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AnAMM can be thought of as an algorithm that instantly finds liquidity for thosewishing to buy or sell a digital asset.
To complete trades, the algorithm utilises liquidity pools, which are composed of cryptocurrencies lent to the protocol by liquidity providers. This removes the need for a'middleman' type of exchange like traditional market-making methods.
To understand automated market makers, it can be useful to look at traditional market makers first.
Traditional market makers -
For traditional markets, such as gold, stocks or oil, market makers provideliquidity so that investors can buy or sell an asset close to the publicly quoted price.
This basically means that they will match a buyer to a seller. A buy order and asell order need to match for a trade to occur. These orders sit within an orderbook. In global finance, with multiple market makers and millions of investors,the order book exchange is a very elegant system.
Applying the scenario to cryptocurrencies, if an investor wants to sell a token, the traditional market maker finds a buyer so that the token can be sold. If an investor wants to buy a token, the market maker finds a seller so that the token can be purchased.
Market makers in the financial industry have always been large financial organisations or institutions that quote the buy and sell prices for each asset. These organisations take on the risks associated with buying and selling assets frominvestors. To cover these risks, traditional market makers charge a 'spread' on each asset covered.
A seller is quoted a 'bid' price that is slightly lower than the market price. In comparison, a buyer is quoted an 'ask' price that is slightly higher than the market price.
Going back to cryptocurrencies, if the market maker buys a token from a seller for $50 and sells it to a buyer for $55, they will have made a $5 profit. Powerful computing allows millions of transactions like this to be performed daily. This provides the liquidity to keep the financial markets moving.
When applying smart contracts to the traditional market maker process, the execution time is extremely long. It can also be very expensive. This is where automatedmarket makers come in.
Automated market makers -
Automated market makers are smart contracts that provide liquidity in the DeFi ecosystem via liquidity pools, rather than the traditional order book system.
On an AMM protocol, such as Uniswap or Curve Finance, digital assets are traded byan automated algorithm against the liquidity held in the liquidity pools. This means digital assets can be swapped at any time. The exchange price of a tokenis determined by the AMM.
AMM protocols hold no capital, are open 24/7 and most offer investors a level of trustlessness and decentralisation, unlike traditional financial services.
Howdoes an automated market maker work?
In a traditional order book, liquidity is provided from buy and sell orders. Those providing liquidity through orders are often referred to as 'makers'. Makers wait for a market 'taker' to agree to the order. Once that occurs, the exchangecan complete.
With AMM protocols, there are no makers. There are no prior orders in the system.There are only takers looking to exchange a specific cryptocurrency pair.
Forexample:
The AMM uses the liquidity pools to automatically complete the cryptocurrencyexchange, without the need for another trader.
When enough token pairs are available on an exchange, the AMM can trade between anytwo of the tokens listed, even if the two tokens do not exist in the same liquidity pool.
If a trader wanted to exchange AAVE for DAI, the AMM could trade DAI for ETH andthen ETH for AAVE in a single transaction.
Automated MarketMakers (AMM Coins)
1. Uniswap(UNI):
Since its inception, the Uniswap Protocol (“Uniswap”) has served as a trustless andhighly decentralized financial infrastructure. Having proven product-market fitfor highly decentralized financial infrastructure with a platform that hasthrived independently, Uniswap is now particularly well-positioned forcommunity-led growth, development, and self-sustainability. The introduction ofUNI (ERC-20) serves this purpose, enabling shared community ownership and avibrant, diverse, and dedicated governance system, which will actively guidethe protocol towards the future.
2. Pancake Swap(CAKE):
PancakeSwap is adecentralized exchange for swapping BEP20 tokens on Binance Smart Chain. PancakeSwap uses an automated market maker (AMM) model where users trade against a liquidity pool. Such pools are filled with users’ funds. They deposit them into the pool, receiving liquidity provider (or LP) tokens in return. They can use those tokens to reclaim their share, plus a portion of the trading fees.
The LP tokens are called FLIP tokens. PancakeSwap also allows users to farm additional tokens –CAKE and SYRUP. On the farm, users can deposit LP tokens, locking them up in aprocess that rewards users with CAKE. Users can stake CAKE tokens to receiveSYRUP, which will have further functionality as governance tokens (and astickets in a lotteries).
3. SushiSwap(SUSHI):
SushiSwap is anautomated market-making (AMM) decentralized exchange (DEX) currently on theEthereum blockchain. We are soon expanding our offerings with the BentoBoxlending platform.
SushiSwap is acommunity-run project, governed by the community vote for all major changes tothe protocol. Day-to-day operations, rebalancing of pools and ratios, business strategy, and overall development is ultimately decided on by our Sushi Chef0xMaki.
4. Curve DAOToken (CRV):
CRV is a governancetoken on the Curve platform with time-weighted voting and value accrualmechanisms.
5. PerpetualProtocol (PERP):
PERP is Perpetual’s native protocol token and is issued by Perpetual DAO. The PERP token isprimarily a utility token designed to facilitate and incentivize the decentralized governance of the protocol. As such, holders of PERP tokensaccrue voting rights proportional to their holdings.
Perpetual Protocolwas launched in late 2019, originally under the name of Strike Protocol.Perpetual Protocol builds on an Uniswap-inspired automated market maker (AMM)design (constant product curve). Perpetual Protocol’s liquidity pool (k) is virtualized and determined algorithmically. Rather than rely on liquidity providers to determine the curve of a given market, Perpetual Protocol can programmatically set and update the parameters of the virtual AMM (x*y=k) andoffer a competitive product for any given market at all times.
The team claimsthat PERP is the first virtual AMM (vAMM), which enables markets with no makerswhile still guaranteeing on-chain liquidity. These maker-less markets lowers the capital demands traditional markets require and pave the way for new andemerging futures.
Perpetual Protocol’s Insurance Fund is guaranteed by the holders of its native token,$PERP. The Insurance Fund is used to cover any unexpected losses from leveraged trading. If the Insurance Fund is depleted, Perpetual Protocol will mint more$PERP to refill the Insurance Fund and cover the losses.
$PERP holders canstake their assets to Perpetual Protocol’s staking pool for a fixed period oftime. In return, stakers are rewarded with a percentage of the transaction fees accumulated across the protocol in addition to inflationary staking rewards.
As the namesuggests, Perpetual Protocol focuses exclusively on perpetual swap contracts.At launch, Perpetual Protocol will support BTC, ETH, and LINK, and can onboardother synthetic assets such as gold, crude oil, or other fiat currenciesthrough governance in the future. Traders can get up to 20X leverage on bothlong and short positions. Perpetual Protocol is supported by a Decentralized Autonomous Organization (DAO) with a strong presence in Asia. It is notintended for United States residents or citizens.
6. Bancor (BNT):
Bancor allowsanyone to easily create completely liquid “smart tokens” that calculate theirown prices and enable a single party to convert any token to another, withoutrequiring a second party to exchange with.
7. Raydium(RAY):
Raydium is anautomated market maker (AMM) and liquidity provider built on the Solanablockchain for the Serum decentralized exchange (DEX). Raydium has afirst-mover advantage as an AMM within Serum and will be an integral part ofbringing new and existing projects and protocols into the ecosystem.
The protocol willact as a bridge for projects looking to expand to Solana and Serum, and in theprocess Raydium and the RAY token will become a foundation for enabling furtherdevelopment with partners, its own platform, and the ecosystem as a whole.
8. 1Inch:
1inch is adecentralized exchange aggregator that sources liquidity from various exchangesand is capable of splitting a single trade transaction across multiple DEXs.Smart contract technology empowers this aggregator enabling users to optimizeand customize their trades.
1inch was launchedin August 2020 after a $2.8 million funding raise from Binance Labs, GalaxyDigital, Greenfield One, Libertus Capital, Dragonfly Capital, FTX, IOSG,LAUNCHub Ventures and Divergence Ventures.
In December 2020,1inch raised another $12 million in Series A funding, led by Pantera Capital,with others including ParaFi Capital, Blockchain Capital, Nima Capital and Spartan Group. The funding round was conducted through a SAFT sale (simpleagreement for future tokens). 1inch in winter 2020 also launched Mooniswap, itsown automated market maker (AMM).
In December 2020, 1inch launched its 1INCH governance token, and the 1inch Network began to begoverned by a decentralized autonomous organization (DAO).
9. Bakery Token(BAKE):
BakerySwap is the1st AMM+NFT exchange on Binance Smart Chain. BakerySwap bills itself as thenext iteration of Uniswap. It aims to be a faster, cheaper, and tastier version of Uniswap. Liquidity providers will be rewarded with BAKE tokens from whichthey can earn a share of Bakery Swap’s trading fees and use for voting as partof BakerySwap’s governance.
The team is an anonymous group of developers who believe in the future of decentralized autonomous organizations (DAO). It does not believe in pre-sale or tokens pre-reserved forthe team. The team will receive a relatively low share of rewards during theentire BAKE farming period, which is 1 BAKE for every 100 BAKE farmed.
10. KyberNetwork Crystal v2 (KNC):
Kyber Network is ahub of liquidity protocols that aggregates liquidity from various sources toprovide secure and instant transactions on any decentralized application(DApp). The main goal of Kyber Network is to enable DeFi DApps, decentralizedexchanges (DEXs) and other users easy access to liquidity pools that providethe best rates.
All transactions onKyber are on-chain, which means they can be easily verified using any Ethereumblock explorer. Projects can build on top of Kyber to utilize all the servicesoffered by the protocol, such as the instant settlement of tokens, liquidityaggregation, and a customizable business model.
Kyber looks tosolve the liquidity issue in the decentralized finance (DeFi) industry byallowing developers to build products and services without having to worryabout liquidity for different needs.
The Kyber NetworkCrystal (KNC) token is a utility token that is the “glue that connectsdifferent stakeholders in Kyber’s ecosystem.” KNC holders can stake theirtokens in the KyberDAO to help govern the platform and vote on importantproposals — and earn staking rewards in Ethereum (ETH) that come from tradingfees.
