What are Automated Market Makers?

Automated Market Makers (AMMs) are smart contracts that facilitate decentralized exchange of tokens without the need for order books or centralized market makers. Instead, they use a mathematical algorithm to determine the price of tokens based on the supply and demand of the tokens in the pool.

How do AMM smart contracts work?

AMM smart contracts are typically based on the constant product market maker formula, which was introduced by Vitalik Buterin and was later implemented by Uniswap, one of the most popular AMM decentralized applications (dApps). The formula works by multiplying the amount of tokens in one pool with the amount of tokens in another pool to get a constant product. The price of the tokens in the pool is then determined by this constant.

When a user wants to trade a token on an AMM, they must first add liquidity to the pool by depositing an equivalent value of two tokens. This increases the size of the pool, which in turn affects the price of the tokens in the pool. When a user trades a token, the smart contract automatically adjusts the price of the tokens in the pool based on the new supply and demand.

AMM dApp Examples

1. Uniswap

Uniswap is one of the most popular AMM dApps, with over $10 billion in daily trading volume. Uniswap allows users to trade any ERC-20 token on the Ethereum blockchain. Users can also add liquidity to the pool by depositing equal values of two tokens.

2. PancakeSwap

PancakeSwap is an AMM dApp built on the Binance Smart Chain. It allows users to trade any BEP-20 token on the Binance Smart Chain. Users can also provide liquidity to the pool by depositing equal values of two tokens.

3. SushiSwap

SushiSwap is an AMM dApp built on the Ethereum blockchain. It is similar to Uniswap, but with additional features such as yield farming and liquidity mining. Users can earn rewards by providing liquidity to the pool.

4. Curve Finance

Curve Finance is an AMM dApp that specializes in stablecoin trading. It allows users to trade stablecoins such as USDC, USDT, and DAI. The platform is designed to provide low slippage and low fees for stablecoin trading.

Conclusion

AMM smart contracts have revolutionized the way we trade tokens by providing a decentralized and automated way to exchange assets. They have also created new opportunities for users to earn rewards by providing liquidity to the pools. As the popularity of AMM dApps continues to grow, we can expect to see more innovative features and improvements to the underlying technology.