Aquarius AMM: Limitations in Support for Fee-on-Transfer, Rebasing, and Deflationary Tokens

1. Introduction

The Aquarius Automated Market Maker (AMM) on the Stellar network currently supports only standard SEP-41 compliant tokens, which maintain a fixed supply and predictable transfer behavior. Certain non-standard tokens, such as fee-on-transfer, rebasing, and deflationary tokens, are not supported due to their incompatibility with the AMM’s internal accounting and liquidity management systems.

2. Unsupported Token Types

The following token types are not supported by Aquarius AMM due to their disruptive behaviors, which can lead to protocol vulnerabilities and accounting inconsistencies.

2.1 Fee-on-Transfer Tokens

Definition: These tokens automatically deduct a fee on each transfer, meaning the recipient receives less than the amount sent.

Why They Are Unsupported:

• Aquarius AMM’s balance tracking assumes that the entire transferred amount is received.

• The deducted fee creates a mismatch between recorded and actual balances.

• This results in inaccurate pool accounting and potential financial inconsistencies.

2.2 Rebasing Tokens

Definition: Rebasing tokens periodically adjust their total supply, either increasing or decreasing balances for all holders based on preset conditions.

Why They Are Unsupported:

• The AMM expects token balances to remain stable unless explicitly adjusted by user actions.

• Rebasing introduces unexpected balance changes, leading to pricing errors and liquidity imbalances.

2.3 Deflationary Tokens

Definition: Deflationary tokens burn a portion of each transfer, gradually reducing the total supply over time.

Why They Are Unsupported:

• Similar to fee-on-transfer tokens, the received amount differs from the sent amount.

• This disrupts the AMM’s balance calculations, causing inaccurate pricing and pool valuation errors.

3. Impact of Adding Unsupported Tokens

Adding fee-on-transfer, rebasing, or deflationary tokens to Aquarius liquidity pools can cause significant operational and financial issues, including:

• Imbalanced Pool Accounting: The AMM may fail to accurately track token balances, resulting in pricing errors and liquidity mismanagement.

• Increased Exploitation Risk: Discrepancies create arbitrage opportunities, where users can manipulate pool imbalances for unfair gains, potentially harming liquidity providers (LPs).

• Financial Loss for LPs: Liquidity providers may suffer reduced returns due to inefficient liquidity allocation and inaccurate token pricing.

By ensuring that only compatible tokens are used, Aquarius maintains accurate accounting, fair liquidity management, and a secure trading environment.