However, one of the useful tools that could help traders is the Automated Market Maker (AMM). An AMM determines the market price and analyses it, providing the best good assets.
Although Automated Market Makers are still in the growth phase, it holds a promising future in their involvement with the market. It can be seen in its regular increase in volume, liquidity supply rate, and several users. It comes with a more straightforward formula for easy understanding for crypto users.
What Are Automated Market Makers (AMM)
AMMs are built on the Ethereum ERC-20 blockchain. They embrace the real purpose of a DeFi, intending to make crypto transactions better. It operates on a liquidity pool. Unlike the traditional approach, it allows a permissionless, automatic trade by relying on liquidity pools.
It adopts the use of formulas instead of order books than conventional exchange uses. The mathematical formulas function as algorithms, and they differ from one transaction to the other. AMMs are known for their liquidity and liquidity providers, low transaction fees, and high transaction capacity.
Role of Liquidity Providers to AMMs
One of the critical features of AMMs is liquidity. It plays a vital role which is why its liquidity providers are highly compensated with incentives such as transaction fees and free tokens.
Liquidity is digital assets deposited by users to enable other users to trade against it. Investments are also susceptible to change from one cryptocurrency to another, and even sometimes, fiat currencies such as dollars, Yen, etc.
The more assets are available in a pool, the more liquidity the collection, which will result in easier trading on decentralized exchanges. When a liquidity provider is no longer interested in a pool for some reason, they can redeem their LP tokens and still receive their share of transaction fees.
How Do Automated Liquidity Makers Work?
The algorithm is also referred to as a constant formula that varies from one protocol to another.
The most popular AMM is Uniswap looks like, x*y = K, while another is from Vitalik, which looks like tokenA_balance(p) * tokenB_balance(p) = k.
The DeFi Protocol proudly supports this algorithm. Here,” x” represents the quantity of one token, and “y” represents the number of other tokens in the liquidity pool. “k” means there is a constant balance of assets that determines the price of tokens in a liquidity pool.
Top 10 Automated Market Makers
AMM exchanges are in their toddler stage; still, in 2021, the protocol is processing billions of dollars equivalent to on-chain daily transactions. Some of the top crypto DeFi exchanges that depend on AMMs include Uniswap, Sushi, Balancer, Curve Finance, etc.
The full description of each of these DeFi exchanges are listed below:
Uniswap is currently one of the largest decentralized exchanges built on the Ethereum blockchain. It was launched in November 2018. This AMM can be used anywhere in the world without worrying about intermediaries.
Uniswap aims at creating a more efficient and effective way of solving low liquidity, one of the problems of decentralized finance. It went further in September 2020 to introduce its own token UNI. This token made a difference in the market.
PancakeSwap functions like every AMM; it allows users to get deposit assets, e.g., tokens, to provide liquidity through farming and incentives.
PancakeSwap became popular after its launch in September 2020. It was built on BEP20 tokens on the Binance Smart Chain network. PancakeSwap’s token, CAKE, originally was launched as a BEP20 token that initially launched on Binance Smart Chain
SushiSwap is also a contributor to the AMM market. It was launched in September 2020, as an upgrade to Uniswap. Thus, the resemblance. As the upgrade implies, it is better equipped and has additional features it was lacking. Examples of such features include increasing rewards for network participants through its in-house token known as SUSHI.
It also increases its users’ effect on its operations and the state of its future by issuing its users with governance rights. Its primary market target is users who will be contributors to its liquidity.
CURVE DAO TOKEN (CRV)
Curve was launched in January 2020, and in the second quarter of 2020, it experienced visible growth. In August 2020, a decentralized autonomous organization (DAO) was launched alongside its in-house token, CRV. Since it was launched with DAO, it became an Ethereum-based AMM.
Curve manages risks associated with AMM, one of which is impermanent loss. It is accomplished through its restrictions and support of stablecoins. However, users can still incur losses once the market rebalances and reflects the cross-market prices.
BANCOR NETWORK TOKEN (BNT)
Bancor was created in 2017. It was designed to target the issue of conversions in which altcoins are the primary beneficiaries of this unique quality and its liquidity providers. This AMM protocol has a feature that allows a monotonous conversion of various crypto tokens into other tokens without third-party involvement.
Bancor is made up of several smart contracts which are in charge of the on-chain conversion of tokens. Like every AMM, it makes the transaction of tokens effortless and swift.
The 1-inch Network’s first protocol creates multiple liquidity sources for the AMMM protocol while offering its users better rates than any individual exchange.
The 1inch Network was created in May 2019. It has unique features, some of which are dynamic pricing, conditional orders, and extra RFQ support, etc.
PERPETUAL PROTOCOL (PERP)
Initially, Perpetual Protocol was created in late 2019, with Strike Protocol as its name. The team is aiming at creating a market without any maker.
Instead of depending on liquidity providers, Perpetual Protocol can automatically set and update the parameters of the virtual AMM (x*y=k) programming to alter the market structure. It has an insurance scheme known as Perpetual Protocol’s Insurance Fund, solely for its native token, $PERP, holders.
Raydium was launched on February 21st, 2021. Raydium is overseen by AlphaRay, which manages its overall strategy, operations, product direction, and business development.
Raydium differs from any other AMMs because its on-chain liquidity is converted to a central limit order book.
In summary, it means that all deposits made to Raydium get converted into limit orders made available in Serum’s order books.
Balancer was launched on the Ethereum blockchain in March 2020. Its users earn incentives in its launched token ($BAL) when they contribute actively to the liquidity pools.
Balancer shares similarities with Uniswap and Curve, where anyone is a creator; that is, anyone can create pools of tokens.
Anyswap was launched in July 2020 to create a network that supports cross-token swaps and trading.
Anyswap has high security. It uses Fusion Network, a very reliable network that guarantees the safety of assets via a process known as private key sharding.
Written by: Narender Charan