AMM

Automated Market Maker

A type of decentralized trading protocol that relies on a mathematical formula to price assets. AMMs are commonly used in decentralized exchanges (DEXs) to facilitate the permissionless and automatic trading of cryptocurrency tokens. Key features of AMMs include:

1. Liquidity pools: AMMs use liquidity pools, reserves of cryptocurrency tokens locked in smart contracts. Each liquidity pool typically consists of a pair of tokens, such as ETH/USDC or WBTC/USDT.
2. Pricing algorithm: AMMs use a constant product formula (Loading formula...$x \times y = k&s=2$) to determine the price of assets in the liquidity pool. The formula ensures that the product of the quantities of the two tokens in the pool remains constant after each trade.
3. Liquidity providers: Users can become liquidity providers (LPs) by depositing an equal value of both tokens in the liquidity pool. In return, LPs receive a share of the trading fees generated by the pool proportional to their share of the pool’s total liquidity.
4. Arbitrage opportunities: When the price of an asset in an AMM deviates from its market price on other exchanges, arbitrageurs can profit by buying the asset on one platform and selling it on the other, helping to keep prices in line across markets.

AMMs have revolutionized decentralized trading by providing a simple, automated way to trade tokens without needing order books or centralized market makers. However, AMMs can be vulnerable to impermanent loss, slippage, and front-running attacks.

• Abbreviation: AMM