Automated Market Maker (AMM) Explained
When working with Automated Market Maker, a smart‑contract system that swaps tokens without an order book. Also known as AMM, it powers many decentralized exchanges by letting anyone add liquidity. In plain terms, an AMM replaces the traditional buyer‑seller matching engine with a mathematical formula—most often the constant product curve. This means you don’t need a counterparty to trade; the contract itself does the math and settles instantly. Because the logic is open‑source, developers can tweak the curve, add fees, or combine multiple assets into a single pool. That flexibility is why we see AMMs on everything from simple token swaps to complex cross‑chain bridges. Understanding Automated Market Maker basics is the first step before diving into the strategies and risks that come with using them.
Key Concepts Around AMMs
One of the main attractions of an AMM is Liquidity Provision, the act of depositing pairs of tokens into a pool so traders can swap them. LPing lets you earn a share of the transaction fees generated by the pool, but it also introduces Impermanent Loss, the temporary reduction in value compared to simply holding the assets. The relationship is clear: AMM enables liquidity provision, liquidity provision brings fee rewards, but fee rewards must outweigh any impermanent loss for the activity to be profitable. Another essential piece of the puzzle is the Decentralized Exchange, a platform that uses AMM contracts to let users trade without a central authority. DEXes like Uniswap, SushiSwap, and PancakeSwap are built on AMM logic, so improvements in AMM design directly affect DEX performance, user experience, and overall market depth.
Beyond the core mechanics, tokenomics plays a vital role. Many projects launch their own governance tokens to incentivize liquidity, reward early adopters, or fund future development. These tokens often tie into the AMM’s fee structure, creating a feedback loop where higher volume boosts token value, and a valuable token attracts more liquidity. This creates a web of dependencies: AMM powers DEX, DEX drives trading volume, volume fuels fee earnings, fee earnings support tokenomics, and tokenomics fuels more liquidity provision. The whole ecosystem hinges on the balance between reward and risk, and the sweet spot shifts as market conditions change. Below you’ll find a curated list of articles that break down each of these pieces—how to spot the right pools, calculate impermanent loss, compare different AMM models, and leverage tokenomics for better returns. Dive in to get practical, data‑driven insights you can apply right away.
- By Eva van den Bergh
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- 14 Apr 2025
Impermanent Loss Explained with Real DeFi Examples
Learn what impermanent loss is, how AMMs cause it, real DeFi examples, and practical ways to offset or avoid it using fees, stable pairs, and new protection tools.
- By Eva van den Bergh
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- 29 Nov 2024
AMM vs Order Book: Which Crypto Trading Model Wins?
A clear, side‑by‑side guide to Automated Market Makers and Order Book models, covering how they work, pros and cons, best‑use scenarios, and future hybrid trends.