![]() How exactly can they do that? Let’s read on. Automated market makers decentralize this process and let essentially anyone create a market on a blockchain. Market makers help you get a good price and tight bid-ask spread on an order book exchange like Binance. Traditional market making usually works with firms with vast resources and complex strategies. If this is a bit confusing right now, don’t worry hopefully, it’ll all come together in the end. The similarity between all of them, however, is that they determine the prices algorithmically. Other AMMs will use other formulas for the specific use cases they target. In this formula, k is a fixed constant, meaning the pool’s total liquidity always has to remain the same. For example, Uniswap uses x * y = k, where x is the amount of one token in the liquidity pool, and y is the amount of the other. This formula can vary with each protocol. Instead of using an order book like a traditional exchange, assets are priced according to a pricing algorithm. Meanwhile, automated market maker protocols like Uniswap regularly see competitive volumes, high liquidity, and an increasing number of users.īut how do these exchanges work? Why is it so fast and easy to set up a market for the latest food coin? Can AMMs really compete with traditional order book exchanges? Let’s find out.Īn automated market maker (AMM) is a type of decentralized exchange (DEX) protocol that relies on a mathematical formula to price assets. Yield farming has become a popular way of token distribution, tokenized BTC is growing on Ethereum, and flash loan volumes are booming. Decentralizing market making this way is intrinsic to the vision of crypto.ĭecentralized Finance (DeFi) has seen an explosion of interest on Ethereum and other smart contract platforms like BNB Smart Chain. This allows essentially anyone to become a market maker on an exchange and earn fees for providing liquidity.ĪMMs have really carved out their niche in the DeFi space due to how simple and easy they are to use. Not only can you trade trustlessly using an AMM, but you can also become the house by providing liquidity to a liquidity pool. ![]() Some use a simple formula like Uniswap, while Curve, Balancer and others use more complicated ones. You could think of an automated market maker as a robot that’s always willing to quote you a price between two assets. ![]()
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