The DeFi space keeps growing and gaining popularity. It provides users with a variety of profitable products and opportunities. Many users find it useful to make an additional passive income.
If you are new to DeFi, you probably have come upon many unfamiliar words and processes. This article will bring you a little closer to understanding the crypto world.
What is an AMM?
An Automated Market Maker is a DEX protocol that uses algorithms to price assets through liquidity pools to enable trading. The traditional exchange needs buyers, sellers, and a central reserve of assets. On the other hand, AMM executes trades through smart contracts and sets the assets’ price based on the pricing algorithm.
Benefits of AMM:
- Token accessibility
- No manipulation
How does it work?
Automated market makers use formulas to power trading token pairs (for example, BSW-BNB). These formulas (known as smart contracts) make a liquid trading market for buyers and sellers.
There is no need for other traders or market makers to act as counterparties as all trading occurs on a peer-to-contract basis. Trades happen directly between user wallets on a decentralized exchange such as Biswap DEX. Whenever you trade BNB for BSW on Biswap DEX, someone on the other side of the trade is buying BNB with their BSW.
There are no order books or order types in AMMs. Instead, prices are set by formulas. Moreover, there is no need to involve another party when making a trade. You interact with a contract directly. This contract is what makes the market for you.
With no counterparties, where does the market in AMM crypto protocols come from? Smart contracts enabling peer-to-peer trading are created by Liquidity Providers.
What is the part of Liquidity Providers and Liquidity Pools in AMM?
Liquidity is necessary for AMMs to function. Liquidity Providers add funds to liquidity pools that allow traders to swap their crypto assets. For example, a trader can use a BNB-BSW pool to either swap BNB for BSW or BSW for BNB. AMMs use mechanisms that don’t depend on other traders to hold the value of assets using liquidity pools to prevent price fluctuation.
Anybody can become a market maker by providing liquidity. It also allows users to gain extra rewards! On Biswap DEX, Liquidity Providers earn a 50% fee reward. Moreover, by providing liquidity to specific pairs, users can enable Biswap Farms for staking.
Discover how to provide Liquidity on Biswap here:
We hope you have learned something new today! Let’s quickly sum it up in a few sentences.
Automated Market Makers are a crucial part of the DeFi space. They enable users to trade assets by using liquidity pools alternatively to a traditional market. Liquidity pools allow traders to exchange tokens. The assets’ price is set according to a specific mathematical algorithm.
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