How does AMM (Automated Market Maker) technology work in the context of decentralized exchanges?

3 answers

• Dec 25, 2021 · 3 years ago
  AMM technology in decentralized exchanges works by utilizing smart contracts to create liquidity pools. These pools consist of pairs of tokens, and users can trade between these tokens directly on the platform. The prices of the tokens are determined by an algorithm that takes into account the supply and demand of the tokens in the pool. When a user wants to make a trade, the smart contract automatically calculates the amount of tokens needed for the trade based on the current price and the desired amount. This allows for decentralized and automated trading without the need for traditional order books.
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• Dec 25, 2021 · 3 years ago
  AMM technology is like having a robot market maker that sets the prices for tokens in a decentralized exchange. Instead of relying on buyers and sellers to set the prices through order books, AMMs use mathematical formulas to determine the prices based on the ratio of tokens in the liquidity pool. This ensures that the prices are always in line with the market demand. So, when you trade on a decentralized exchange using AMM technology, you're essentially trading with the smart contract that acts as the market maker.
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• Dec 25, 2021 · 3 years ago
  In the context of decentralized exchanges, AMM technology works by allowing users to provide liquidity to the platform. Users can deposit their tokens into liquidity pools, and in return, they receive liquidity provider (LP) tokens. These LP tokens represent the user's share of the liquidity pool. When a trade occurs, the smart contract automatically adjusts the token balances in the pool to reflect the new trade. This ensures that the liquidity pool always has enough tokens to facilitate trades. As a result, users can trade directly with the liquidity pool, without the need for a centralized order book or an intermediary.
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