Automated Market Makers (AMMs) Explained
2 min read · · Korean original
A market maker helps buyers and sellers trade assets (stocks, currencies, commodities, Bitcoin, and more) smoothly and at the best possible price.
An Automated Market Maker (AMM) is a type of protocol that takes over the role of a traditional market maker. AMMs are mainly used on decentralized exchanges (DEXs) and use algorithms to help people swap assets.
- A market maker sets market prices by participating directly in a centralized exchange's order book.
- An automated market maker sets the prices of assets in a pool automatically, following the protocol's algorithm on a decentralized exchange.
The core of an automated market maker is how it sets prices. Prices are determined by comparing the ratio of assets deposited in the pool with traders' requests.
Let's take a liquidity pool made up of Tether (USDT) and Ether (ETH) as an example. If demand for Ether suddenly spikes, the pool becomes imbalanced, with more Tether and less Ether. As a result, the price of Ethereum rises relative to Tether.
Automated market makers may look quite similar to market makers that use a centralized exchange's order book model, but there are differences. The biggest difference is that an automated market maker sets prices automatically based on the pool's liquidity. This also means you can do arbitrage trading by taking advantage of the price difference between a centralized exchange and the pool.
