Automated Market Maker (AMM)

September 7, 2021

Automated Market Makers for Cryptocurrency

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What is an Automated Market Maker?

Automated Market Markers or AMMs are protocols used in decentralized finance. AMMs use pricing algorithms to determine the price of digital assets that are traded on an exchange. Instead of using an order book, which lists all open buy and sell orders, AMMs use a mathematical formula to price assets. Users don’t require permission to trade and instead can initiate trades when they find a price that they deem acceptable. AMMs help to reduce human error and market manipulation. The pre-funded liquidity pools also allow users to earn additional passive income for providing liquidity.

How do Automated Market Makers work?

There are four main AMMs (Uniswap, Kyber Network, Balancer, Curve Finance) that create a liquidity pool of tokens that are governed by a smart contract. Any member of the market can participate in algorithmic AMMs by adding liquidity. Automated liquidity pools are either created and governed by professional market players, or they’re automated by a set algorithm. AMMs are present on the Ethereum network and trades and fees are conducted with ERC-20 tokens. Most Automated Market Markers are set up to work with the Etherum network because Ethereum is able to also host smart contracts directly on its network.

How do you trade with Automated Market Makers?

Trades made with AMMs take place directly between users and smart contracts, instead of buyers and sellers. To help to create the market users provide liquidity to a pool that can be traded against. To trade with Automated Market Makers you’ll need a digital wallet that includes at the very list Ethereum. However, to put funds into a liquidity pool you’ll also need the ERC20 token that’s included in the initial smart contract.

What is the best Automated Market Maker for Crypto?

There are four main Automated Market Makers in crypto (Uniswap, Kyber Network, Balancer, Curve Finance). The Kyber Network, which was also the first to introduce automated liquidity, and its liquidity pools are set by professional market makers. On the Kyber Network, the price of assets listed in the smart contract can be regulated and controlled. If you’re interested in having your own liquidity pools, then you may want to consider Uniswap. The token price on Uniswap is determined by the ratio between tokens in the liquidity pool.

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Automated Market Maker FAQ’s

1. What is the best automated market maker software?

Automated Market Makers are relatively new, which means there will be new software and systems that are developed which lower fees and increase liquidity. Some platforms allow you to build customizable trading strategies, such as Hummingbot and Executium. The best AMM solutions use mathematical formulas that help prevent slippage.

2. How do people make money using automated market makers?

Users can make money by adding liquidity to the AMM liquidity pool. Often the amount of money made is based on the percentage of liquidity a user has in the total pool. When trades are made, users then can receive passive income based on the fee amounts. Profit is maximized in high-volume trading situations.

3. What is automated market maker Defi?

Decentralized finance (Defi) continues to explode, and although AMMs are relatively new, they are very valuable to the crypto space. Automated market markers support the decentralized mission of crypto, putting power in the hands of users and using mathematical formulas to prevent market manipulation.

4. What does it mean to be a market maker?

Market makers help to create the buy and sell price of digital assets by providing liquidity. By ensuring there is enough liquidity, trades can occur smoothly, without creating an impermanent loss.

5. What is automated market maker arbitrage?

Arbitrage refers to adjusting the real value and cost of a token, which is usually down when there is a large fluctuation in token price. The decentralized protocol Uniswap uses the CPMM model to make adjustments to the token pool price.