Autonomous Market Makers (AMMs) are a type of decentralized exchange (DEX) protocol that relies on a mathematical formula to price assets. In traditional financial exchanges, assets are priced according to supply and demand. However, in an AMM, assets are priced using a formula that takes into account the current supply of each asset in a liquidity pool.
In the context of cryptocurrency, AMMs facilitate the exchange of digital assets without the need for an order book or a centralized authority. Instead, transactions are executed directly between users (peer-to-peer) based on the price set by the AMM. This makes them an important component in the world of decentralized finance (DeFi).
In an AMM, users can also provide liquidity to a pool and earn fees in return. When a user provides liquidity, they deposit a pair of assets into a pool. For example, in the Uniswap protocol (one of the most popular AMMs), a user might deposit an equal value of two different tokens. This pool can then be used by other users for trading.
One notable feature of AMMs is that they allow anyone to create a liquidity pool for any pair of tokens. This greatly increases the accessibility and range of possible trades within the DeFi space. However, AMMs can also be subject to price manipulation and other risks, so it’s important for users to understand the underlying mechanics and risks of any DeFi protocol they use.
There were many different AMMs in operation, including Uniswap, SushiSwap, Balancer, Curve, and others. Each of these platforms has their own specific design choices, strengths, and weaknesses, with ongoing innovation and competition in the space.