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Automated Market Maker (AMM) price, marketcap, chart, and fundamentals info
Automated Market Maker (AMM) are tools that provide automated liquidity for exchanges. This can be considered as a type of new generation decentralized exchange with outstanding advantages compared to the old decentralized exchange and the decentralized exchange.
In the cryptocurrency industry; Most transactions take place on centralized exchanges such as Binance, Coinbase, Kraken. They have met most of the needs of users but still have some shortcomings.
Blockchain technology is inherently geared towards security and anonymity; But exchanges are routinely hacked for millions of dollars and exposing users’ identities, making them go against their original commitments. That is not to mention the fact that there are too many exchanges causing the cryptocurrency to disperse; resulting in very low liquidity of less popular cryptocurrencies; Users often have trouble signing up from one exchange to another. Therefore, Automated Market Maker (AMM) was born to solve the above situation.
The birth scene of Automated Market Maker (AMM)
In recent years, the decentralized financial (DeFi) market has exploded with smart contract cryptocurrencies creating huge demand for the exchange of tokens. The aforementioned conditions have created favorable conditions for Automated Market Maker (AMM) such as Uniswap; Sushiswap was born and developed rapidly in transaction volume. They have many advantages that old exchanges do not have so they have a certain foothold.
How Automated Market Maker (AMM) works
Automated Market Maker (AMM) owns an exchange protocol that relies on mathematical formulas to value an asset, not an order book. For example on regular exchanges; the bid and ask prices are entirely set by the user and hung up; When anyone wants to buy or sell, the order will be executed and the transaction will be executed. But Automated Market Maker (AMM) is different; There are no pre-set orders. Buying and selling prices are completely equal. Those who wish to buy or sell when placing orders will be matched immediately; and the price of that currency will be algorithmically adjusted.
Uniswap uses the formula x * y = k, where x is the quantity of one token in the liquidity group and y is the quantity of the other. In this formula; k is a constant constant, meaning that the total liquidity of the group must always be the same.
It sounds so complicated, can you explain more simply?
In fact, in Automated Market Maker (AMM), there is no buy or sell order; it’s just depositing one currency into a pool containing two cryptocurrencies and withdrawing another. Withdrawing a cryptocurrency causes the ratio between them to change; the price between them also changes.
For example, in a Pool there are 1000 USDT and 1000 DAI. You deposit 100 DAI with the desire to get USDT, the rate between the two types of money in the pool now is close to 900 USDT and 1100 DAI => Next time you have to send 110 Dai to get 90 USDT. Obviously USDT has increased in price, now you understand? However, keep in mind that this adjustment will take place algorithmically, so the price will likely increase indefinitely if you purposely want to withdraw all of the money of one of the two cryptocurrencies in the pool.
What is a liquidity pool
As mentioned above. The way Automated Market Maker (AMM) works requires an inbuilt supply of liquidity. That means someone must provide both cryptocurrencies at the same time to the pool for users to exchange when there is a need. In return, they receive a certain fee when the transaction is incurred; usually 0.3%. This is a substantial annual fee. This causes the profitable monopolistic position of the exchanges to be broken as users can also enjoy transaction fees.
In addition, giving profits to liquidity providers solves the lack of liquidity for less popular cryptocurrencies when they have an incentive to bring money to Automated Market Maker (AMM) to make a profit. .
Automated Market Maker (AMM) limitations
Due to the unique way of operation of Automated Market Maker (AMM). They have limited the lack of liquidity but still have a slippage problem. The more one cryptocurrency you take, the higher the price increases. Take for example there are 100 doge in the liquidity pool. But if you want to buy 200 doge, the price will increase indefinitely so your money won’t be enough to buy 200 doge anymore (remember the formula x * y = k?). X or y never decreases to zero due to the nature of multiplication. That has prompted Automated Market Maker (AMM) to create token farm mechanisms to motivate users to add their money to the liquidity pool. However, this is not a big deal.
Irregular losses occur with depositors to the liquidity pool. The price of the cryptocurrency market is always volatile and that’s a big deal. Because the prices between trading pairs are always changing according to the market trends. The user will always take away your bullish currency and return you the bearish cryptocurrency. That will most likely cause the depositors in the liquidity pool to lose money. Depositing money in a few liquidity pools has the smallest abnormal loss in cryptocurrency pairs with less volatility such as stablecoins USDT, USDC, DAI STABLE …
Expensive transaction fees
Exchanges under the current AMM format are largely built on the Ethereum Blockchain. Capital is known for its expensive transaction fees and is often congested. It makes no sense to spend tens of dollars to place a trade.
Automated Market Maker (AMM) advantages over traditional exchanges
You don’t have to go through complicated identity verification process but can use any Automated Market Maker right away. As long as you have a digital wallet you can connect to it.
Because the price is determined by the algorithm and done automatically by the smart contract; You do not have to worry about placing orders falling behind or waiting forever without matching orders. Just confirm the amount of coin you want to buy and it will be returned to your account without having to worry.
Hard to be attacked
Due to the direct exchange of coins; The amount of coin transferred will be transferred directly to your wallet without being kept in any exchanges, so the possibility that hackers will get your coins is extremely small.
All transactions will be recorded to Blockchain; You can permanently retrieve trading information without worrying about losing your account or falsifying information on an exchange. It may sound odd, but it is common for exchanges to override the volume.
The Automated Market Maker (AMM) at present, although there are still many limitations and not many functions; But that does not mean that their futures are either. The birth of AMMs is a Blockchain revolution that helps the economy run better; Allowing idle funds to be profitable and eliminating intermediaries acting as bridges between users. The more and more progressive and progressive AMM variations than the old AMMs have shown that the industry is maturing; It is completely possible to replace centralized exchanges in the future.
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