What is AMM in crypto?

An Automated Market Maker (AMM) in cryptocurrency is a type of decentralized exchange (DEX) mechanism that enables the trading of digital assets without needing a traditional order book. Instead of matching buyers and sellers, AMMs use a formula to price assets and provide liquidity directly through smart contracts.

Key Points about AMMs:

1. Formula-Based Pricing: AMMs like Uniswap use a constant product formula (x * y = k) to determine prices. This means the product of the quantities of two assets in a liquidity pool remains constant 1.

2. Liquidity Pools: Users can provide liquidity by depositing pairs of assets (e.g., ETH and USDC) into these pools. The pooled assets then enable the AMM to provide quotes for trades 1 2.

3. Incentives for Liquidity Providers: Liquidity providers earn fees from transactions that occur within the pool, which compensates them for the price volatility risk they take on 3.

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     1

     Impermanent Loss Explained

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     2

     Understanding Automated Market Makers

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     3

     Automated Market Makers

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     4

     Exploring AMMs

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     5

     The Future of Order Books

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     6

     Dominance of Automated Market Makers

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4. Efficiency and Innovation: AMMs have gained traction due to their simplicity and the reduced need for continuous order adjustment, which can be computationally expensive on blockchains like Ethereum 4 5.

5. Dominance in DeFi: AMMs such as Uniswap and Curve dominate the decentralized trading space, reflecting high utility and demand 6.

In summary, AMMs represent a significant innovation in decentralized finance (DeFi), enabling efficient and seamless trading by substituting traditional market makers with algorithm-driven mechanisms that manage liquidity and pricing dynamically.