Automated Market Makers: Primer on the Technology that is Revolutionizing the Way We Trade Cryptocurrencies and DeFi Assets

Automated Market Makers: Primer on the Technology that is Revolutionizing the Way We Trade Cryptocurrencies and DeFi Assets

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Date published
February 25, 2023

Have you ever wondered how DeFi markets would function without liquidity providers?Here's a primer on the critical role of Automated Market Makers and why they are so essential for the growth and sustainability of DeFi markets. 👇 🧵


1/ Automated Market Makers (AMMs) have revolutionized the way traders access liquidity in DeFi markets.They eliminate the need for a centralized order book, enabling traders to trade directly with a liquidity pool.

2/ Below, I will get a little more technical and outline the mechanics of Automated Market Makers. 👇

3/ Simply put, AMMs use algorithms to determine the price of assets traded on a DEX (Decentralized Exchange). Liquidity pools serve as the backbone and are smart contracts that contain a pair of assets, with each asset having a weight that determines its price.

4/ The majority of AMMs use a price function called the constant production formula. In this formula, the product of the of the two asset quantities in the pool remain constant.

5/ The constant production formula can be represented as: x * y = k, where x the quantity of one asset in the pool, y is the quantity of the other asset and k is the constant product.


6/ One of the most significant benefits of AMMs is that they provide liquidity to the market without the need for central authority, such as a bank or financial institution. It also makes it easier for traders to trade in illiquid DeFi assets.

7/ AMMs also enable anyone to become a liquidity provider (LP), by depositing funds into a pool. This allows LPs to earn a share of trading fees and enjoy a passive income stream.

8/ In addition, AMMs provide traders with a more secure and transparent way to trade cryptocurrencies and other DeFi assets. Since the price of assets is determined algorithmically, there is much less room for manipulation.

9/ AMMs are also permissionless, meaning that anyone can access them without restriction.

This permissionless system creates an inclusive financial system with little to no barriers of entry.

10/ Since AMMs are non-custodial, traders have full control and access to their funds at all times. This massively reduces the risk of hacks and theft, a topic that is extremely important in the DeFi space.

11/ To add to the above tweet, AMMs have helped reduce reliance on centralized exchanges, which are frequently targeted by hacks and theft (For example, look at what happened to Mt. Gox in 2014, many investors have yet to receive their assets almost 10 years later!)

12/ The largest AMM is currently Uniswap (@Uniswap), which currently controls over 75% of DEX market share.After its release in November of 2018, it has inspired the launch of many other AMM projects, which I will talk about below 👇


13/ SushiSwap (@SushiSwap) is another very large AMM project, which launched in August of 2020.While very similar to Uniswap, they have differentiated themselves by offering rewards to users who stake their token: $SUSHI. This creates a very strong community around the project.

14/ Another AMM project is Curve Finance (@CurveFinance), which was launched in January 2020.Curve sets itself apart from other AMM projects by being specifically designed for efficient stablecoin trading.

15/ Lastly, Balancer (@Balancer) is another AMM project, albeit a bit more complex.Balancer allows users to create their own custom pools with different weights for different assets. Because of this, highly experienced users/traders can create very complex trading strategies.

16/ While those are some of the large AMM projects out currently, there are many more AMM projects out there and lots of innovative projects in the pipeline.

17/ Outside of being used for trading purposes, AMMs have also been used as a fundraising tool for new projects.

18/ For example, Balancer has a feature called "liquidity bootstrapping pools" that allows new projects to raise funds / acquire liquidity by offering tokens in exchange for liquidity.

19/ The success of AMMs in recent years has really helped to fuel the growth of the DeFi ecosystem.

20/ They have made decentralized exchanges much more accessible to the average user. They offer a simple and easy to use interface, making it very easy for new traders and users to learn.

21/ This rise in use of AMMs is likely to have a massive impact on cryptocurrency markets and DeFi assets in the future.

22/ As more traders and users begin to move towards decentralized exchanges, we could see a large shift away from centralized exchanges.

23/ This shift away from centralized exchanges can create a much more decentralized trading ecosystem. This is very beneficial, as it creates a financial system that has greater accessibility, transparency and inclusivity.

24/ In conclusion, AMMs are a powerful tool for trading cryptocurrencies and have become a very important part of the DeFi ecosystem. They offer a more transparent and accessible alternative to CEX's and have the potential to revolutionize the way we trade cryptocurrencies.

25/ Want to keep the conversation going? My Twitter DMs are open, so please feel free to reach out to me!

26/ Also, special thanks to @nonieengel , @offdeblockchain and @ethanweii for your helpful feedback and helping me with this thread! Also, huge thanks to the @chapterone team and my incredibly talented fellow researchers in Research Cohort #2! So thankful for this opportunity!

27/ Interested in reading more content from our researcher's here at Chapter One?Follow our @chapterone research list!