Automated Market Makers (AMMs)

Automated market makers are the most widely used type of DEX as they enable instant liquidity, democratized access to liquidity provision, and—in many cases—permissionless market creation for any token. An AMM is essentially a money robot that is always willing to quote a price between two (or more) assets. Instead of an order book, an AMM utilizes a liquidity pool that users can swap their tokens against, with the price determined by an algorithm based on the proportion of tokens in the pool.

Since they’re always able to quote a price for a user, AMMs enable instant access to liquidity in markets that otherwise may have lower liquidity. In the case of an order book DEX, a willing buyer has to wait for their order to be matched with the order of a seller—even if the buyer posts their order to the “top” of the order book close to the current price, the order may never execute. 

In the case of an AMM, the exchange rate is determined by a smart contract. Users can get instant access to liquidity, while liquidity providers (depositors into the AMM’s liquidity pool) can earn passive income via trading fees. This combination of instant liquidity and democratized access to liquidity provision has enabled an explosion of new tokens being launched through AMMs and unlocked new designs that focus on distinct use cases, such as stablecoin swaps. If you’d like a more detailed exploration of AMMs, read this post covering how AMMs work.

While most current AMM designs deal with cryptocurrencies, AMMs could also be used to facilitate swaps of NFTs, tokenized real-world assets, carbon credits, and much more.

Some popular AMM DEXs include Bancor, Balancer, Curve, PancakeSwap, Sushiswap, Trader Joe, and Uniswap.

Powered by BetterDocs