How Do Automated Market Makers (AMMs) Work?
AMMs are smart contract systems used by decentralized exchanges (DEXs) to create liquidity pools and determine asset prices algorithmically, rather than using a traditional order book. They rely on a constant product formula (e.g. x y = k) to maintain the relationship between the quantities of two tokens in a pool.
Liquidity providers deposit assets and earn fees from trades.
Glossar
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.
Liquidity Providers
Capital ⎊ These entities supply the necessary assets to decentralized exchanges or automated market makers to facilitate continuous trading in crypto derivatives and options.
Constant Product Formula
Formula ⎊ The Constant Product Formula, a cornerstone of Automated Market Makers (AMMs) prevalent in decentralized finance (DeFi), establishes a mathematical relationship ensuring liquidity pool balance.
Smart Contract Systems
System ⎊ Smart Contract Systems represent the comprehensive, self-executing digital agreements deployed on a blockchain that automate the terms and conditions of financial derivatives and options trading.
Decentralized Exchanges
Access ⎊ These platforms offer permissionless entry to cryptocurrency and tokenized asset markets, democratizing capital deployment into novel financial structures.
Liquidity Pools
Mechanism ⎊ Liquidity pools represent a fundamental shift in market microstructure, functioning as decentralized exchange (DEX) components that facilitate trading via automated market makers (AMMs).