Automated Market Makers (AMM) – Everything You Need to Know

Beginner’s Guide / 01.11.2020

Investors are seemingly flooding the world of digital currencies with the number of cryptocurrencies in the market today exceeding the 7000-mark. As more digital currencies emerge, it becomes imperative to establish exchange ecosystems. For a long time, individuals have relied on centralized exchanges to swap their digital assets because of the vast amount of liquidity they possess. 

However, despite the liquidity levels and ease of accessibility, centralized exchanges have become insecure as people incur financial losses. The focus is now shifting towards decentralized exchanges because of their security architecture. Further, implementing automated market makers on decentralized exchanges will ultimately counter the liquidity issues that the platforms encounter. 

An Overview of Automated Market Makers

The crypto trading environment usually operates 24/7 without any barriers to business hours. Therefore, investors are generally on high alert on how the market works and gives unprecedented freedom to execute trades. To successfully perform a trading activity, we need to leverage some key instruments, such as automated market makers. Put merely, AMM protocols determine the price of tokens in decentralized exchanges. 

Automated Market Makers – AMM – procedures contain trading pairs and facilitate digital assets exchange without order books. Each trading pair has its price, and the market makers solve complex algorithms automatically to know their value. For instance, if a user wants to swap token X for token Y, they will set their smart contract to execute the task. 

After that, the contract sends the X tokens to a liquidity pool whereby the system plays its role in calculating how many tokens of Y a user should receive. All users require to engage in trade is a wallet address and the asset they wish to buy or sell. On the other hand, liquidity can be termed as the ability to which markets permit the purchase and sale of assets.

The good thing about using AMM is that the exchange procedures are fully automated compared to centralized exchanges that rely on third-party interventions. Investors on AMM find it convenient to commit their funds to the system since it incentivizes them to contribute to liquidity pools. Hence, it is safe to say that users can make some income on AMM protocols for providing liquidity, which comes in the form of tokens.

Types of Automated Market Maker Projects

The market maker protocols in use today possess unique features that suit different audiences. Either way, the platforms still perform similar tasks of exchanging digital assets. Below are some of the popular automated market maker (AMM) projects available in the crypto space

Balancer

This project mainly involves two parties who benefit from it. One party entails the liquidity providers who own Balancer pools or a partition of the pool. The other group consists of ordinary users who wish to exchange digital assets from the pool. Traders are charged a fee for utilizing the Balancer platform since it gains more liquidity from the pools. 

Moreover, users can choose whichever pool they would like to trade because most of them contain diverse tokens, charges, and investment opportunities. Balancer gives users the complete freedom to design smart contracts according to what the contract is supposed to establish. 

The platform does not have the authority to stop or edit the smart contracts once the user places it for a specific function. Apart from mixing the accustomed pair tokens, Balancer can accommodate a mixture of up to 8 digital assets. 

Besides, Balancer fees range from 0.0001% to 10%. Additionally, the Balancer protocol contains their governance token (BAL), which grants liquidity providers the right to vote on any suggestions that propel the platform to greater heights.

Uniswap

Uniswap stands out as one of the best and most widely used DeFi projects. The AMM-based firm is well known for listing new tokens without paying any fees. To add to that, Uniswap boosts the newly listed token with substantial amounts of liquidity. Uniswap merges with Ethereum blockchain, giving users an advantageous position to receives unprecedented access to numerous ERC-20 tokens. Its decentralized architecture allows users to conduct trades eliminating the need to register with the platform. 

The only thing required is an active Ethereum wallet such as MetaMask. Uniswap calculates its trading prices through the formula (x*y=k), whereby k is constant, while x and y represent both Ether and ERC-20 tokens found in the pool. 

AMM’s primary objective of Uniswap is to ascertain a significant amount of liquidity every time. An interesting fact that Uniswap holds is the ability to exchange an ERC-20 token for another ERC-20 token. According to the platform, each token value correlates with the order size.

Final Word

AMM services are gradually revamping exchange ecosystems. Users have an easy time exchanging the tokens they hold with other valuable digital assets. It has created a doorway to earning rewards and funds for investors who contribute to liquidity pools. In turn, these pools are what drive and sustain the AMM exchanges. 

Unlike Uniswap, which mostly deals with fluctuating assets, projects like Curve handle stable digital assets, eliminating impermanent losses due to high volatility levels. The majority of investors currently prefer decentralized exchanges, which give a secure and anonymous ecosystem for you to conduct your transactions. Furthermore, decentralized AMMs offer lower fees to perform exchange services.

Adam is an outgoing young lad who likes adventures and discovering new things. Despite his boring life, he loves writing about cryptocurrencies and exploring what blockchain technology can do for the coming digital world where all adventures will be virtual.