Automated Market Maker

You might want to use a central exchange (DEX) to manage transactions and find prices. DEX, unlike traditional exchanges, uses an automated market maker (AMM) to create a mobile trading platform that offers autonomy, liquidity, and automation.

Many new token add to on exchanges cryptocurrency every day. Users fails not notice most of these token. Lack of liquidity was one reason they were not include. Encryption/blockchain startups have invested a lot of energy and funds in technology, products, white papers, teams, consultants, etc. They forgot to consider token liquidity.

We will discuss what crypto market making means and why liquidity is so important. Let’s get start.

What Is the Cryptocurrency Market?

Before we get into the technical details about Automated Market Maker (AMM). Let’s first understand how the financial sector coordinates market making.

As the name implies, market making is the act of pricing an asset while also providing liquidity to the markets. Market makers create liquidity for financial assets. As a result, they must find a way for traders to buy and sell the asset, affecting its price in the market.

To facilitate Bitcoin transaction exchanges, Bitcoin uses order books or order matching systems. The order book records the price at which the trader would like to buy or sell bitcoins at a moment’s notice.

On the other hand, the order matching system use to match and complete bot buy and sell orders. The market price for the digital asset will determine at the time the transaction complete.

Read also for knowledge: How Can FOMO Affect the Cryptocurrency Market?

If there aren’t enough counterparties available to trade with, the market may consider short of liquidity or slipper. Slippage is when a large number of orders are processed, pushing the asset’s price up or down.

Some cryptocurrency exchanges employ professional traders, such as brokers, banks, and other institutional investors, to provide liquidity to avoid this scenario.

Market making is the process of providing liquidity. The entities that provide liquidity are called market makers. Therefore, understanding what an Automated market maker is will make it easier to understand the workings of an automated market maker.

What is Automated Market Maker (AMM) ?

AMM uses mathematical formulas that are predetermined to determine and maintain the price for matched cryptocurrency pairs. AMM permits anyone to provide liquidity for matched assets. Anyone can become a liquidity provider (LP) under the agreement.

Let’s look at Uniswap for a case study. The protocol uses the x*y=k formula, where X is the asset’s value and Y is the asset’s value. K is the constant value. The product must consistent regardless of whether asset A or B’s value changes.

Although Uniswap, Balancer, and other companies have many options for handling AMM, they still require liquidity to operate properly and avoid slippage. This agreement encourages liquidity providers by providing liquidity pool services and a portion of the governance tokens-generated commissions. You will pay transaction fees if you contribute funds to run a liquidity pool.

You will be issued a liquidity provider token after you have lent your funds. This token represents your share in the liquidity pool. You can also receive transaction fees as passive income with this token. These tokens can be used on other agreements to increase your income farming opportunities. To withdraw liquidity from the pool, you will need to submit the LP token.

AMMs are also great for arbitrage. Arbitrage allows you to profit quickly from inefficiencies in financial markets. They purchase an asset at a lower cost on one exchange and immediately sell it on another platform with a higher interest rate. Arbitrageurs can sell or buy tokens if there is any inconsistency between the prices of tokens and the exchange rate on an external market.

What is Encryption Market Creation?

The creation of a crypto market means that liquidity is provided for the cryptocurrency market. It also contributes to the token economy. Market creation is also important because it creates a stable financial environment, crucial in volatile crypto markets.

The market maker is people who work in this area. Market makers use software to analyze the market and make decisions. Automated Market maker, as with any industry, can bad or good. So be cautious when you add them to your team.

Read also for knowledge: What is FUD?

Market making should not confuse with fake trading volume. Fake trading volume, contrary to market-making, uses techniques like illegal “random trade.”

Investors are Attracted To Token High Liquidity

You should know that ICO adoption will limit if there is not enough liquidity in the crypto market. Good liquidity will attract more sophisticated investors who appreciate its value. Higher transaction volumes are possible when there are more buyers and investors.

Positive Effect For Crypto Market

As stated above, investors and crypto exchanges prefer tokens that have good liquidity. Why? Good liquidity equals more organic trading volume. Higher transaction volumes equal stable and higher prices for tokens.

You will avoid price fluctuations and survive in a bearish market. This is a win-win scenario for investors, token holders, and cryptocurrency exchanges.

Conclusion For Automated Market Maker

It is not possible to have cryptocurrency liquidity by itself. This is because the crypto market is still young and unregulated. It is important to include it in your overall strategy. However, there are no doubts about that. Your team should make it a top priority to prevent insufficient token liquidity.

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