DeFi in AMM
DeFi has changed the way market, trading, and money were seen earlier as the DeFi Development has brought a new vision with new ideas and solutions for modern businesses. Similarly, there is a new term for DeFi in AMM.
AMM stands for Automated Market Maker and is a protocol that enables access to decentralized finance by the general public. Basically, it creates a marketplace digitally that runs on algorithms to automatically price and trade assets in the financial market. It works on DeFi protocols thereby without any third-party involvement in transactions.
Working of AMMs
An AMM works likewise to an order book exchange in which there are trading pairs, for example, ETH/DAI. However, there is no requirement for a counterparty. In exchanges, there is a concept called trading pair where pairs exist to quote the value of two currencies to see how they measure against each other.
Under the AMM model, a user plays several roles like a trader, a liquidity provider, and a protocol governor. The protocol itself achieves two things:
Costs assets
The price for an asset that is to be purchased or sold is determined.
Executes trades via smart contracts
No counterparty is available and trade takes place between the party and the contract.
The liquidity for the market however is created by the liquidity providers, referred to as LPs, so as to create an ecosystem for trading.
All in all, AMM is just a type of decentralized exchange that is designed to resolve some issues faced earlier and has been beneficial for the users of DeFi in AMM by providing an array of options though being true to the term decentralization.
Original Source: https://defidevelopmentservices.wordpress.com/2022/12/14/what-is-an-amm-and-how-does-it-work/
