The role of AMM on Decentralized Exchange (DEX)
As you have at least understood in the discussion of the last post, the importance of liquidity pool is great. As important as smart contracts and liquidity pools are on decentralized exchange sites, another important tool is used to manage them, which is called an automatic market maker. Let's shed some light on what this automatic market maker (AMM) is and how it works.
Automated Market Makers (AMMs) play a pivotal role in the world of decentralized exchanges (DEXs). How much currency will be deposited in the liquidity pool will be controlled? But this may remain a question from the discussion of the last post. The answer to this question can be found today because this is exactly what an automatic market maker does. It is important to collect data on what currency is being traded with whom when and how much the price of any currency fluctuates and based on that database how much liquidity a currency needs to have and when what is being traded is a method to control the liquidity accordingly—market maker. Unlike traditional exchanges relying on order books, AMMs utilize smart contracts to facilitate peer-to-peer transactions. One of the key advantages of AMMs lies in their ability to provide liquidity without the need for centralized authority.
AMM is the concept of liquidity pools where users can contribute their assets to these pools, allowing the protocol to automatically determine asset prices based on a predefined algorithm. This eliminates the need for buyers and sellers to match orders. It is associated with the popular Ethereum-based protocol Uniswap, which has democratized access to liquidity. Users can easily swap tokens directly from their wallets without relying on intermediaries, making the trading process seamless and inclusive.
This is particularly significant for smaller projects seeking liquidity and exposure in the decentralized finance (DeFi) system. AMMs introduce the concept of impermanent loss, which occurs when the value of assets in a liquidity pool change compared to holding those assets individually. Traders and liquidity providers need to be aware of this dynamic, which adds an extra layer of risk and reward to participating in liquidity pools.
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VEIGO (Community Mod)
AMM aka Automated Market Makers is a very important component in decentralized crypto exchange. This is a topic that many people are not well aware of and this is why I believe reading such informative article is very helpful that can help people to enhance they are knowledge about the market makers and how the orders are filled in the market. Nice
Thank you so much for sharing this concept. It was new to me.
Indeed from your article it shows that AMM plays great role in decentralized exchange like utilization of smart contracts to facilitate peer-to-peer transaction which is a wonderful aspect amongst others. Enjoyed reading this educative post.
AMM plays a lot of vital roles apart from utilizing and facilitating peer to peer transactions, it also introduced the concept of impermanent loss, adding an extra layer of risk to reward when participating in liquidity pool. Thanks for sharing