Automated market maker (AMM)

An Automated Market Maker (AMM) is a decentralized trading protocol that allows users to trade cryptocurrencies directly with a smart contract, without the need for an order book or traditional intermediaries like brokers. AMMs utilize a mathematical formula that automatically determines the prices of assets based on their relative supply and demand. AMMs are primarily needed in the crypto space for a couple of reasons: 1. Liquidity Provision: In traditional markets, liquidity is typically provided by market makers who maintain order books and facilitate trades. However, creating an order book for every token in a decentralized ecosystem can be challenging and costly. AMMs offer an alternative by allowing users to supply liquidity to a liquidity pool and earn fees in return. This helps maintain consistent liquidity for various tokens, even those with lower trading volumes. 2. Trade Execution: AMMs provide an efficient way to execute trades instantly. Instead of waiting for a counterparty to match your buy or sell order, AMMs use the predetermined mathematical formula to determine the trade price based on the ratio of token assets in the liquidity pool. This enables traders to transact directly with the protocol without relying on an external entity to facilitate the trade. Overall, AMMs have revolutionized decentralized trading by providing liquidity and enabling efficient trade execution without needing centralized intermediaries. They have played a significant role in the growth of decentralized finance (DeFi) and have become a cornerstone in the crypto ecosystem.