"Automated Market Makers And Their Role In DeFi"

Assalam O Alaikum

Hello, dear friends! Well, come to my post. How are you all? I hope you will be doing well, by the grace of Almighty Allah. I'm also fine and enjoying my day. Today I'm here to share my knowledge about the topic "Automated Market Makers and Their Role in DeFi" in this Steem Alliance community. So let's start without any further delay.

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What are automated Market Makers AMMs?

Friends, the automated market makers AMMs are the protocols that allow us to exchange digital assets without the need for an order book. They also act as a decentralized exchange through which we can sell, buy, and trade our crypto currencies directly with other people. The AMMs use smart contracts and algorithmic mechanisms to validate transactions between the traders. In this regard, we can say that they don't depend on any traditional order books because the buyers and sellers are directly involved in the exchange of digital assets using the AMM protocols.

Also, the other traditional order books or exchanges collect the orders from buyers and then match them with the sellers to validate the transactions, but the AMMs use liquidity pools and mathematical algorithms to validate the transactions between both individuals. In this way, the AMMs increase the liquidity of crypto currencies, which allows us to do quicker transactions than traditional exchanges. The uniswap and pancakeswap are the most common examples of AMMs that can be found in the digital world.

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If we talk about the workings of AMMs, then we can say that their working revolves around the liquidity pools, which are also known as the backbone of AMMs. This is because all the transactions within the AMMs are done through these liquidity pools. Each pool consists of a pair of specific crypto currencies, and when we want to trade, i.e., buy or sell any crypto currency, we need to be involved in these liquidity pools.

So when a user wants to trade digital assets, he needs to interact with these liquidity pools instead of matching orders traditionally. After getting into liquidity pools, the orders of buyers and sellers are automatically matched with each other on the basis of a specific ratio that is set by both of them. After that, the process is done through mathematical algorithms and smart contracts.

The role of automated market makers in DeFi

Automated market makers play a crucial role in decentralized finance (DeFi). This is because they act like a decentralized exchange through which people can trade their assets quickly because they increase the liquidity of crypto currencies. In addition, AMMs improve the overall working, security, efficiency, and transparency of financial services because they reduce the need for centralized exchanges for trading.

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In DeFi, the AMMs allow people to swap their digital tokens with another crypto token and then provide them with an opportunity to earn more yield. Also, they provide liquidity to digital assets because they can be traded quickly. In this way, we can say that the AMMs have been proven to be a transformative force in financial services because they have revolutionized them totally.

• The AMMs provide the people with full control over their assets, and in this way, they provide them with an opportunity for decentralized trading because no other authority is involved in that.

• The AMMs enhance the liquidity of digital tokens and also provide great liquidity to these tokens, whose trading volume is very low. This is because in AMMs, all the trading is done through liquidity pools. In this way, it makes the market more efficient.

• The AMMs provide people with access to several financial services at the same time. So by participating in various financial activities, they can earn more yield.

• The AMMs have also innovated the whole decentralized finance platform because they have brought several updates to them. It includes the arrival of new features, strategies for trading and investing, and the improvement of new protocols.

Conclusion

In conclusion, we can say that the AMMs have a great role in the trading of crypto currencies and are also revolutionizing the whole DeFi space. But it contains some drawbacks as well. These can be in the form of high gas fees, security issues, and scalability issues as well. Besides all of them, AMMs have a crucial role in the decentralized finance ecosystem because they provide liquidity and reduce the need for centralized exchanges and traditional order books for trading. Anyway, it was all about that topic, and I hope you will like it.

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Written by @abdullahw2

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Thanks All 💗

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