NFT Automated Market Maker (AMM)
What it is, How to Use Liquidity Pools and Mitigating Impermanent Loss.
What is AMM?
Automated Market Maker (AMM) is a decentralized trading protocol that uses algorithms to set the price of assets. Instead of relying on a centralized order book, AMM uses liquidity pools to facilitate trades.
These pools are filled with crypto assets that the AMM uses to trade with people buying or selling one asset for another. An AMM NFT marketplace allows traders to buy or sell their NFTs through liquidity pools.
What is a Liquidity Pool?
A liquidity pool is a collection of assets locked into a smart contract on a blockchain network. The assets in the pool are used to facilitate trades, and the pool itself determines the price of the assets being traded.
How to Use a Liquidity Pool in AMM NFT?
To use a liquidity pool in AMM, users deposit an equal value of two assets into the pool. For example, if you want to trade an NFT for ETH, you’ll deposit an equivalent worth of NFTs and ETH/another token into the pool.
The pool then determines the price of the NFT based on the available supply and demand in the pool. You can buy or sell NFTs at the current market price, which is determined by the AMM algorithm.
What is Impermanent Loss?
Impermanent loss occurs when the price of tokens inside an AMM changes relative to their pair between when they are deposited in the liquidity pool and when they are withdrawn.
This means that holding tokens in an AMM can result in impermanent loss compared to holding them in your wallet. Impermanent loss is called “impermanent” because the losses only become realized once you withdraw your coins from the liquidity pool.
How to Mitigate Impermanent Loss in AMM?
One way to mitigate impermanent loss is using an “ IL protection strategy.” IL protection strategies involve depositing both tokens in a liquidity pool so that the value of the assets remains balanced. This approach can minimize the impact of price changes on individual assets in the pool.
Benefits of Liquidity
Liquidity’s benefits include instant trades, increased transparency, and higher earnings for sellers. In addition, liquidity enables traders to buy or sell their NFTs instantly without waiting for someone to agree to their price.
This means that NFT AMMs like Sweep n’ Flip can increase the liquidity of the NFT market, making it easier for more people to participate in trading.
How does NFT AMMs Increase Liquidity Compared to Traditional NFT Marketplaces?
NFT AMMs increase liquidity compared to traditional NFT marketplaces by automating the trading process. Traditional NFT marketplaces require a buyer and seller to agree on a specific price for an NFT, and the marketplace acts as a middleman to facilitate the transaction.
NFT AMMs, on the other hand, use an Automated Market Maker (AMM) model to enable assets to be traded using crypto liquidity pools as counterparties. This means that the AMM automatically sets asset prices based on supply and demand, allowing traders to instantly buy or sell their NFTs through liquidity pools without waiting for someone to agree to their price.
Examples of NFT AMMs
There are several examples of AMMs for NFTs, including SudoSwap, a decentralized, on-chain NFT exchange using an AMM model. Sudoswap allows LPs to deposit NFTs and/or ETH into liquidity pools and then buy or sell NFTs instantly.
Another example is the Liquidity Book, a new kind of AMM designed by the team behind Trader Joe, the largest DEX on Avalanche. The Liquidity Book protocol uses a form of AMM that allows for more efficient price discovery and lower slippage. Uniswap is a popular AMM that allows exchanging ERC-20 tokens, including NFTs.
Uniswap uses a constant product formula to determine the price of tokens in the liquidity pool, and it has become one of the most popular AMMs in the DeFi space.
NEWS NEWS
An NFT marketplace aggregator with automatic flipping and hassle-free UX is coming.
With an Automatic Market Maker (AMM) integrated into Sweep n’ Flip, the platform could provide base liquidity for NFT collections, making it easier for traders to buy and sell NFTs instantly. Using an AMM protocol, Sweep n’ Flip could leverage liquidity pools to enable frictionless and low-cost transactions. This would significantly improve the user experience by allowing traders to execute trades easily without worrying about the market's lack of liquidity.
BUT WHY DO U CARE ABOUT UX?
Furthermore, with an AMM, Sweep n’ Flip could offer a broader range of decentralized financial services to NFT traders. This would incentivize LPs to deposit NFTs and/or ETH into the liquidity pools, thereby providing more liquidity to the market and enabling traders to buy and sell NFTs more easily.
Overall, integrating an AMM into Sweep n’ Flip would be a game-changer for the platform, making it the go-to destination for hassle-free NFT trading with improved liquidity and additional decentralized financial services.
Make sure to stay tuned for our upcoming launch of the Automated Market Maker (AMM) integration to the Sweep n’ Flip platform.
Join our community and be the first to know when the AMM goes live!
🫂 Join our discord group to follow all the news.
