AMMs or Automated Market Makers is a robot worker that powers all decentralized exchanges (DEXs) to find a better price to trade and to eliminate the need for centralized changes.
How AMMs works?
Take Uniswap as an example, it used the amount of one token time the amount of the other token to provide fixed liquidity.
The formula is X*Y=K
X is the amount of one token.
Y is the amount of the other token.
K is fixed liquidity.
It means to maintenance fixed liquidity, you may need two different tokens with the same conversion rate.
For example, if your liquidity is 10, and you pair with Bitcoin to stablecoin USDC. You either get 10 Bitcoin to 1 USDC or 1 Bitcoin to 10 USDC or any combination to reach 10.
Optimized AMMs
According to research, constantly shifting profits into AMMs can reach optimization that minimizes the loss through bid/ask spread.
The problem of the robot worker
AMMs operate passively. It only executes after certain conditions are made. Unlike humans, we can react when the environment changes. The robot will execute sell trades even though the market environment still rising up.
Ethereum network gas fees
The more robot workers, the higher the gas fees. Because robot wants to execute trades as fast and as efficiently possible, they need high gas fees to make a priority trade which increase the entire gas fees.
The downfall of the robot worker
The robot workers are frequently cheating the system by finding arbitrage on the Decentralized Exchange platform which increases the cost of gas fees and reaches the competition ceiling on the platform that human workers may take a while to reach.
It demonstrates some insight that robot worker is not the ultimate solution but a means to exploit the current environment with sustainable growth potential.
The future of Defi
Of course, there are many aspects of Defi not limited to the Decentralized Exchange platform. Mechanized robot traders are not perfect on the platform but expose the faults on the platform itself.
We may need to fix the Decentralized Exchange platform through a better solution such as to encourage lower gas fee trades.
In conclusion
Defi is still a future with or without AMMs. We need robots to serve everyone but not to exploit the current system.
Photo by Mulyadi on Unsplash
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Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose cryptocurrencies are mentioned in this article. This information is only for educational
