Learn about the automatic market maker AMM

Programmatic trading rules are the core of decentralized exchanges

DeFi representative

Decentralized Exchange (DEX)

DeFi has been popular for more than half a year,

In the field of DeFi,

The most successful product may be the decentralized exchange (DEX) represented by Uniswap.

Of course, there is also a wave of decentralized exchanges in 2017.

However, most of the two years from 2018 to 2019 ended hastily due to poor management.

So why can decentralized exchanges like Uniswap rise?

One of the most important reasons,

They all introduce the automatic market maker model,

So what is an automated market maker?

Principle of Implementation

Centralized Exchange (CEX)

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Before we start introducing AMM,

Let's first take a look at how we usually achieve transactions in the exchange?

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Dynamics | WTZex exchange responded to the so-called "Tuan Zhang was arrested": Cooperating with fan investigations is just a normal way to understand the situation: According to block rhythm news, on November 9, the staff of WTZex exchange responded to the so-called "Tuan Zhang" in the community. "Being arrested": "Today, the head of the delegation assisted a fan to cooperate with the investigation after participating in the Chengdu event. He just understood the situation normally. Some people outside deliberately spread rumors. I hope that the rumors will stop with the wise and stop spreading rumors." WTZex exchange is an exchange founded by Mr. Wang, a blockchain self-media person, in 2019. It is known as the world's largest membership-based exchange. According to spectators who participated in a mining event in Chengdu on November 9, Head Wang, who also participated in the event, was taken away by suspected plainclothes police after the event. [2019/11/10]

For example, I want to buy and sell WDC on an exchange,

I have two ways,

One is the market price transaction,

Directly set the quantity of WDC to buy/sell,

The exchange will match for me according to the market price,

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Match a sell order for a buyer,

Match a buy order for the seller;

There is also a limit order,

The exchange will buy or sell according to the price and quantity I set,

If there has been no matching order,

Then your pending order will always be pending,

Unable to close the transaction, waiting for the transaction.

1. Centralized exchanges adopt the order book model

2. If there is no order with a suitable price, it will not be executed

AMM

Decentralized Exchange Core

AMMs fundamentally change the way users trade cryptocurrencies,

Different from the traditional order book trading mode,

AMM transaction parties,

They are all interacting with the liquidity asset pool on the chain.

Liquidity pools allow users to

Seamlessly switch between tokens on the chain in a non-custodial and non-custodial manner.

And Liquidity Providers,

Earn passive income through transaction fees,

Whereas transaction fees are based on the percentage of their contribution to the asset pool.

More importantly,

Your assets are still in your personally controlled wallet,

Instead of entering the trading platform,

So the assets are still 100% safe,

This is impossible in any case with traditional CEX.

Since 2017,

There are mainly three primary designs of constant function market makers in the market:

The first type to appear is the Constant Product Market Maker (CPMM),

It is popularized in Bancor and Uniswap.

CPMM is based on the function x*y=k,

This function determines the price range for two tokens based on the available quantity (liquidity) of each token.

When the supply of token X increases,

Y's token supply must decrease, and vice versa,

To keep the product K constant.

When plotting this function,

The result is a hyperbola,

Liquidity is always available,

But the price will get higher and higher, approaching infinity at both ends.

The second type is Constant Sum Market Maker (CSMM),

It is ideal for zero-slip transactions,

But it cannot provide unlimited liquidity.

Constant Sum Market Maker (CSMM) follows the formula x+y=k,

When drawing it, a straight line is created.

Unfortunately,

If the off-chain reference price between tokens is not 1:1,

This design then allows arbitrageurs to deplete one of the reserve assets.

This situation will destroy one side of the liquidity pool,

forcing liquidity providers to suffer losses,

And make traders no longer have liquidity.

Therefore,

Not a common AMM model.

The third type is Constant Mean Market Maker (CMMM),

It allows the creation of more than two tokens,

and weighted AMMs outside the standard 50/50 distribution.

In this model,

The weighted geometric mean of each reserve asset remains unchanged.

For a liquidity pool with three assets,

Its formula is as follows: (x*y*z)^(⅓)=k.

With the development of AMM technology,

We see the emergence of advanced mixed constant function market makers CFMM,

It combines various functions and parameters,

To achieve specific behavior,

Such as adjusting the risk exposure of liquidity providers,

Or reduce price slippage for traders.

Author: Free

Responsible editor: Wozxd

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