BlockchainIntermediate#DeFi#Liquidity
AMM (Automated Market Maker)
A
Definition
A type of decentralized exchange protocol that relies on mathematical formulas to price assets rather than a traditional order book.
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Concept Diagram
Key Takeaways
1
AMMs use mathematical formulas to price assets automatically without traditional order books
2
Liquidity providers deposit equal-value pairs of tokens and earn fees from each trade
3
The constant product formula x*y=k determines prices as the ratio of tokens in the pool changes
4
AMMs are the backbone of decentralized exchanges like Uniswap, Curve, and Balancer
Practical Example
A Uniswap ETH/USDC pool holds 1,000 ETH and $2M USDC. When someone buys ETH, the pool adds USDC and removes ETH, automatically adjusting the price upward based on the constant product formula.
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Related Terms
Blockchain
TVL (Total Value Locked)The sum of all assets currently staked or invested within a DeFi protocol, reflecting its depth and adoption.
Blockchain
DEX (Decentralized Exchange)A P2P marketplace where users can trade cryptocurrencies directly without a central intermediary taking custody of funds.
Blockchain
Impermanent LossThe temporary loss of funds experienced by liquidity providers due to volatility in a trading pair within an AMM.
Blockchain
Liquidity PoolA collection of funds locked in a smart contract used to facilitate trading by providing liquidity on decentralized exchanges.
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