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What is an automated market maker?

by Kevin Bellah

Users who are interested in decentralized finance are familiar with the term Automated Market Maker (AMM). It is a very promising concept that simplifies trading without the intervention of outsiders. Traders always receive a price at which they can buy or sell certain assets. Depending on the volume of the order, it may affect the average price in one direction or the other. Many people work on searching for AMM, and find the right and proven algorithms, such as odos.xyz.

Automated Market Maker is the most popular DeFi principle. Trades include billions of trades in terms of volume and liquidity. However, a decentralized way of trading digital currency that can increase opportunities for people is where the sphere can add and improve relationships between people. Empowering all users is what the industry needs more.

Decentralized finance. How did they appear?

Thanks to the blockchain, specialists can decentralize a financial asset. Moreover, smart contracts can bring many of these processes to automation. Decentralized financing offers a myriad of options related to lending or liquidity. All these products involve only the parties to the relationship. However, there are no public authorities or private banks in the chain. 

Already today, many platforms: 

  • show a large volume of financial transactions; 
  • have good liquidity; 
  • attract more and more users. 

And here the question arises: are such exchanges capable of overtaking centralized ones? Today it seems unrealistic, but in a few years the answer may not be so clear.

AMM – a new direction of the exchange

Beginners or inexperienced users will immediately say that Automated Market Maker and classic exchanges are no different. Both the first and the second are platforms that charge a commission for the convenience of trading. But here it is worth highlighting a significant difference.

AMM does not work with the list of orders. Instead, the liquidity pool is used to buy and sell in real time at the best possible price. The price of an asset is calculated using formulas that come from decentralized platforms. Due to modern technologies and fast algorithms, the operation takes place within a few seconds and at an actual cost.

A variety of AMM protocols differ from each other and therefore use independent pricing systems and options to form the final asset value.

It is also worth understanding that traditional exchanges rely on market makers and market takers to ensure that there is not much price divergence. A large spread of prices in the order book can create strong price fluctuations. This, in turn, can lead to market panic and inevitable consequences. Decentralization of the trading and matching process empowers users. Hence, it is an opportunity to create new markets.

As you can see, there are a huge number of ways to save and replenish your wallet. The main thing is to choose the right direction and  high-quality platform, which will help you complete operations on time and without unnecessary risks

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