What’s AMM?
You have probably heard of Automated market makers over the last few months. But what exactly are those? AMM is a decentralized exchange (DEX) protocol that relies on a mathematical formula to price assets. This formula can vary. For instance, WhiteSwap has x * y = k, where x is the amount of one token, y is the other, while k is a fixed constant (the pool’s total liquidity).
There are two major types of automated market makers. One is governed and set up by professional market makers. The other is automated by an algorithm, which allows users to take part by providing liquidity into a smart contract.
How do they work?
With Automated market makers you don’t have another trader on the other side to make a trade. You simply interact with a smart contract that “makes” the market for you. In other words, AMMs are smart contracts that form a liquidity pool of ERC-20 tokens. They replace the standard exchange-listing process as well as limit-order books.
So who creates the market? The liquidity is provided by users that are called liquidity providers (LPs). They add funds to liquidity pools. In return for this, LPs earn fees from the trades that take place in their pool.
It’s important to keep an eye on the pool and make sure that market conditions are in your favor. Some users face the situation called “impermanent loss”. What is that?
Impermanent loss is when the price ratio of tokens changes when you deposit them in the pool. If the change is significant, the impermanent loss is bigger. So AMMs perform better when pairs have a similar value.
So what are the pros of AMMs?
- The technology became the basis for new trading models.
- Price slippage between the execution of trades is smaller.
- Latency on trade calls takes milliseconds.
- High liquidity has been developed on the markets.
- It helps to reduce front-running, price manipulation, and wash trading.
- Price fluctuation was reduced to acceptable levels, which means less slippage.
What are the examples of AMMs?
The number of Automated market makers has grown over the past few months. The most well-known must be Uniswap, but there are certainly some worthy newcomers. For example, WhiteSwap.
WhiteSwap is an automated market-making (AMM) decentralized exchange (DEX) that currently works on the Ethereum blockchain. Its initial governance token (WSE or WhiteSwapExchange) liquidity mining phase has already went live, allocating 45,000,000.00 WSE. Within two months, the community will receive 87% of tokens.
To sum up…
Automated market makers have some limitations. However, they bring a immeasurable innovation into the world of crypto.
AMMs are still at the start of their way. They may already have some strong points, but remain quite limited in features. So everyone expects more improvements, such as lower fees, less friction, and better liquidity.
