AMM Automated Market Maker
An automated market maker, or shortly AMM is a type of algorithm that operates on a decentralized exchange and facilitates the buying and selling of cryptocurrencies.
An automated market maker (AMM) is an algorithm that operates on a DEX and facilitates the buying and selling of cryptocurrencies. AMMs use mathematical formulas to automatically set the prices of assets based on the supply and demand of those assets on the DEX.
This allows users to easily buy and sell cryptocurrencies without needing a traditional order book or market maker.
AMMs were first introduced in the crypto industry by the popular DEX Uniswap, which uses an AMM called the constant product formula. This formula (x * y = k) calculates the price of an asset based on its supply and demand, ensuring that the value of the assets being traded remains constant.
One of the key advantages of AMMs is that they allow for efficient and liquid markets, even for relatively illiquid assets. This is because AMMs provide users with a mechanism for buying and selling assets without needing a matching buyer or seller. This allows for creating a market for an asset, even if there is not a lot of demand for it.
In addition to facilitating the buying and selling of assets, AMMs also often provide users with the ability to earn rewards by providing liquidity to the market. This can be a lucrative way for users to generate passive income by supplying assets to the AMM and collecting a share of the trading fees generated by the DEX.