Threat Modeling:
makefile
# Example threat modeling template
Asset: User database
Threat: SQL injection
Vulnerability: User input is not sanitized before being used in SQL queries
Risk: High
Mitigation: Implement input sanitization and parameterized queries
Code Review:
vbnet
# Example code review finding
Vulnerability: SQL injection
Code: user_query = "SELECT * FROM users WHERE username='" + username + "'"
Mitigation: Refactor code to use parameterized queries or an ORM to prevent SQL injection attacks
Vulnerability Scan:
# Example vulnerability scan using a tool like Nessus
Target: Application server
Vulnerabilities found: Open ports, outdated software, weak encryption settings
Mitigation: Close unnecessary ports, update software, and configure encryption settings according to best practices
Penetration Testing:
# Example penetration testing using a tool like Metasploit
Target: Web application
Exploit attempted: SQL injection
Results: Successful exploit, access to sensitive data
Mitigation: Implement input sanitization and parameterized queries to prevent SQL injection attacks
Compliance Review:
makefile
# Example compliance review against OWASP Top 10
Threat: Injection
Status: Mitigated
Mitigation: Implemented input validation and sanitization to prevent SQL injection, XSS, and other injection attacks
Step 8 Deployment to Mainnet:
Our smart contract has been thoroughly tested and audited for security, it’s time to deploy it to the main Ethereum network, also known as the mainnet. This is the network where real transactions take place and where our smart contract will interact with other contracts and users.
To deploy our smart contract to the mainnet, we’ll follow these steps:
Choose an Ethereum client: You’ll need to choose an Ethereum client to interact with the Ethereum network. Some popular options include Geth, Parity, and Infura.
Fund your account: To deploy a smart contract to the mainnet, you’ll need to pay gas fees in Ether. Make sure you have enough Ether in your account to cover the gas fees for the deployment.
Compile your smart contract: Use a Solidity compiler to compile your smart contract code into bytecode that can be executed on the Ethereum Virtual Machine (EVM).
Create a deployment script: Write a deployment script that specifies the bytecode of the smart contract and any constructor arguments that need to be passed.
Deploy your smart contract: Use your chosen Ethereum client to deploy the smart contract to the mainnet by running the deployment script. Once the deployment is complete, you’ll receive a transaction hash that you can use to verify the deployment on a blockchain explorer.
Here’s the deployment script in JavaScript using the web3.js library:
javascript
const Web3 = require('web3');
const HDWalletProvider = require('@truffle/hdwallet-provider');
const contract = require('./build/MyContract.json');
const mnemonic = process.env.MNEMONIC;
const providerUrl = process.env.PROVIDER_URL;
const provider = new HDWalletProvider(mnemonic, providerUrl);
const web3 = new Web3(provider);
const deploy = async () => {
const accounts = await web3.eth.getAccounts();
console.log(`Deploying contract from account ${accounts[0]}`);
const myContract = new web3.eth.Contract(
contract.abi,
null,
{ data: contract.bytecode }
);
const result = await myContract.deploy().send({
from: accounts[0],
gas: 3000000
});
console.log(`Contract deployed at address ${result.options.address}`);
}
deploy();
Here we are using the HDWalletProvider to sign transactions using a mnemonic phrase, and the web3.eth.Contract object to create an instance of our compiled contract bytecode. We then use the .deploy() method to create a deployment transaction, passing in the constructor arguments if needed.
Finally, we use the .send() method to send the transaction to the network and wait for the deployment
to complete.
Common Errors Encountered and How to Fix them
Compilation Errors:
Error: “ParserError: Expected pragma, import directive or contract/interface/library definition.” - This error usually occurs when there is a syntax error or missing import statements. Review your code and ensure proper syntax and import statements are included.
Error: “TypeError: Member not found or not visible after argument-dependent lookup in type (contract name).” - This error occurs when you try to access a member (function, variable) that is not defined or not visible in the contract. Check the contract to make sure the member exists and is properly defined.
solution
Review the code for syntax errors and missing import statements. Ensure that the code is properly formatted and all necessary dependencies are imported.
Double-check the version of the Solidity compiler specified in the contract and the compiler configuration. Make sure they are compatible.
Verify that all contract names, functions, and variables are correctly defined and spelled.
Deployment Errors:
Error: “Error: Returned error: VM Exception while processing transaction: revert” - This error occurs when a require statement fails or a function execution reverts. Check the conditions and requirements specified in the contract and ensure that they are met before deploying or calling the function.
Error: “Error: Gas estimation failed” - This error indicates that the gas required for a transaction could not be estimated. It can occur when a contract or function is too complex or requires excessive gas. Try increasing the gas limit for the transaction or optimizing your code to reduce gas consumption.
solution
Check the conditions and requirements specified in the contract’s require statements. Ensure that the required conditions are met before deploying or calling the function.
Review the contract constructor parameters and make sure they are correctly specified when deploying the contract.
Increase the gas limit provided for the transaction if the error is related to running out of gas.
Optimize the contract code to reduce gas consumption, if possible.
Runtime Errors:
Error: “Error: VM Exception while processing transaction: out of gas” - This error occurs when a transaction runs out of gas during execution. It usually indicates that the gas limit provided for the transaction is insufficient. Increase the gas limit to ensure successful execution.
Error: “Error: VM Exception while processing transaction: invalid opcode” - This error can occur due to various reasons, such as calling a non-existent function or accessing an array index out of bounds. Review your code to ensure that all function calls and array accesses are valid.
Blockchain-Specific Errors:
Error: “Error: Transaction was not mined within 50 blocks” - This error occurs when a transaction is not mined within a certain number of blocks. It may indicate network congestion or a low gas price. Increase the gas price or wait for network congestion to subside.
Error: “Error: Invalid address” - This error indicates that an invalid address was provided as a parameter. Double-check the address and ensure it is a valid Ethereum address.
solution
Verify that all function calls and array accesses are valid. Check that the functions and arrays exist and are used correctly.
Review the logic of the contract and ensure that all conditions and state changes are properly handled.
Check for any incorrect assumptions or calculations in the contract’s logic.
Blockchain-Specific Errors:
Increase the gas price or gas limit if the error is related to gas estimation or running out of gas.
Monitor network congestion and adjust gas prices accordingly. Consider using gas price estimation tools to determine optimal gas prices.
Ensure that the addresses provided as parameters are valid Ethereum addresses. Double-check for any typographical errors or incorrect address formats.
Conclusion
This tutorial has taught us how to Build an automated market maker (AMM) on the Celo Blockchain. First step was setting up a development environment, next was understanding the automated market concepts, designing the AMM next, writing the smart contract and then deployment. All of these were covered in this tutorial as well as possible errors that were made and fixed during creation.
Next Steps
We now have a solid understanding of Building an automated market maker (AMM) on the Celo Blockchain and it’s importance and usage, we can now explore and delve into it’s efficiency and reliability by the blockchain
About the Author
Michael Diagbare is a Software Engineer with expertise in Web, Blockchain development and content creation, certified by Cisco and MongoDB university. He is passionate about building software, problem solving and helping programmers deal with complicated tasks and challenges.
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