The system that manages the trading transactions recorded in the order books in the traditional method with automatic smart contracts is called an automated market maker (AMM).
AMM, whose primitive varieties were first introduced in the early 90s, was created to provide liquidity to the market or stock market.
Typically used in autonomous trading platforms and decentralized cryptocurrency exchanges (DEX), AMM eliminates the need for the match between buyers and sellers to be controlled by a specific center or authority.
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It’s possible to think of the automated market maker as an artificial intelligence ready to offer real-time prices between two assets.
Removing the need for trust and offering the opportunity to trade with Zero Knowledge Proof, AMM allows every user to become a market maker for the stock market and earn profit on transaction fees.
The liquidity needed by the users is again met by the users.
AMM-based decentralized exchanges do not use the traditional order book that brings buyers and sellers together in a consensus environment. Instead, it connects the liquidity pools containing both value assets in the trading pair with a smart contract. Liquidity in transactions is provided by users who want to earn passive income from trading fees and support the network.
Uniswap (UNI), one of the prominent names among automatic market makers, allows users to earn passive income by providing liquidity in return for the asset they lock into the system. Similar to this Ethereum (ETH) based protocol, alternatives such as SushiSwap (SUSHI), Curve (CRV) and Balancer (BAL) also provide AMM services.
How does AMM work?
When trading on traditional cryptocurrency exchanges, you need a user who does the opposite of your transaction to convert your asset to another asset. The available trades listed on the order book on the exchange are matched and exchanged between two users
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For example, a user who sells Binance Coin (BNB) for Binance USD (BUSD) on the cryptocurrency exchange Binance’s decentralized trading platform Binance DEX is automatically matched with another user.
On platforms such as Uniswap, the system called “Peer to Contract (P2C)” is used instead of peer to peer (P2P) connection.
In AMM protocols, there is no need for the other party, ie another user acting like you. Instead, the protocol runs a smart contract that automatically “markets”. Automated market makers use pre-prepared algorithms to determine the prices of assets.
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