AMM DEX Overview — New way of exchange
Summary
Automated market maker (AMM) is a part of the decentralized finance (DeFi) ecosystem. They allow digital assets to be traded permissionless and automatically by using liquidity pools rather than a traditional market of buyers and sellers.
What is DEX?
DEX (Decentralized Exchange) is:
- a decentralized digital assets marketplace based on blockchain mechanics.
- an auto digital assets marketplace that occurs directly between users (peer-to-peer).
- working without the custody/permissions of third parties or funds.
What is AMM?
AMM (Auto Market Maker) is:
- automate the process of pricing and matching orders on the exchange by using algorithms to determine the prices at which buy and sell meet.
- Users can trade easily without worrying about order types, and matching due to liquidity pools.
- faster and more secure than their centralized counterparts, as they are powered by smart contracts and protected by the underlying blockchain network.
How does AMM DEX work
The key component of AMM DEX:
- Liquidity Pools: This is a pool run by a smart contract with the formula k = x^0.5 * y^0.5 (x and y is pair of the token(s); k is constant)
- Liquidity Providers: This user(s) will provide pair of tokens to the Liquidity Pool
- Liquidity Aggregator: This is an aggregate tool that calculates the best rate of price for trader(s)
- Exchange (Swap) tool: A place that trader(s) use to swap their token(s)
Mechanic:
- Liquidity Pool contains 50/50 of a pair of tokens (50% of token and 50% stablecoin) which are provided by Liquidity Providers.
- Liquidity Aggregator will aggregate liquidity from multiple AMMs and choose the best trading price for users
- Traders start to swap, and the token in the pool will be provided for them and take the same rate amount of stablecoin and vice versa.
- A small amount of fee will be calculated by the token. Fees will be used to reward Liquidity Providers (s) and maintain the app.
Why is AMM DEX important?
- At the side of the project, DEX plays an important role as a portal for transferring the stable coin into the token of the ecosystem, leading to the growth of the total value lock (TVL) hence enhancing the money flow inside an ecosystem.
- On the side of participants, users can reach many potential projects which are undervalued, they can own their token/ coin without needing the KYC or using the financial services of third parties.
- Suitable for a new listing token — token with low market cap, fully diluted cap, or low liquidity tokens with high slippage.
- Transaction information(s) are transparent thanks to blockchain features.
DEX vs CEX
Conclusion
DEX is a useful tool of DeFi, with the development of DEX, users can participate in trading new coins/tokens with small capitalization with very good growth potential. With DEX, users are no longer dependent on a third-party financial service provider, they can completely control their assets. In recent years, DEX has also developed more types of use like on traditional CEX such as perpetual trading, showing that the potential of DEX is still very large, not serving the needs of trading digital assets but also converting users from web 2 to web 3.
