How Do Automated Market Makers (AMMs) Differ from Traditional Order Book Exchanges in a Smart Contract Context?
Traditional exchanges use a central order book to match buyers and sellers based on their specified prices. AMMs, however, use a smart contract to pool assets (liquidity) and an algorithm to determine the asset price based on the ratio of assets in the pool.
Trades are executed directly against this pool, not against a specific counterparty's order. This allows for continuous, non-custodial trading without relying on a central entity.
Glossar
Fee Distribution
Allocation ⎊ Fee distribution within cryptocurrency derivatives represents the partitioning of revenue generated from trading activity, typically between exchanges, liquidity providers, and stakers of collateral.
Liquidity Provision
Capital ⎊ Supplying assets to decentralized pools forms the essential base layer for automated trading and derivatives pricing across the digital asset landscape.
Traditional Order Book Exchanges
Exchange ⎊ Traditional Order Book Exchanges represent a foundational market structure, primarily utilized in conventional financial markets and increasingly adapted for cryptocurrency derivatives trading.
Automated Market Makers (AMMs)
Architecture ⎊ Automated Market Makers (AMMs) represent a fundamental shift in exchange design, utilizing algorithmic liquidity provision rather than traditional order books.
Central Order Book
Architecture ⎊ The Central Order Book represents the core market microstructure architecture of most centralized exchanges for cryptocurrency, options, and derivatives trading.
Smart Contract
Code ⎊ The contract is fundamentally self-executing code deployed on a distributed ledger, embodying the terms of the agreement in an immutable format.