Crypto 101: Unpacking Automated Market Makers
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. 🟢