What is an AMM, why does it matter, and how do you use one?
In this blog, we will learn about:
AMMs- the secret weapon of DeFi.
How AMMs facilitate a decentralized flow of money
Using AMMs
Consider the stock market, one of the oldest markets in the world which is still in existence today. In its infancy, the stock market's buyers and sellers had to be matched and made by manually, and in person. Because of the nature of our society, traditionally, it has not been easy for a "regular person" to be on either side of market making. Investor accreditation and lack of big liquidity will easily have most people sitting out of this game,
Automated market makers change this aspect of the game by market making between buyers and sellers while requiring no identification or capital requirements except what is needed to execute the transaction.
Ether Delta, the first widely adopted DEX. (Decentralized exchange)
Initial problems= Not user friendly, often did not have enough buyers and sellers available to have a constant flow of exchange.
In 2016, Vitalik Buterin proposes the idea of automated market makers in a Reddit post.
First automated market makers:
Bancor (2016) In June 2021-28 MM trading volume/ per day.
Uniswap (2018 ) In June 2021-158 MM trading volume/ per day.
Curve (2018) In June 2021- 41 MM trading volume/ per day.
SushiSwap (2020) In June 2021-138 MM trading volume/ per day.
Pancake Swap (2020) In June 2021-473 MM trading volume/ per day.
These Automated Marker DEXs large accumulative volume is entirely provided for by the community (by community we mean buyers, sellers, and holders of certain digital assets.) They are permissionless, which means anyone can participate in trading regardless of investor accreditation. Not only that, the management of the execution of the trades is all done through code, rather than through a centralized body such as the government, the Nasdaq, or Charles Schwab.
AMMs allow participants to
- trade assets.
- provide their assets as liquidity for the protocol, and earn interest and swap fees in return.
- participate in governance.
Participants are able to trade assets, because AMM DEXs have liquidity pools so that assets are always available for buying and selling. Liquidity is available because token holders are incentivized to stake their assets in a liquidity pool, and therefore earn the said interest and swap fees.
Since the AMM is Decentralized, DEXs can have their own governance tokens in which the community provides funding to the DEX, and gains governance/ voting rights for future decisions.
In DeFi, the community members who hold the liquidity reap the benefits of the fees of the movement of capital, rather than banks who hold the liquidity in Tradfi.
Full tokengated lessons provided by Omakasea.
Access tokens can be found here.
