What is Automated Market Making and Why Does it Matter?
The world of cryptocurrencies is confusing, but with a bit of understanding, even new users can sail smoothly through the unchartered waters. One of the significant questions that discourage new users is how to purchase, trade, or sell cryptocurrencies. While the answer to this question can be given in a one-word answer, that is, crypto exchanges, it begs more questions.
Crypto exchanges are trading platforms where users can place an order to sell or purchase a crypto asset, and the exchange will help the user find the right buyer or seller. A centralized exchange oversees the operations and stores the funds in a cold storage or hardware wallet to facilitate the trade acting as the middleman.
In case the CEX cannot find the right buyer or seller, it is believed that the liquidity of the crypto asset is low. Liquidity is a term used to quantify the ease of trading of a particular digital asset. If the asset can be sold or bought easily, it has high liquidity and vice versa.
When the liquidity of an asset is low, slippage can occur due to the time gap between placing and completing an order. Slippage can hurt the trader significantly, which makes the centralized exchange a non-viable model. Moreover, as centralized exchanges facilitate the order, they charge hefty transaction fees.
So, the solution? Decentralized Exchanges have become increasingly popular because they eradicate all the intermediaries and reduce the transactional costs significantly. Moreover, they are not custodial, which means better security for the users. Decentralized exchanges use autonomous protocols called AMM to facilitate trade instead of order books.
What are AMMs, and why do they matter?
AMMs or Automated Market Makers enable the trading of digital assets in a permissionless and decentralized environment by utilizing liquidity pools instead of traditional methods. An AMM protocol creates a liquidity pool for various assets and incentive participation by liquidity providers by offering rewards.
An AMM will connect the trader to the corresponding liquidity pool and complete the order by adding the tokens (the trader wants to sell) to the pool in exchange for the tokens the trader wants to purchase. In simple terms, a liquidity pool is a shared pot of tokens where traders the price of the token inside the pool is determined by a mathematical formula.
The most significant benefit of an AMM is that they are managed using automated protocols, do not involve any intermediaries, and have lower transaction fees. Moreover, all DEXs powered by AMMs are non-custodial and do not store user assets locally or digitally, ensuring complete protection against hacks.
One of the best examples of DEX AMMs in the present scenario is CoinSwap. CoinSwap is an incentivized Defi protocol that has taken the AMM approach to the next level by utilizing Binance Smart Chain to offer faster and lower-cost transactions. CoinSwap has one of the most rewarding incentivized models for the liquidity providers that supports its AMM model.
Also, CoinSwap combines the best of decentralized finance with AMMs to offer a suite of revolutionary products. To learn more about CoinSwap, visit https://coinswap.space/.