AMM
Automated Market Makers (AMM) are smart-contract-based protocols that allow crypto-assets to be exchanged on decentralised exchanges (DEXs), without relying on an intermediary or a traditional order book.
Unlike markets that match buy and sell orders, AMMs determine asset prices through a mathematical formula based on the ratio between the crypto-assets held in a liquidity pool.
Liquidity pools are repositories of tokens deposited by users. They provide the liquidity needed to execute orders, and those who deposit their assets may receive a share of the transaction fees. The size of these rewards varies and depends on the protocol and market conditions.
Because liquidity is supplied by pools rather than by the presence of buyers and sellers, AMMs allow trades to be executed continuously, including in markets that operate 24/7.
AMMs also reduce some of the barriers to accessing crypto-asset exchanges, as they do not require a third-party-managed order book. Operating through smart contracts, however, entails specific risks, including impermanent loss for liquidity providers and technical risks associated with the contract code.
In summary, Automated Market Makers are a core component of the decentralised finance (DeFi) ecosystem: through algorithms and liquidity pools, they define how crypto-asset exchanges are executed on decentralised exchanges.
Disclaimer: This entry is for information purposes only and does not constitute investment advice, a recommendation or a solicitation to invest.
