The Secrets of Creating Stable, Oracle-Free Liquidity Pools

I thought, “If I could predict that one candle, I could avoid this.” My fixated hope that one oracle, one data point would shield me felt foolish in hindsight, and I realized the real power lies in the architecture of the system itself.

Why You Need an Oracle‑Free AMM

The idea of an oracle‑free Automated Market Maker (AMM) isn’t new. In fact, the fundamentals of AMMs—such as the constant product formula and the way reserves dictate prices—are laid out in depth in Understanding Automated Market Makers and the Core DeFi Mechanics. A classic AMM, traders trade against a pool of reserves that follows the constant product formula, x*y=k, a key concept that helps explain why relying on a single candle is a poor substitute for a robust market design.

A stable‑coin pair, like USDC‑DAI, may already provide some price stability, but that alone is insufficient. Without a proper self‑regulating buffer and real‑time on‑chain checks, even stable pairs can experience surprising slippage. In this post I walk through how to build an AMM that doesn’t need a third‑party oracle, borrowing ideas from recent guides on creating truly independent liquidity pools.

The Core Mechanisms of an Oracle‑Free AMM

1. Define the price band
   LPs choose a 0.99–1.01 price band, reflecting the typical spread between USDC and DAI. The pair sits in an “in‑range” state when trades happen within this band.

2. Set the fee parameters

   • Base fee: 0.2%
   • Buffer fee: 0.1% for the buffer that grows if the pool experiences high slippage

3. Initialize the buffer
   On deployment, the pool starts with a 1% buffer relative to its total reserves, providing a cushion for price adjustments.

4. Implement TWAP checks
   Before executing a swap, the contract fetches the average price over the last 20 blocks. If the proposed price deviates by more than 5%, the transaction reverts. This step mirrors the practical guidelines described in Practical Steps to Build an Automated Market Maker Free of Oracles.

5. Manage the buffer
   On every trade, the fee that lands in the buffer is subtracted from the total reserves. If the buffer dips below 0.5% reserves, the pool automatically raises the buffer fee to 0.2% for the next trade cycle. This self‑insurance approach is a common pattern for building oracle‑free AMMs from scratch, as detailed in Building Oracle‑Free Automated Market Makers from Scratch.

6. Emergency halt
   If a single trade moves the pool price by over 2%, the contract triggers a halt() function. Traders can cancel or get a refund; LPs can withdraw at full or partial amounts depending on the time elapsed. This guardrail is an essential feature highlighted in the discussion of designing oracle‑free AMMs, see Designing Oracle‑Free AMMs: A Deep Dive into Core DeFi Primitives.

7. Periodic rebalancing
   Every 24 hours, the pool sends a “rebalancer” transaction that swaps a small portion of the accumulated buffer back into the main reserves to avoid devaluation of the buffer tokens.

By following this workflow, you essentially build a pool where the smart‑contract code acts as its own oracle—an idea explored in depth in The Mechanics of AMMs in a DeFi Landscape Without Oracles.

Why This Matters for Traders and LPs

Traders: you’ll see slippage that is predictable and bounded. There’s no fear that an oracle will lag and cause you to end up with an unexpected price.
LPs: the buffer and time‑based controls provide a transparent, audit‑friendly way to maintain price integrity, a best‑practice approach echoed in many oracle‑free AMM tutorials.

Final Takeaway

The most important takeaway? Don’t chase a fancy oracle; master the design of the system itself. By embedding a real‑time buffer, TWAP checks, and an emergency halt—principles that are at the heart of building truly independent AMMs—you get the same reliability that a conventional oracle offers, without the additional cost and risk. For a comprehensive look at how AMMs can function seamlessly in a DeFi landscape without external oracles, read The Mechanics of AMMs in a DeFi Landscape Without Oracles.