AMM (Automated Market Maker)
Tue, Apr 15An Automated Market Maker (AMM) is a protocol that operates on decentralized exchanges (DEX), eliminating the traditional order book found in conventional exchanges, where liquidity is generated by buyer and seller orders. Instead, it utilizes liquidity pools, which are shared collections of tokens.
Users of the AMM contribute tokens to the pool, after which the price of an asset is determined through a mathematical formula.
AMMs are particularly beneficial for new DEXs that initially face a limited number of buyers and sellers, resulting in low liquidity during their early stages.
As the assets supplied by liquidity providers (buyers and sellers) increase in the pool, the liquidity of the DEX also rises.
Liquidity providers are motivated by earning fees based on their share of the pool tokens contributed, while the DEX benefits from enhanced liquidity, facilitating easier trading on the platform.
There are various methods by which AMMs design their mathematical formulas for pricing and liquidity, and these differences are what set one AMM model apart from another.
Four well-known AMMs in the DeFi space that have gained significant popularity are Uniswap, Pancakeswap, Curve, and Balancer.
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