What is an Automated Market Maker?

• AMMs are an integral part of the decentralized finance (DeFi) ecosystem, enabling permissionless and automated trading of virtual assets

• They work by using liquidity pools and a fixed mathematical formulas to determine prices

• AMMs aim to provide seamless liquidity, accessibility and decentralized management; Their structure plays an important role in the buying and selling of various assets.

How AMM-Based DEXs Work

AMM DEX is based on smart contracts and algorithms to enable trading without the need for centralized participation. Liquidity pool consists of two or more tokens. Each token has a certain amount of seed funding. Investors (liquidity providers) are free to invest in this pool. Prices in the liquidity pool on AMM are determined automatically based on the ratio of the number of tokens in the pool. Users can instantly trade tokens from the pool. Because AMM does not rely on a centralized party, orders are executed immediately. Commissions are charged to trading users to support AMM. A share of the commissions is allocated to pool participants according to their contribution. This incentivizes the supply of liquidity to the pool. Pool can be automatically rebalanced by adding or removing tokens. Smart contracts are responsible for this.

Advantages of AMM-Based DEXs in comparison to CEX

Any AMM-based crypto exchange has several advantages over centralized ones, here we feel the advantage of being centralized and decentralized. First, they provide a high level of security, as users control the funds themselves and do not need to trust a centralized structure. Second, they have transparency and openness. Finally, they can be accessed anywhere in the world and without verification. Let me give an example: Decentralization, Security, Privacy, Global Access, No Listing Requirements, Lower Fees, Continuous Liquidity, Community Governance, Interoperability