Automated Market Makers (AMMs) are the lifeblood of decentralized exchanges (DEXs). They use algorithms to provide liquidity for trades, ensuring a smoother, decentralized trading experience.
But not all AMMs are created equal. This guide will dive into different types of AMMs and their ideal use cases.
Constant Product Market Maker (CPMM)
Used by platforms like Uniswap ($UNI), the CPMM model abides by the formula x*y=k, keeping the product of two token quantities constant.
Great for general trading pairs, it does come with a downside called “impermanent loss,” which can impact liquidity providers’ profits. 🟣
Constant Mean Market Maker
This model, utilized by Balancer ($BAL), accommodates multiple tokens in a pool with different weights. It’s like an upgraded version of the CPMM, offering more flexibility but retaining some vulnerability to impermanent loss. 🟠
StableSwap Invariant Market Maker
Designed for stablecoins (cryptocurrencies pegged to stable assets), Curve Finance ($CRV) uses this model to minimize impermanent loss, keeping things steady and secure. 🔴
Hybrid Function Market Maker
Bancor’s ($BNT) model allows liquidity providers to stake just one token instead of two, mitigating the impermanent loss problem. It also keeps a separate stash of Bancor Network Tokens (BNT) for every listed token. 🟢
Concentrated Liquidity Market Maker
Uniswap V3’s innovative model lets liquidity providers choose their capital’s price ranges, making liquidity provision more efficient. You can decide where you want your money to work. ⚫
Dynamic Automated Market Maker (DAMM)
Kyber Network’s ($KNC) DAMM (also known as KyberDMM) auto-adjusts parameters in response to market conditions.
Ideal for stable pairs, it offers ‘amplified pools’ to boost capital efficiency. 🔵
Matching AMMs with Liquidity Pools or Trading: A Quick Guide
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CPMM for General Pairs: If you’re dealing with trading pairs like $ETH/$DAI, go for CPMM like on Uniswap.
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Constant Mean for Multi-Token Pools: Balancer’s model is perfect for a pool with multiple tokens (ETH, DAI, $MKR) with different weights.
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StableSwap for Stablecoin Pools: If you’re focusing on stablecoin swaps ($USDC/DAI/$USDT), Curve Finance’s StableSwap is your best bet.
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Hybrid Function for Single-Token Liquidity: Prefer to provide liquidity with a single token (like ETH)? Go with Bancor’s Hybrid Function model.
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Concentrated Liquidity for Specific Ranges: Uniswap V3 allows you to target specific price ranges, which is perfect for setting liquidity provisions.
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Dynamic AMM for Stable Pairs: KyberDMM is ideal for stable pairs (like USDT/USDC) and shines during high volatility periods.