Automated Market Making (AMM), as a subset of Decentralized Exchange (DEX), is one of the most meaningful evolutions nourishing the Digital Asset market and financial sovereignty. Centralized Exchange (CEX) sucks and an affront to the cardinal principles of Cryptocurrency and its underlying technology of Blockchain.
Further, Cryptocurrency frown upon third-party involvement in every transaction, thus the popular adage in Crypto, “Not your Keys, Not your coins.” It implies that if you don’t control the private keys to a wallet, then you don’t command the coins in it.
Transacting on a CEX means you have to surrender your private keys to someone you don’t know. Hence a very crucial infrastructure supporting the buying and selling of Cryptocurrency is a contradiction.
However, the emergence of DEX has accomplished the spirits and letters of Crypto. Upshots like Non-custodial Wallets and AMM are a colossal breakthrough for the virtual currency industry.
What is Automated Market Making
In a traditional order book, you will need to set up a buy or sell trade and wait for someone to fill it. Therefore an exchange of a token or coin takes place between a buyer and a seller.
An AMM removes the counterparty, preferably offering an automated trade experience. Traders, however, interact with a smart contract that creates the market for them utilizing liquidity pools rather than the traditional market of buyers and sellers.
Replacing buyers and sellers with liquidity pools powered by Smart Contracts to execute trades in a permissionless manner is unique in every sense. It also means that the exchange of Crypto happens amid users and contracts.
Decentralizing market-making in this model is central to the conception of Crypto. There is no involvement of Intermediaries to delay transactions.
The mathematical equation guiding AMM on tokens/coins price determination is known as the Constant Product Formula. Ethereum co-founder Vitalik Buterin was the first to propose the formula as tokenA_balance(p) * tokenB_balance(p) = k.
Down the lane, UniSwap popularized it as x * y = k, where the constant is a representation by k, which means there is a consistent balance of assets that decides the value of tokens in a liquidity pool.
Therefore, an AMM with GDEFI Tokens (GDEFI) and Ethereum (ETH), Whenever there is a purchase of GDEFI, the value of GDEFI increases since there is fewer GDEFI in the pool than earlier on. Inversely, the price of ETH dips as there is more of it in the pool.
Predominately there are three main designs when it comes to AMM.
Uniswap: It is the pacesetter in this space, empowering users to form a liquidity pool using any two ERC-20 tokens that come with a 50/50 proportion and the most lasting AMM standard on Ethereum.
Curve: This protocol concentrates on devising liquidity pools of related assets like stablecoins. Accordingly, it provides
lower prices and valuable trades in the market, and at the same time resolving the difficulty of inadequate liquidity.
Balancer: Balancer expands the boundaries of Uniswap by granting users access to create liquidity pools with at most eight different assets in unspecified degrees, consequently expanding the extensibility of AMMs.
GlobalSwap DEX, a fork of Uniswap with its unique intuitive hallmarks on the GDDFI platform, will have AMM with several liquidity pools. It is a full-fledge DEX coming soon, this 3rd quarter 2021.