Written by artist on March 10, 2021

What are Automated Market Makers

Decentralized Finance and AMM

Automated market makers or AMM is a protocol that allows traders to convert their tokens without interacting or relying on another trader. This is possible due to large liquidity pools of different assets by different providers available to oblige traders.

Automated Market makers allow chain to chain interaction and exchange. They are the most inrigual part of a liquidity pool. AMM allows trade execution from different pools, multiple pair search, best prices for both traders and liquidity providers.

AMM beats typical DEX order books by setting prices mathematically according to the liquidy available. This is called a deterministic algorithm. The makers are the liquidity providers which are incentivized by the fee received on the trade. The formulae of organizing prices are mathematical and vary according to the platform.

How is AMM different from a DEX protocol?

The only difference is the orderbook. A DEX orderbook consists of different users posting trades. A make creates an order to add liquidity to the orderbook. A taker on the other hand fills that order and the trade gets succesful.

This means either a taker or the maker is agreeing to a price set by the maker or trader. A maker can set 102 USDC for 98 DAI and the taker has to accept the order in order to swap his assets.

Automated market maker completely addressed this problem and has eliminated makers role. The market makers are liquidity providers that reserve their assets to form a pool of assets. Everyone who wants to exchange their tokens is a taker. This pool of assets acts as a market maker.

Two of the most famous platforms using AMM protocol are uniswap and binance smart chain. Ethereum and Ethereum centric assets currently dominate the market due to higher liquidity pools.

This is mainly due to the number of stable coins developed on the Ethereum blockchain. More liquidity providers are interested in these assets to avoid short-term losses. Stable coins are low volatile and considered a safe asset.

Verus is also working on reserve pools to connect Ethereum with the verus blockchain. This will be possible through decentralized bridges and fractional currencies.

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