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 that maintain a fixed supply and predictable transfer behavior. Tokens with certain non-standard behaviors, such as fee-on-transfer, rebasing, and deflationary mechanisms, are not supported by Aquarius 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 the Aquarius AMM due to their non-standard behaviors, which disrupt internal accounting and can lead to protocol vulnerabilities:

2.1 Fee-on-Transfer Tokens

Fee-on-transfer tokens automatically deduct a fee each time they are transferred. This results in the recipient receiving less than the amount sent.

• Why Unsupported: Aquarius AMM’s balance tracking relies on the assumption that the entire transferred amount is received. With fee-on-transfer tokens, the deducted fee causes a discrepancy between the recorded balance and the actual balance, leading to inaccurate pool accounting and potential financial inconsistencies.

2.2 Rebasing Tokens

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

• Why Unsupported: The AMM’s accounting system expects token balances to remain stable unless explicitly adjusted by user actions. Rebasing tokens introduce unexpected changes in balance, creating mismatches in the AMM’s records and leading to pricing errors and liquidity imbalances.

2.3 Deflationary Tokens

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

• Why Unsupported: Similar to fee-on-transfer tokens, deflationary tokens cause the received amount to differ from the sent amount. This discrepancy interferes with the AMM’s balance calculations, resulting in inaccurate pricing and pool valuation.

3. Impact of Adding Unsupported Tokens

Adding unsupported tokens (fee-on-transfer, rebasing, or deflationary tokens) to Aquarius liquidity pools can lead to several operational and financial issues:

• Imbalance in Pool Accounting: The AMM’s internal records may not accurately reflect the actual token balances in the pool, causing pricing errors and liquidity mismanagement.

• Increased Exploitation Risk: These discrepancies can create arbitrage opportunities where users manipulate pool imbalances to gain an unfair advantage, potentially harming liquidity providers (LPs).

• Financial Loss for LPs: Liquidity providers may experience reduced returns due to inaccurate token pricing and inefficient liquidity allocation caused by incompatible token behaviors.