AMM (Automated Market Maker)

An Automated Market maker (AMM) is a protocol that runs on decentralized exchanges (DEX), that takes away the order book that exists on traditional exchanges, where liquidity is provided by buyer and seller orders, and replaces it with liquidity pools, a shared pot of tokens.

Users of the AMM supply the pool with tokens after which price of an asset is calculated by a mathematical formula.

AMMs help new DEXs who would be faced with a small number of buyers and sellers trading on a regular basis – or low liquidity – early on in their existence.

As assets provided by liquidity providers (buyers and sellers) grow in the pool, so does DEX’s liquidity.

Liquidity providers are incentivized by earning a fee for their share of the pool tokens provided, and the DEX is rewarded with increased liquidity, making trading on the DEX far easier.

There are different approaches to how AMMs configure their mathematical formula for pricing and liquidity, and it’s that distinction that makes one AMM model different than the next.

Four popular AMMs in DeFi that have grown immensely in popularity are Uniswap, Pancakeswap, Curve, and Balancer.

Related Terms

PancakeSwap

A Decentralized Exchange (DEX), utilizing the automated market maker (AMM) protocol for defining digital asset prices and providing liquidity, built on Binance Smart Chain (BSC). Pancakeswap is a fork of Sushiswap, a DEX built on Ethereum that also utilizes the AMM system.

Token

A Token is a digital asset that operates on a parent blockchain or on another digital asset’s blockchain because it doesn’t have a blockchain of its own. The term “token” also tends to describe almost all other cryptocurrencies other than Bitcoin and Ethereum, the two largest cryptocurrencies in existence today. Tokens have multiple purposes and use cases.

XRP

XRP, launched in 2012, is the native currency that runs on the XRP Ledger (XRPL), a public, open-sourced, permissionless, and decentralized blockchain that anybody can contribute to or transact on. XRP is used on the XRPL, which is a payment settlement, asset exchange, and remittance network for global payments used by private financial businesses and […]

Money Legos

Also called Money Legos, refers to the idea of composability, the combining of simple protocols that are already doing something very well on their own, into a brand new protocol or service. Lego blocks, or individual protocols operating on the same blockchain network, can “snap” onto another Lego block, or protocol, creating new and incredible DeFi projects. The protocols can interoperate, or work together using middleware, that binds the various protocols together.

Uniswap

Uniswap is currently the largest decentralized exchange (DEX) by trading volume operating on the Ethereum blockchain, which allows anyone to swap ERC20 tokens. Uniswap was the pioneer in using the automated market maker model, where users supply Ethereum tokens to liquidity pools, and algorithms determine how to price assets.