• News
    • Latest News
    • Press Releases
  • Markets
  • Articles
    • Opinion
    • Explainers
    • Guest Posts
    • Sponsored Posts
  • Policy
  • Videos
  • Podcasts
  • Learn
    • DeFi Basics
    • Blockchain Fundamentals
    • Tutorials
    • Reviews
  • Research
    • Case Studies
  • Explore
    • NFTs
    • DAOs
    • Crypto Gaming
    • Metaverses
    • Web3
    • Stablecoins
    • CBDCs
    • DeFi
  • Markets Pro
    • Swap Crypto
    • DeFi Planet Pro
    • Coin Prices
    • Crypto Exchanges
    • Crypto Analyzer
No Result
View All Result
DeFi Planet
  • News
    • Latest News
    • Press Releases
  • Markets
  • Articles
    • Opinion
    • Explainers
    • Guest Posts
    • Sponsored Posts
  • Policy
  • Videos
  • Podcasts
  • Learn
    • DeFi Basics
    • Blockchain Fundamentals
    • Tutorials
    • Reviews
  • Research
    • Case Studies
  • Explore
    • NFTs
    • DAOs
    • Crypto Gaming
    • Metaverses
    • Web3
    • Stablecoins
    • CBDCs
    • DeFi
  • Markets Pro
    • Swap Crypto
    • DeFi Planet Pro
    • Coin Prices
    • Crypto Exchanges
    • Crypto Analyzer
No Result
View All Result
DeFi Planet
No Result
View All Result
Home Articles

Automated Market Makers (AMMs) Explained

29 March 2022
in Articles, Opinion
Reading Time: 7 mins read
105 6

Contents

  • 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!
Share64Tweet40Share11
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

CurveFi’s-CrvUSD-Stablecoin-All-you-need-to-know
Articles

CurveFi’s CrvUSD Stablecoin: All You Need To Know

24 May 2023

Introduction Stablecoins, with a market valued at an impressive $130 billion, have become a vital tool in DeFi to safeguard against market volatility and the risks of traditional finance. However, most stablecoins available today are centralized and prone to...

Careers-In-Cryptocurrency-How-To-Land-Your-First-Crypto Job
Articles

Careers In Cryptocurrency: How To Land Your First Crypto Job

23 May 2023

Introduction If there's one thing everyone can agree on, it's that "cryptocurrency" is no longer just a buzzword. In a remarkable feat, it has become the fastest tech product and industry to hit the trillion-dollar mark, achieving this milestone...

Popular-NFT-marketplaces-and-what-they-offer
Articles

Popular NFT Marketplaces And What They Offer

19 May 2023

Introduction The NFT market is predicted to grow to a valuation of $211.72 billion by 2030, demonstrating the enormous potential for wealth creation through this innovative concept. The sector's current valuation of $10 billion, as well as the estimated...

The-AI-Renaissance-How-Generative-AI-is-Shaping-the-Future-of-Technology
Articles

The AI Renaissance: How Generative AI is Shaping the Future of Technology

17 May 2023

TL;DR Generative AI is a form of artificial intelligence that uses machine learning to analyze large datasets and create new content.  This advancement has transformed the creative process by enabling the creation of unprecedented and distinct content in previously...

Swap Crypto

Markets Update

DOGE Hits $10B Market Cap; Community Criticizes New Twitter CEO Appointment

1 week ago

NFT Market in Q1 2023: A Tale of Strong Starts, Mixed Performances, and Shifting Market Dynamics

2 weeks ago

Pepe Coin Makes Impressive Market Debut, Surpasses Shiba Inu and Dogecoin in Market Capitalization

3 weeks ago

Litecoin (LTC) Retraces After Hitting $100: Can LTC Halving Lead to New ATH?

4 weeks ago

Bitcoin Shows Potential to Reach $30,000 Amid Volatile Market Conditions

4 weeks ago

XRP Fluctuates As Ripple-SEC Case Nears Conclusion and Regulatory Pressures Mount

1 month ago
Read More

Spotlight

All about SolChicks

All about Algorand

All about Bitcoin

All about Goracle

Press Releases

BitMEX Introduces a New PnL Realisation Feature for More Capital-Efficient Cross-Margining

BitMEX Introduces a New PnL Realization Feature

byGuest Author
13 April 2023
0

...

BitMEX Joins TRUST Protocol to Expand Travel Rule Compliance Capabilities, Aims to Adapt Swiftly in an Evolving Landscape

BitMEX Joins TRUST Protocol to Expand Travel Rule Compliance Capabilities

byGuest Author
13 April 2023
0

...

Vybe Launches Bntyhntr: A Digitalized Treasure Hunt Product on the Algorand Chain

Vybe Launches Bntyhntr: A Digitalized Treasure Hunt Product on the Algorand Chain

byGuest Author
25 January 2023
0

...

BetDEX-Exchange-to-Launch-on-Solana-Mainnet-Ahead-of-2022-FIFA-World-Cup.jpg

BetDEX Exchange to Launch on Solana Mainnet Ahead of 2022 FIFA World Cup

byGuest Author
8 November 2022
0

...

BetDEX-Exchange-Becomes-First-Fully-Licensed-Sports-Betting-Exchange-on-Blockchain.jpg

BetDEX Exchange Becomes First Fully-Licensed Sports Betting Exchange on Blockchain

byGuest Author
1 November 2022
0

...

Read More
  • About Us
  • The Team
  • Careers
  • Contact
  • Partnerships

© Copyright 2023 DeFi Planet   |   Terms & Conditions   |   Privacy Policy

No Result
View All Result
  • News
    • Latest News
    • Press Releases
  • Markets
  • Articles
    • Opinion
    • Explainers
    • Guest Posts
    • Sponsored Posts
  • Policy
  • Videos
  • Podcasts
  • Learn
    • DeFi Basics
    • Blockchain Fundamentals
    • Tutorials
    • Reviews
  • Research
    • Case Studies
  • Explore
    • NFTs
    • DAOs
    • Crypto Gaming
    • Metaverses
    • Web3
    • Stablecoins
    • CBDCs
    • DeFi
  • Markets Pro
    • Swap Crypto
    • DeFi Planet Pro
    • Coin Prices
    • Crypto Exchanges
    • Crypto Analyzer

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
  • bitcoinBitcoin(BTC)$28,112.004.92%
    BITCOIN
    24H : 4.92%
    Volume : $10,472,340,145.00
    Marketcap : $544,994,719,910.00
  • ethereumEthereum(ETH)$1,912.144.55%
    ETHEREUM
    24H : 4.55%
    Volume : $6,144,886,615.00
    Marketcap : $229,839,532,862.00
  • tetherTether(USDT)$1.000.0100%
    TETHER
    24H : 0.0100%
    Volume : $15,651,248,772.00
    Marketcap : $83,173,917,859.00
  • binancecoinBNB(BNB)$314.022.44%
    BNB
    24H : 2.44%
    Volume : $496,789,321.00
    Marketcap : $49,521,044,495.00
  • usd-coinUSD Coin(USDC)$1.0000.060%
    USD COIN
    24H : 0.060%
    Volume : $1,731,479,299.00
    Marketcap : $29,086,628,516.00
  • rippleXRP(XRP)$0.4873.17%
    XRP
    24H : 3.17%
    Volume : $676,192,492.00
    Marketcap : $25,291,715,482.00
  • cardanoCardano(ADA)$0.3834.49%
    CARDANO
    24H : 4.49%
    Volume : $229,845,625.00
    Marketcap : $13,401,310,404.00
  • staked-etherLido Staked Ether(STETH)$1,911.864.82%
    LIDO STAKED ETHER
    24H : 4.82%
    Volume : $15,214,192.00
    Marketcap : $12,997,632,774.00
  • dogecoinDogecoin(DOGE)$0.0742.46%
    DOGECOIN
    24H : 2.46%
    Volume : $248,202,420.00
    Marketcap : $10,309,245,554.00
  • matic-networkPolygon(MATIC)$0.9523.48%
    POLYGON
    24H : 3.48%
    Volume : $207,442,868.00
    Marketcap : $8,819,087,511.00

Add New Playlist

Are you sure want to unlock this post?
Unlock left : 0
Are you sure want to cancel subscription?
-
00:00
00:00

Queue

Update Required Flash plugin
-
00:00
00:00