• About Us
  • Careers
  • Contact
No Result
View All Result
Sunday, June 1, 2025
DeFi Planet
  • News
    • People
    • Business
    • Crime
    • Regulation
    • Crypto
    • CBDC
  • Markets
    • Bitcoin
    • Ethereum
    • Stablecoins
    • Altcoins
    • Crypto ETFs
    • Memecoins
  • Policy
  • Articles
    • Press Releases
    • Opinion
    • Explainers
    • Guest Post
    • Sponsored
  • Directory
    • Companies
    • People
    • Products
    • Wallets
  • Multimedia
    • Videos
    • Podcasts
  • Learn
    • DeFi Basics
    • Tutorials
    • Reviews
    • Blockchain Fundamentals
  • Research
    • Case Studies
  • Explore
    • DeFi
    • Crypto Gaming
    • NFT
    • DAO
    • Metaverses
  • Jobs
  • Markets Pro
    • DeFi Planet Pro
    • Spend Crypto
    • Swap Crypto
    • Coin Prices
    • Crypto Exchanges
    • Crypto Analyzer
  • News
    • People
    • Business
    • Crime
    • Regulation
    • Crypto
    • CBDC
  • Markets
    • Bitcoin
    • Ethereum
    • Stablecoins
    • Altcoins
    • Crypto ETFs
    • Memecoins
  • Policy
  • Articles
    • Press Releases
    • Opinion
    • Explainers
    • Guest Post
    • Sponsored
  • Directory
    • Companies
    • People
    • Products
    • Wallets
  • Multimedia
    • Videos
    • Podcasts
  • Learn
    • DeFi Basics
    • Tutorials
    • Reviews
    • Blockchain Fundamentals
  • Research
    • Case Studies
  • Explore
    • DeFi
    • Crypto Gaming
    • NFT
    • DAO
    • Metaverses
  • Jobs
  • Markets Pro
    • DeFi Planet Pro
    • Spend Crypto
    • Swap Crypto
    • Coin Prices
    • Crypto Exchanges
    • Crypto Analyzer
No Result
View All Result
DeFi Planet
No Result
View All Result

Automated Market Makers (AMMs) Explained

29 March 2022
in Articles, Opinion
Reading Time: 7 mins read
110 6
Home Articles

Contents

Toggle
  • What is an Automated Market Maker?
  • What is a Liquidity Pool?
  • Advantages of an AMM
    • • No Know Your Customer (KYC) Process
    • • Improved Liquidity
    • • Income Stream
    • • Reduced Price Fluctuation
    • • Swift Token Swaps
    • • Non-Custodial
  • Disadvantages of AMMs
    • • Security Risks 
    • • Liquidity Issues
  • Common Examples of AMMs
    • • Balancer
    • • UniSwap
    • • Sushiswap
  • In Conclusion,

Automated Market Makers (AMMs) have emerged as an important element of decentralized exchanges, as users seek a way to exchange their tokens without having to deal with a custodial authority.

AMMs enables users to exchange their cryptocurrencies for others without entrusting their tokens to a centralized exchange.

What is an Automated Market Maker?

An AMM is a type of decentralized exchange that exchanges tokens through liquidity pools. Peer-to-peer (P2P) exchange is an example of a decentralized exchange. When it comes to swapping tokens, decentralized exchanges are often confronted with liquidity concerns. A potential buyer, for example, must wait for a potential seller to place an order before the swap can take place on a peer-to-peer (P2P) decentralized exchange. This may take some time, defeating the purpose of instantaneous token exchange.

AMMs are resolving challenges caused by low liquidity levels. They enable permissionless and automatic token switching via liquidity pools rather than traditional means of exchange.

This type of crypto exchange involves a transaction between a person and a liquidity pool. It is a peer-to-contract transaction in which participants exchange tokens with a pool and pay gas fees for transactions.

Typically, liquidity providers supply tokens to liquidity pools (LPs). Anyone can choose to be a liquidity provider as long as the pool is open to the public. Liquidity providers are compensated with gas fees, a new governance token, or both.

What is a Liquidity Pool?

AMMs operate with liquidity pools. Liquidity pools can be regarded as a reservoir of tokens that users can trade against in a decentralized manner. Pools are often open to the public, allowing anyone to inject liquidity, although some are designed to be private.  Balancer, for example, provides flexible options for developers of liquidity pools.

Balancer is an example of an Automated Market Maker with liquidity pools that are regulated by a pre-established algorithmic formula. Typically, this defines the value of tokens in the exchange.

Balancer has a variety of liquidity pools, including public, private, and smart pools.

Anyone can participate in public pools to provide liquidity and earn profits. Private pools are designed for a limited number of liquidity providers, while smart pools are a hybrid of public and private pools.

Smart pools incorporate flexibility into the parameters guiding the pools while permitting any user to inject liquidity.   

Advantages of an AMM

AMMs provide numerous benefits to the decentralized financial sector, which will be discussed further below.

• No Know Your Customer (KYC) Process

AMMs such as UniSwap and Pancakeswap can be used without requiring the user to go through any Know Your Customer (KYC) procedures. When signing up on a crypto exchange, potential traders must fill out their information, which may involve uploading their identity cards and proof of residence documents.

 

When using UniSwap, all the user has to do is connect their wallet to the AMM and swap their tokens. It is not necessary to register or upload any documents.

• Improved Liquidity

When the concept of decentralized exchange was developed, liquidity became a critical issue because individuals found it impossible to instantly swap their tokens for another, which was the norm in centralized exchanges. AMM addresses the previously stated difficulties by allowing users to instantly swap tokens without the requirement for custodial authorities.

• Income Stream

AMMs provide a revenue stream for liquidity providers. Injecting liquidity into pools grants users access to a percentage of transaction fees, new governance tokens, or both. The incentives provided to liquidity providers may differ depending on the AMM. New AMMs typically offer higher returns than older ones. For example, when Sushiswap first launched, it employed the vampire attack to lure liquidity providers from UniSwap to its platform.

• Reduced Price Fluctuation

Traders can deal with reduced slippage or price fluctuation due to the increased liquidity provided by the pools in an AMM. It makes token swapping much easier and more cost-effective for traders.

• Swift Token Swaps

The regular decentralized exchange may have to deal with slower users, especially if it is a peer-to-peer trading platform. This is because a potential buyer must wait for a seller to place an order before a transaction can occur. AMMs enable traders to trade against smart contracts, increasing the speed of token swaps.

• Non-Custodial

Instead of a centralized entity, traders interact with the smart contract. The trader is not required to hold their tokens on a centralized account before swapping. Their wallet interacts with the smart contract in real-time and instantly exchanges tokens. Throughout the process, users retain complete custody of their cryptocurrency. This means that, unlike on a centralized crypto exchange, traders do not have to worry about their tokens being stolen during a hack.

Disadvantages of AMMs

• Security Risks 

Cyber attacks against liquidity pools are common, especially when loopholes or vulnerabilities in the pool architecture are discovered. There have been multiple reports of liquidity providers losing their assets due to the depletion of pool tokens. In some cases, outsiders may be responsible, while in others, the development team may be the culprits. 

Chef Nomi, the developer of Sushiswap, for example, siphoned $14 million in an exit scam but ultimately refunded the money and apologized to members of the community.

• Liquidity Issues

Because not all AMM’s liquidity pools are as large as UniSwap’s, their operations may suffer.

Common Examples of AMMs

Over time, new AMMs emerge to address issues that older solutions may have overlooked. Below are some examples of Automated Market Makers. As always, do your due diligence before using any of them.

• Balancer

Balancer is an innovative AMM that offers flexible options to users, based on what they intend to achieve with the pool. It has several liquidity options such as public or shared pools, private pools, and smart pools. 

The public pools available on Balancer are the same as those found in other AMMs. It enables anyone to inject liquidity while also earning rewards. The main distinction between Balancer’s public liquidity pools and others is that liquidity providers can deposit any combination of up to eight different tokens, while the others may only permit up to two tokens.

The parameters that govern public pools are fixed and cannot be altered once they have been finalized. This means that parameters such as the type of tokens added to the pool and the ratio cannot be altered.

Private pools are designed to be extremely flexible, allowing users to change the parameters of the pools. Usually, this type of pool is funded by a single individual or a group of people, and it is not open to the public. This means that not everyone is allowed to inject liquidity into the pool. Only the owner of the pool is permitted to provide liquidity.

Smart pools, on the other hand, are a hybrid of public and private pools. In this case, the pool’s governing parameters are flexible, and anyone can provide liquidity. Unlike in a public pool, factors such as swap fees, tokens, pool weight, liquidity pool restrictions, and much more can be changed over time.

• UniSwap

UniSwap is regarded as one of the first AMMs in existence, having been established on November 2, 2018. It has grown to be one of the most popular Automated Market Makers, with the feature that allows anyone to create a pool on the platform. Users can also provide liquidity on any pool they want.

It enables the decentralized exchange of ERC20 tokens, allowing users to exchange their ETH for any ERC20 token and vice versa.

• Sushiswap

Sushiswap is a fork of UniSwap established in 2020 by a person or group of individuals known as Chef Nomi. It launched a vampire attack earlier in its development, aiming to induce liquidity providers to move their liquidity from UniSwap to Sushiswap. They provided liquidity providers with SUSHI, their native token, for injecting liquidity into various pools.

It performs functions similar to those provided by UniSwap.

In Conclusion,

  • AMMs are a type of decentralized exchange. 
  • AMMs work with liquidity pools. 
  • Liquidity providers are rewarded for injecting liquidity into pools. The rewards can come as a share of transaction fees, governance tokens, or both. 
  • There are different examples of liquidity pools such as UniSwap and Balancer. 

 

If you would like to read more articles like this, follow DeFi Planet on Twitter, LinkedIn, Instagram and Facebook.

 

Don't miss out!

Subscribe To Our Newsletter

Receive top education news, lesson ideas, teaching tips and more!
Invalid email address
Give it a try. You can unsubscribe at any time.
Thanks for subscribing!
Share67Tweet42Share12
Previous Post

Deutsche Bank Believes That NFTs Could Become Mainstream With The Help Of Instagram

Next Post

Japan to Revise Foreign Exchange Law to Prevent Sanction Evasion

Rose Nnamdi

Rose Nnamdi

Related Posts

Are Stablecoins Bank Deposits?
Articles

Are Stablecoins Bank Deposits?

31 May 2025
Is the Rise of “L2 Clusters” Accelerating Interoperability or Reinforcing Silos?
Articles

Is the Rise of “L2 Clusters” Accelerating Interoperability or Reinforcing Silos?

27 May 2025
Are Storage Tokens Worth the Hype?
Articles

Are Storage Tokens Worth the Hype?

27 May 2025
The Biggest Hacks and Exploits in DeFi History & What We Can Learn from Them
Articles

The Biggest Hacks and Exploits in DeFi History & What We Can Learn from Them

27 May 2025

Featured Posts

Assessing The Impact of China’s Crypto Crackdown

byOlajumoke Oyaleke
19 January 2025
0

Why Are We Trying to Make Bitcoin Like Ethereum? (And Why We Should Not)

byOlajumoke Oyalekeand1 others
3 January 2025
0

Global Crypto Taxation Trends: Supporting Growth or Hindering Innovation?

byOlajumoke Oyaleke
31 December 2024
0

The 10 Worst Crypto Mistakes And How To Avoid Them | DeFi Planet

The 10 Worst Crypto Mistakes And How To Avoid Them

byArjun Chand
26 August 2021
1

A Dive Into The Life Of Meme Coin, DogeCoin | DeFi Planet

From Comic Relief to Crypto Sensation: The Epic Evolution of Dogecoin

byRose Nnamdiand1 others
4 August 2021
0

Read More

Chain of Thoughts

Are Stablecoins Bank Deposits?

Are Stablecoins Bank Deposits?

byOlu Omoyele
31 May 2025
0

...

DAOs and the Coordination of Human Endeavour

DAOs and The Coordination of Human Endeavour

byOlu Omoyele
27 April 2025
0

...

Should DeFi Be Regulated?

Should DeFi Be Regulated?

byOlu Omoyele
27 March 2025
0

...

Is Tokenization All That It’s Cracked Up To Be?

Is Tokenization All That It’s Cracked Up To Be?

byOlu Omoyele
26 February 2025
0

...

Markets Update

Your Weekend Crypto Roundup | May 2025 (Week 5)

10 hours ago

Your Weekend Crypto Roundup | May 2025 (Week 4)

1 week ago

Your Weekend Crypto Roundup | May 2025 (Week 3)

2 weeks ago

Your Weekend Crypto Roundup | May 2025 (Week 2)

3 weeks ago

Your Weekend Crypto Roundup | May 2025 (Week 1)

4 weeks ago

Your Weekend Crypto Roundup | April 2025 (Week 4)

1 month ago
Read More

Events

Crypto Valley Conference
Crypto Valley Conference
5 Jun 25
Risch-Rotkreuz

Spotlight

All about Ethereum
All about Algorand
All about Bitcoin
All about Gora

Press Releases

Zircuit Enables Non-Custodial Wallet Top-Ups for Crypto.com Visa Cards

bychainwire
30 May 2025
0

Bet20 Launches Premium Casino Platform with Trusted Licensing, Instant Crypto Withdrawals, and Elite Gaming

bychainwire
29 May 2025
0

Reddio’s Exclusive Token Generation Event (TGE) and Alpha Trading on Binance Wallet – May 29, 2025

bychainwire
29 May 2025
0

Weed Launches Global Well-Being Platform Powered by AI

bychainwire
28 May 2025
0

Cache Wallet Begins Token Sale with Early Demand and Asset Recovery Breakthrough

bychainwire
27 May 2025
0

Read More

ADVERTISING

ABOUT

TEAM

CAREERS

CONTACT

TERMS & CONDITIONS

PRIVACY POLICY

© Copyright 2025 DeFi Planet

Welcome Back!

Login to your account below

Forgotten Password?

Retrieve your password

Please enter your username or email address to reset your password.

Log In

Add New Playlist

No Result
View All Result
  • News
    • People
    • Business
    • Crime
    • Regulation
    • Crypto
    • CBDC
  • Markets
    • Bitcoin
    • Ethereum
    • Stablecoins
    • Altcoins
    • Crypto ETFs
    • Memecoins
  • Policy
  • Articles
    • Press Releases
    • Opinion
    • Explainers
    • Guest Post
    • Sponsored
  • Directory
    • Companies
    • People
    • Products
    • Wallets
  • Multimedia
    • Videos
    • Podcasts
  • Learn
    • DeFi Basics
    • Tutorials
    • Reviews
    • Blockchain Fundamentals
  • Research
    • Case Studies
  • Explore
    • DeFi
    • Crypto Gaming
    • NFT
    • DAO
    • Metaverses
  • Jobs
  • Markets Pro
    • DeFi Planet Pro
    • Spend Crypto
    • Swap Crypto
    • Coin Prices
    • Crypto Exchanges
    • Crypto Analyzer

© Copyright 2024 DeFi Planet   |   Terms & Conditions   |   Privacy Policy

-
00:00
00:00

Queue

Update Required Flash plugin
-
00:00
00:00