Balancer Protocol
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Balancer Protocol

What Is an Automated Market Maker (AMM)?

Automated market makers are an exciting new development in the decentralized finance industry. Let’s look at how they work and their current course.

How AMMs Work

An AMM is a DeFi technology that provides users with an option for trading at any time. Its first feature is that it rejects the traditional system for buying and selling. There are no gatekeepers, and you normally don’t even need to create an account.

Liquidity Pools

AMMs provide traders with a new option by creating liquidity pools. They also incentivize liquidity providers to place more assets into the liquidity pool.

Who Can Contribute to the Liquidity Pool?

Accessibility is another major feature of AMMs. If someone has an internet connection and any kind of ERC-20 token, they can contribute to a liquidity pool.

Why Do People Contribute?

Liquidity providers earn fees when traders interact with a pool. While this is the most common and direct way contributors are incentivized, there is another way liquidity providers can earn.

Yield Farming

Some AMMs encourage liquidity provision by providing token rewards. With these AMMs, liquidity providers earn bonus yield through a practice called “yield farming”.

The Future of AMMs

AMMs, first developed in 2018, are now a well-ingrained part of the DeFi ecosystem. Later versions have also added to the structure of AMMs, including automation tools for liquidity providers.

Balancer Protocol

Balancer Protocol is one of the leading AMMs, offering a self-balancing AMM and price sensor. The idea is to create the opposite structure of a traditional investment fund. Instead of paying fund managers to balance your portfolio, you collect fees from traders who rebalance it for you.

The Bottom Line

Automated Market Makers follow up on the shortcomings of traditional market-making. The traditional process requires manual work which takes significantly longer for traders and market makers alike. The decentralized finance industry has been enabled to move much further ahead thanks to this new source of liquidity.

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